>Reliance Industries & Reliance Petroleum (HSBC)

Downgrade to N(V) while raising targets: Growth priced in

■ Following the completion of key projects in FY10, we expect RIL to refocus on new E&P development and exploration; raise our E&P valuation to INR920/share (INR661)

■ A 56% increase in RIL’s stock price since March has closed its alpha with Sensex that grew 39%

■ Raise our targets to INR1,945 (INR1,640) for RIL and INR122 (INR102) for RPL, but downgrade both to N(V) from OW(V)


■ E&P upside key to valuation
RIL plans to complete three key projects in FY10, resulting in 77% growth in our FY09-11e EPS estimates. We now expect RIL to focus on new E&P development projects and exploration. Recognising the E&P projects pipeline and potential resources in RIL’s E&P portfolio, we increase our valuation of the E&P business to INR920/share (INR661). In our valuation, we have considered 20tcf (12tcf) of 2P reserves, resources from the KG D6 block, and the potential for the ramp-up of gas production to 120MMcmd owing to satellite discoveries. With exploration regaining priority, we also take into account 1,500MMbbloe of additional risked prospective resources at a valuation multiple of USD2/bbloe. RIL’s partners, Niko Resources and Hardy Oil, suggest healthy potential for the KG D9 and Mahanadi D4 blocks, respectively.

■ RIL’s recent run-up closes its alpha with Sensex
RIL’s 17% outperformance against Sensex since March 2009 has closed the valuation gap between the two. At the current price, the stock trades at a FY11e PE of 10.6x. While the news flow on project ramp-up is likely to be positive over FY10, changes in the valuation band are dependent on the execution of the next set of growth projects and discovering new resources, in our view. We expect focus on these to be back-ended in FY10, with existing projects being a priority.

■ RIL and RPL: Downgrade to N(V) from OV(W)
We cut our FY10e estimates for RPL by 4.5% and for RIL by 3.1% due to the flow-through effect of the FY09 actuals and a slower start of the second crude unit than our earlier expectations. We raise our target price for RIL to INR1,945 (INR1,640) mainly due to our higher E&P valuation. Based on a swap ratio of 1:16, we raise our target price for RPL to INR122 (INR102).

To see full report: RIL & RPL