Friday, December 11, 2009


Reliance Industries (RIL) is well on its way to be a fully integrated energy major with a growing upstream portfolio complementing the refining and petchem businesses. KGD6 start-up is set to transform RIL’s business profile with 12% share in revenues and 49% in EBITDA in FY11E from E&P. Commissioning of the new refinery at Jamnagar and the ongoing economic revival would likely support margins in the refining and petchem space. Notably, the next leg of growth could come through an inorganic initiative; the latest bid for Lyondell provides a hint of RIL’s intended strategy in this direction. Though an adverse Supreme Court verdict on pricing could depress KGD6 value, we remain optimistic on RIL’s long-term prospects. Reinitiating coverage with Outperformer and a price target of Rs1,207.

New frontiers await…

Integration adds tremendous value: A 1.24m bpd refining hub at a single location and 2bn boe deepwater gas play combine to make RIL one of world’s largest global integrated energy players. E&P should provide a hedge to revenue cyclicality of refining and petchem, while usage of KG gas for captive use is likely to help margins in the refining and petchem business as well. We expect 36% CAGR in RIL’s PAT over FY09-11.

Market undervaluing E&P upside: Besides the producing assets, we see ~23bn boe (4bn risked) of resources in RIL’s exploration assets, a part of which should be proved up (booked as reserves) over the next 3-5 years. We see significant upside from these assets going forward, and attribute Rs243 per share of value to the same in our SOTP valuation, over and above the value from the producing assets.

Valuation upside from E&P and margins: We have valued RIL using the SOTP method with refining & petchem delivering Rs532 per share and E&P Rs631 per share to our valuation. The current stock price, we believe, does not fully capture the strength of RIL’s E&P portfolio, while pricing in too much pessimism around the refining and petchem business. Our target price of Rs1,207 per share implies a 13% upside from here.

To read the full report: RIL