Tuesday, August 4, 2009


Marred by lower GRMs and higher taxation

Reliance Industries’ (RIL) Q1FY10 recurring net income was lower than expected, at Rs36.4bn (12% YoY dip), despite higher-than-expected PBT, owing to higher effective tax rate. RIL factored-in 15% minimum alternate tax (MAT) rate in its reported earnings on account of increase in MAT rate in the recent union budget. The company’s PBT was ~10% higher than I-Sec estimates on the back of lower other expenditure and interest costs. Despite an impressive 27% income CAGR over the next two years, we remain negative on RIL due to concerns about its ongoing court cases with Reliance Natural Resources (RNRL) & NTPC and weak outlook on its refining & petrochemical businesses. Owing to higher tax rate and slightly higher investments made by the company in its retail business, we lower our target price estimate to Rs1,745/share from Rs1,756/share earlier. Refusal by the government to allow tax shield on gas production from NELP blocks would further reduce our target price by Rs30/share. Maintain HOLD.

EBITDA declines 3% YoY to Rs59.2bn on lower refining profitability, which was partially offset by higher profitability from the petrochemicals and O&G businesses. RIL saw 52% YoY dip in refining margins to US$7.5/bl due to lower product spreads and lower light-heavy differential. While higher polymer margins led to 32% YoY growth in petchem EBIT, commencement of production from KG D6 field led to 100% YoY jump in O&G segment profitability.

Recurring net income dips 12% YoY to Rs36.4bn on higher effective taxation. RIL factored-in effective tax rate of 21% (vis-Ă -vis our expectations of 11.3%) due to higher MAT rate as per the budget. Interest costs dipped 28% QoQ due to lower interest rates, as LIBOR-linked loans were cheaper 150bps in Q1FY10.

Lower earnings estimate, valuations. We lower our FY10-11E earnings estimate for RIL 10-12% due to higher effective tax rate. However, we maintain our EBITDA, and PBT estimates as we maintain our outlook on the company. We also lower target price to Rs1,745/share from Rs1,756/share earlier to reflect the revision in earnings. We value RIL’s extant business, including Reliance Petroleum (RPL) refinery, at Rs1,020/share; retail business at Rs38/share; gas-marketing business at Rs42/share; E&P at Rs798/share; and special economic zone (SEZ) at Rs10/share. Given that the stock is trading at significant 16% premium to our target price estimate, we maintain our negative stance on the company and advise investors to
book profit at current levels.

To see full report: RIL