>RELIANCE INDUSTRIES (CITI)

Downgrade to Hold: Factoring in US$10 GRM + E&P Upsides

■ Wait for better risk reward — Stock leaves little upside to our new target price of Rs1835 (from Rs1475) which factors in: (i) E&P value at Rs729, 40% premium to NAV thus factoring in meaningful reserve upside, (ii) stable refining margins (blended assumption of US$9.7-10.8 over FY10-11E), and (iii) roll fwd to Mar-10E with ref/petchem valued at 6x FY11E EV/EBITDA. Downgrade to Hold (from Buy) with Low Risk rating (from Medium Risk).

■ How much to pay for FY11E and E&P upside now? — Though we expect 28% earnings CAGR over FY09-11E, RIL is trading at PER of 11x FY11E. Current valuation recognises the superior earnings mix (KG is 38% of FY11E EBITDA) and the upside potential in E&P, but leaves low margin for error in the cyclical businesses. A more constructive view on the stock is contingent on (i) material improvement in refining/petchem outlook, and/or (ii) stock correction.

■ 4Q slightly below — EBITDA at Rs54.4bn was impacted as GRMs ($9.9/bbl) were lower due to weak diesel spreads. Premium to Singapore was lowest in last 10 qtrs. Polymer margins and volumes rebounded in 4Q after production cuts in 3Q. PAT (adj.) however beat expectations due to higher other income.

■ E&P - D6 under control, new exploration will have to wait — Company is aiming at 40mmscmd by end-Jun and 80mmscmd by end-FY10. Exploration wells in other blocks will be in 2HFY10, with one rig from D6 and one new delivery. Entry in domestic oil retailing is likely to be gradual and at a controlled pace.

■ Balance sheet — Net debt was Rs280bn. FY10E capex guidance at $4.5-5.0bn incl. RPL’s remaining capex of US$0.5bn (total project cost of US$6.5-7.0bn).

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