>Reliance Petroleum (NOMURA)

DOWNGRADE TO NEUTRAL

Investment Conclusion

Since the announcement of the RIL-RPL merger and a share-swap ratio of 1:16 on 2 March, RPL has been trading at around 1/16th of the RIL share price rather than on the basis of its own
fundamentals, and it is likely to continue to trade at this ratio, in our view. After the significant
outperformance in recent months, we believe RIL's share price has already factored in all the near term earnings upside. We have downgraded RIL to NEUTRAL, with a revised price target of INR1,725/share (from INR1,650/share). At our revised price target of INR1,725/share for RIL, we calculate an implied price target of INR108/share for RPL. Given no potential upside from current levels, we downgrade to NEUTRAL.

Summary
■ In a surprise move, RPL has declared the commercial commencement of its refinery from 15
March 2009 (vs our expectation of April 2009 to gain maximum advantage of tax benefits under
the SEZ policy).

■ RPL's refinery processed 3.6mn tonnes of crude during 4Q FY09 at about 97% utilisation.

■ For more details on our RIL downgrade, please refer to our note " Fully valued - downgrade to NEUTRAL" dated 4 May 2009.

RPL refinery may surrender SEZ benefits and instead opt for tax holidays under 80-IB

In yet another surprise move, Reliance has declared the commercial commencement of RPL’s refinery from 15 March 2009. Our and market expectations were that commercial commencement would be from the new financial year beginning April 2009 to get the maximum advantage of tax benefits under the SEZ policy. The key rationale, in our view, is that the company may now opt out of the SEZ status for the old refinery, and instead opt for the seven-year tax holiday (which would be available for six years and 15 days now to the RPL refinery) available under Section 80-IB. The tax holiday under Section 80-IB is available only if the refinery has commenced commercial production before 31 March 2009, as the government has decided it will not extend this scheme beyond this date for private sector refiners. The company indicated that it has until end-FY10 to decide whether it will retain SEZ status or opt for 80-IB benefits.

To see full report: RPL