>Reliance Industries Ltd. (GOLDMAN SACHS)

Positive News – Estimates Under Review

First Take: Petchem surprises to upside; other income boosts profits

News
Reliance Industries (RIL) reported 4QFY09 adjusted PAT of Rs38.7bn, down 1% yoy, but ahead of Bloomberg consensus of Rs36.5bn. The results also beat our estimate of Rs32.8bn on the back of: 1) higher-than-expected petrochem margins at 18% (up 4.6% qoq) owing to better-than-expected realization from demand recovery and depreciation of INR-USD rate; and
2) higher “other” income. Refining margin of US$9.9/bbl, however, came below our estimate due to weakness in middle distillate cracks.

Analysis
We believe 4Q results demonstrate that RIL’s core commodity businesses are best positioned among regional peers to withstand the down cycle, given 1) its low operating cost structure in refining (opex US$1.5-1.75/bbl) and 2) that it sells the majority of its petrochemical products in highdemand markets like India and China. Since limited fresh investments are likely to be made in the medium term in these core businesses, we believe their cash flow will be increasingly deployed towards the company’s targeted US$4.0-4.5bn of annual capex in the E&P division. With commencement of gas production from D-6 block on April 2, we believe RIL management will focus on developing its other discovered blocks over the next 12-18 months. RIL currently has a total of 35 blocks under NELP, more than 50% of which are in highly prospective KG and Mahanadi basins.

Implications
Our estimates, 12-month target price and rating for RIL are under review. Going forward, we believe the gas business will improve the company’s earnings profile by: 1) adding high proportion of non-cyclical earnings, and 2) improving overall operating margins.

To see full report: RIL