>RELIANCE INDUSTRIES (DEUTSCHE BANK)

■ Rebound in refining juxtaposed with recent sell-off augurs well for the stock

We reiterate Buy on RIL with 26% potential upside to our target price. With a 10% fall YTD, the stock trades at 14.0x FY11E PE and 8.4x FY11E EV/E. Key prospective catalysts: i) recent rebound in margins and light-heavy differentials, coupled with plant closures, augurs well for refining outlook; ii) petchem is enjoying near-term tail winds from tight markets and delays in new start-ups; iii) proposed deregulation of auto-fuels could help RIL revive its fuel retailing business; and iv) potential exploration success, acquisitions and gas dispute resolution.

Buy on refining, petchem tail winds and 10% correction

■ Refining bottoming out; US$1/bbl swing implies 3.6% upside to earnings
Our channel checks and the company’s recent results suggest that global refining margins may be at rock bottom. We believe that oil demand revival, spurred by improved economic outlook and ongoing capacity rationalization, could eventually turn around refining margins. The caveat is that the revival is difficult to time and we cannot wish away the volatility in oil prices even under normalized markets.

■ Higher-margin E&P to drive growth, de-risk the portfolio
We expect RIL’s ramp-up in KG D6 gas driving margin expansion and also EPS CAGR of 34.3% for FY10-12. In addition, the increasing share of the E&P (oil&gas) segment should help remove the cyclical risk in refining and petrochemicals.

■ Prospective catalysts: reviving earnings; potential end to KG D6 gas dispute
Our target price of INR1,235/sh uses equal weighting for PE-based and DCF methods. We use 16.1x FY11e PE based on RIL’s five-year average 12m rolling PE. Our DCF uses 10.2% WACC, based on our assumptions of India CoE of 13.4% and terminal growth of 4%. Risks are: i) a worsening global economy along with new capacities hurting refining and petchem outlook; ii) the RIL-RNRL dispute dragging on; iii) production outages; and iv) policy vagaries.

To read the full report: RELIANCE INDUSTRIES