>RELIANCE INDUSTRIES (GOLDMAN SACHS)

What surprised us: Reliance Industries (RIL) reported 2QFY10 PAT of Rs38.5bn, down 6% yoy, in line with our expectation of Rs.38.6bn and Bloomberg consensus of Rs38.1bn. RIL’s EBITDA at Rs72.2bn, up 11% yoy, came in above our estimate of Rs65bn, as higher-than-expected recouped costs from D-6 (based on 1P reserves) depressed net profit. RIL’s 2Q cash profit was up 12.5% yoy. While refining margin at US$6/bbl came below our estimate of US$6.3/bbl, owing to stabilization losses in new refinery, petchem did better than expected. We note that RIL’s earnings appear to have bottomed out in 1Q and are likely to show strong growth going forward from stabilization/ramp-up of the new projects.

With refining cycle passing through trough, D-6 gas ramp-up on track and a likely petchem trough in FY11E, we see multiple growth drivers in the medium term for RIL. Moreover, we believe RIL has the room to pursue inorganic growth in its businesses, as we see no major projects lined up to consume more than US$20bn of excess cash flow for FY11E-14E after its committed capex. In addition to scope for future reserve accretion in E&P, we find that RIL’s refining valuations do not reflect the trough and its petchem segment is also at a discount to the regional multiples.

In line with expectations: Low GRM, high recouped costs surprise

What to do with the stock: We reiterate our Buy on RIL (on Conviction list) and SOTP-based 12-m TP of Rs2,620, implying upside of 31%. Key risks: 1) Delay in D-6 ramp-up; 2) court case overhang; 3) petchem weakness; 4) lack of exploration success.

To read the full report: RIL