>RELIANCE INDUSTRIES (KOTAK SECURITIES)

Reality versus speculation. We analyze the factors that could propel RIL stock about 20% higher from current levels in a hypothetical exercise and conclude that favourable annpuncements on new E&P discoveries hold the key. We see limited scope for positive surprises in the chemical and refining segments and, in fact do not rule out negative surprises. Finally better disclosures may improve sentiment and multiplies; we believe the current level of disclosures leaves a lot of room for improvement.

Valuation 1: Rs 2,300 would entail higher chemical and refining margins and gas reserves
We compute that a fair valuation of Rs 2,300 for RIL stock, based on FY2011E estimates, would entail (1) significantly higher chemical margins (+16-24%), (2) very high refininf margins (US $13.8/bbl and US$12.4$/bbl for RIL and RPET refineries) and (3) additional 16 tcf of gas to be discovered over the next six years. Our SOTP-based 12-month fair valuation is Rs 1650 and fair valution based on FY2011E estimates is Rs1,750.

Valuation 2: Rs2,300 would entail large new E&P discoveries, unchanged margins in others
We estimate that RIL would need to add 51 tcf of additional gas reserves next over the six years without additional contribution from other businesses to reach our fair valuation of Rs 2,300 in our hypothetical exercise. It would be interesting to see if RIL can create further value from gas through forward integration into merchant power generation and city gas distribution.

Valuation exercise 3: Rs1,375 in downside scenario
We calculate RIL's fair valuation at Rs1,375 in our downside scearion of (1) weaker than assumed margins (US$50/ton lower for major chemicals, US$2/bbl lower for refining margins) and (2) higher-than-expected taxation (no income tax exemption for gas production). We also do not rule out lower multiples in case if lower0than-expected earnings.


Disclosures: Higher disclosures can boost positive sentiment and multiples
We believe in the quality of disclosures is not commensurate with the size and complexity of RIL's operations. In our view, higher disclosures will be perceived as a positive by the market and result in a possible re-rating of the stock. On the other hand, continued reticence with regard to disclosures and unexplained mismatches in reported financial statements may result in investors eventually de-rating the stock

To see full report: RIL