>RELIANCE INDUSTRIES (MACQUARIE RESEARCH)

Event
■ Recent press reports suggest RIL may be looking to acquire refining and oil product marketing (R & M) assets in the US. We continue our thematic series on RIL’s acquisition potential.

■ We believe that RIL’s stated strategy for inorganic growth, coupled with its increased need for a distribution and marketing network for its high-end products, has enhanced the potential for acquisitions, especially in the qualitydiscerning large US market.

Impact
■ RIL’s need for overseas acquisition. RIL has commissioned its 580kbpd high-end refinery earlier in the year and hence requires a large discerning consumer base. Given its larger share of Euro IV/V compliant gasoline in the product slate, the US would be the natural market for the new refinery. Given the unattractiveness of the domestic retail fuel market, superior quality of RIL’s products and its large production capacity, we believe RIL will benefit from greater control of overseas distribution network to maximise its returns.

Shopping in America

■ Types of assets that fit the bill. Product differentiation, especially branded products, is essential to enhance the returns in the auto-fuel retailing market. In addition, RIL will likely be looking for a captive product storage and distribution network in the US. Mid-sized auto-fuel marketers with distribution assets could be primary targets. In our view, US-based R & M companies, Tesoro or Delek could be a good fit for RIL (Fig 8). Valero and Sunoco are also a good fit, but quote at the highest 1-year forward EV/EBIDTA (Fig 11).

■ Build or buy? GRM plunge provides opportunity. Weak demand, coupled with increased capacity, has plunged GRMs to US$ 1.3/bbl (Singapore complex, Fig 5), well below the average operating cost of most refineries. Valero has shut the 235kbpd Aruba refinery. Sunoco has announced plans to shut its 145kbpd Eagle Point refinery. Tesla refinery was recently transacted at a fraction of the price it cost RIL to build its highly competitive export refinery (Fig 6). We feel buying is currently a better opportunity than to build.

■ Does RIL have the financial muscle? RIL holds US$4bn in cash, US$8bn in treasury stock and if it doubles its current net debt-to-equity of 0.35x it can borrow another US$10bn, ie, a total potential of ~US$22bn. The largest R & M company in the US has a US$12bn EV; the others are less than US$7bn.

Earnings and target price revision
■ No change.

Price catalyst
■ 12-month price target: Rs2,400.00 based on a Sum of Parts methodology.
■ Catalyst: Gas pricing settlement and new growth initiatives.

Action and recommendation
■ Reiterate Outperform. We believe RIL is poised for sizeable volume-driven profit growth, despite cyclical pressure on margins.

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