>RELIANCE INDUSTRIES (GOLDMAN SACHS)

Outlook remains positive, adverse case outcome priced in; Buy

What's changed
RIL has sold 15 mn in treasury stock, representing about 7.5% of total treasury shares, raising Rs31.9 bn of cash. This does not alter our positive outlook on RIL; it reduces the leverage on RIL’s consolidated balance sheet and could be a precursor to levering up for future growth.

Implications
We estimate RIL will generate about US$27 bn of excess cash flow over FY2011E-14E, after committed E&P capex, without any major projects lined up to consume this cash (RIL should turn net cash by FY13E). This could lead it to pursue inorganic growth opportunities in E&P and core businesses, in our view. We believe valuation, scope, and earnings accretion from such growth initiatives could drive RIL’s medium-term stock performance beyond the earnings visibility from D-6. With optionality of cash adding to strong E&P growth, a stable core business, and the stock already pricing in a full Rs325/share impact of an adverse outcome in the gas dispute (in our view), we find risk/return very favourable after today’s stock correction.

Valuation
We reiterate our Buy on RIL with a 12-month SOTP-based target price of Rs2,430, implying potential upside of 16%. We believe the E&P business will improve RIL’s earnings profile by: (1) adding a higher proportion of non-cyclical earnings, and (2) improving overall operating margins.
Moreover, we find RIL’s refining valuations do not reflect its efficiency and scale in an improving business environment, possibly due to the overhang of the court case on the stock price. RIL’s petchem segment is also trading at discount to regional multiples, in our view. We have currently valued refining and petchem segments at mid-cycle multiples. Following the recent underperformance, RIL is at 20% discount to the Indian market P/E.

Key risks
(1) Delay in D-6 ramp up, (2) court case overhang, (3) refining weakness

To see full report: RIL