>RELIANCE INDUSTRIES (NOMURA)

Fully valued - Downgrade to Neutral

Investment Conclusion
Reliance Industries' share price has rallied nearly 51% since its recent lows made in early March. YTD in 2009 it has outperformed the Nifty index by 27%. The key catalysts for such an outperformance, in our view, are the commencement of production from KG-D6 and better-than-expected refining and petchem margins. With the addition of KG-D6 and new refinery in FY10, we expect earnings to increase about 30% in both FY10 and FY11. However, we believe earnings upsides are already factored in the current price after the recent rally. We have moved forward our valuation to FY11 and revised our price target to INR1,725 (from INR1,650). With no potential upside from the current level, we downgrade the stock from BUY to NEUTRAL.

Summary

■ We revise our EPS estimates to INR123 for FY10 (previous INR115) and INR160 for FY11 (previously INR163).

■ As a long-term investment stock, we continue to believe that potential upside is likely from its large E&P portfolio. In our PT, we already factor an exploration upside of INR189/share for discoveries for which firm reserve/resource estimates are yet to be disclosed.

Downgrade to NEUTRAL – will look for better entry point

The share price of Reliance Industries has rallied since the beginning of 2009, up 41% on an absolute basis and outperformed the benchmark Nifty index by 27%. From its recent lows in early March, the stock has sharply risen by nearly 51% (vs. Nifty, which was up 30% over same period).

The key catalysts for this recent outperformance, in our view, are:

■ A much-awaited commencement of oil & gas production from its key KG-D6 block, and

■ A better-than-expected performance in the core refining and petrochemical business, led by a rebound in both the refining and petrochemical margins.

The commencement of gas production and increased visibility on offtake of an initial volume of 40mmscmd are clearly a positive for the company, in our view. The E&P business will soon become its key core business with EBIT share of 47% in FY10E and 58% in FY11E; E&P alone contributes nearly 55% of Reliance Industries’ NAV in our estimates.

Refining and petrochemical margins also rebounded in 4Q09 from their November 2008 lows, due to lower run-rates in the refining and petrochemical plants, and delays in the ramp-up of new capacity. We continue to remain bearish on the refining and petrochemical sectors. We believe that the refining margin will resume its downward trend in 2Q09, while the petrochemical margin will turn downwards in 3Q09, as the impact of the expected large Chinese and Middle-Eastern capacity is finally felt.

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