Friday, March 12, 2010

>RELIANCE INDUSTRIES: 4QFY10 shall be an inflection point

During April – Dec 09, RIL has doubled refining capacity and added one of the world’s largest gas facilities, and yet earnings have stagnated due to more than halving in GRMs. We believe a recent tripling in GRMs, further gas rampup and shift to cheap in-house gas shall herald 4QFY10 as an inflection point.

We forecast a 39% QoQ rise in RIL’s 4QFY10 PAT. Our scenario analysis (Fig 1) suggests a Rs 15–25bn QoQ PAT growth due to the above factors.

Sustained and significant rise in GRMs: Singapore GRMs have tripled QTD to US$ 6.0/bbl from near 10-year low of US$ 1.7/bbl during Oct-Dec 09. Our sensitivity analysis shows a US$ 2.5-4.0/bbl QoQ rise in GRM adds Rs 13-21 bn to PBT. We believe RIL enjoys a double leverage to rising GRMs: (1) Our regional refining team believes that the rise in margins is sustainable and forecasts a rise in refining margins from US$ 3.5/bbl in 2009 to US$6/bbl in 2010. Nearly 1m bpd of refining capacity has closed globally, and during CY10 capacity closures is forecast to exceed additions (Figs 2 and 3)

(2) A potential widening in light-heavy crude price differential shall further significantly benefit Reliance as it has amongst the world’s most complex refineries. High refined product inventory levels (Fig 5) has constrained widening of light-heavy spreads. A strong growth in US economy (5.9% in 4Q09 actual) has recently spurred demand and hence could cut inventory.

Ramping up of KG-D6 gas production: We believe RIL’s KG-D6 production has increased to ~60 mmscmd from an average of 45mmcmd during 3QFY10, a 33% QoQ jump. Production plateau of 80-89mmscmd is unlikely until end CY-10 though, once GAIL India (GAIL IN, Rs400.10, Outperform, TP: Rs506.00) expanded HBJ pipeline is fully commissioned.

Reduction in operating costs: RIL has switched over from imported LNG, which costs ~US$9/mmBTU for in-house use to KGD6 gas saving it US$ 2- 4/mmBTU. We estimate a PBT increase of Rs 2-5bn QoQ.

Petchem margins also higher: We estimate that polymer integrated margins are up 13.3% QoQ and polyester margins have risen 2.8% (Figs 6, 7 & 8)

Earnings and target price revision
No change

Price catalyst
12-month price target: Rs1,207.00 based on a Sum of Parts methodology.
Catalyst: New oil & gas finds, and potential acquisitions.

Action and recommendation
RIL is one of our top picks. We believe the company is not only poised to witness strong and highly visible earnings growth over the next two years, but sharply enhanced upstream exploration activities and likely corresponding finds shall sustain growth in the longer term.

To read the full report: RIL