>RELIANCE INDUSTRIES LIMITED (MORGAN STANLEY)

Stepping on the Gas

Investment conclusion: We reiterate our Overweight stance on Reliance Industries (RIL) and update our price target to Rs2,371 per share, marking to market our sum-of-the-parts multiples for each division. We expect RIL’s profits to grow at an impressive CAGR of 37% F2009/11, on the back of RIL’s E&P business. Reliance started commercial production from the KG D6 field on April 2, 2009, and is currently producing 30 mmscmd of gas. It has signed up with customers for 40 mmscmd of gas at US$ 4.2/mmbtu. The company should touch 80 mmscmd of gas in the next six months.

RIL’s 80 mmscmd of gas implies an annual US$8 billion saving for the country, or replacement of close to 26mn tons of crude oil; that is as much as ONGC produces domestically. We estimate 20 mmscmd of gas would go to the fertilizer industry and most of the rest to the power industry. This would imply about 13 million tons, or almost 50% of the country’s fertilizer production,
and 12,500 MW of power, or 8-9% of power produced in the country, would run on RIL’s gas.

There is a lot of uncertainty around the RIL-RNRL litigation and we highlight four different possible scenarios. Our base case is based on

US$ 4.2/mmbtu for all the D6 gas to customers other than NTPC and RNRL, who would get the gas at a lower price when their power plants are ready to consume the gas. We believe the green field ventures by both RNRL and NTPC are at least 3 years away, and until then RIL should be able to earn US$ 4.2/mmbtu on its entire gas production.

We estimate RIL to be FCF positive in F2010 with cash earnings increasing from US$4.5bn in F2009 to US$7.4bn in F2010 and US$9.4bn in F2011, and capex hovering around US$3.5-4.5bn per annum. We believe the E&P business should enable the company to grow 17% sequentially in each of the next four quarters despite lower GRMs and petrochemical netbacks.

To see full report: RIL