>Reliance Industries (MERRILL LYNCH)

E&P valuation raised; Upgrade PO to Rs1,735

■ Upgrade PO by 13% to Rs1,735/share; Retain Buy
We have upgraded the E&P valuation (57% of PO now) of Reliance Industries (RIL) by 22%. The upgrade is due to the one-year rollover of the DCF of its 2P reserves and resources, assuming a 2% weaker rupee and more aggressive exploration upside valuation. A 2% weaker rupee in FY10E has boosted EPS by 3% and the valuation of other business by 1-4%. We raise our PO by 13% to Rs1,735/share. The revised PO offers 14% potential upside. RIL’s fair value on a DCF basis is Rs1,976/share (30% potential upside). We retain our Buy on RIL

■ E&P valuation up by 22% to Rs989/share (57% of PO)
As we are about to end FY09, we have rolled over by one year the DCF valuation of RIL’s 2P reserves and resources. This has boosted its E&P valuation by Rs95/share. Assuming a weaker rupee (Rs47 to US dollar vis-à-vis Rs45 earlier) has boosted the E&P valuation by Rs40/share. Exploration upside valuation is also raised by Rs40/share, as we now value 2bn boe as against 1.5bn boe earlier. E&P valuation has thus been raised by 22% to Rs989/share.

■ Adverse ruling on gas pricing main risk; hit Rs160-243/sh
Adverse court ruling on KG D6 gas pricing is the main risk. Downside to valuation is Rs160-243 per share if it has to sell gas at US$2.4/mmbtu to RNRL and NTPC.

■ FY10E EPS growth now at 37% YoY; FY09-11 EPS CAGR 34%
Assuming average rupee at Rs47 vis-à-vis US dollar (rupee at over Rs51 now) meant upgrade in FY10E EPS of RIL by 3%. Its FY10E EPS growth is now 37%. Two-year EPS CAGR to FY11E remains at 34%. We now also have FY12E EPS, which, at Rs207.8/share, is up 20% YoY. Thus, growth continues beyond FY11E.

To see full report: RELIANCE INDUSTRIES