>RELIANCE INDUSTRIES (IDFC SSKI)

Reliance Industries (RIL) has delivered consistently high sequential growth for the last three quarters. The stock has, however, underperformed the Sensex due to concerns around sustainability of GRMs, future cash flow utilization and overhang of Supreme Court ruling in the RIL-RNRL dispute. We believe the concerns are overblown. We see the trend turning for refining spreads, as the economic recovery gathers pace and OPEC brings heavy crude supply back, thereby reviving the premium for complex refiners. While the petchem business will increasingly face headwinds from capacity additions, strong volume growth in the domestic market should soften the blow. The upstream business remains on track with the ramp-up of KG D6 a matter of time. While the timing and size of Lyondell (LB) bid remains uncertain, we see substantial upside in LB in the long run even at US$14.5bn. RIL may also look at other acquisitions (e.g. VCI) in the upstream space. We expect a 23% PAT CAGR over FY09-12E for RIL. Reiterate Outperformer.

■ Refining cycle is turning: RIL reported GRMs of US$5.9/bbl in Q3FY10, against Singapore benchmark GRMs
of US$1.9/bbl. With Singapore benchmarks showing a marked improvement to ~US$3.9/bbl for January 2010, we expect significant improvement in RIL’s Q4FY10 margins as well. We see RIL’s GRM rebounding to double digits by H2FY11, led by improved availability of heavy crude and economic revival gathering steam.

■ Petchem – playing the domestic growth story: With consistently high double-digit growth for the last three quarters, the strength in the domestic petrochemicals market has caught everyone by surprise. We see the volume growth sustaining over the next 12-18 months, which should help offset the likely weakness in petchem business due to the huge capacity additions over FY11-12E.

■ Valuations attractive; Outperformer: With improvement in the key business of refining and marketing as also strong volume growth in petchem, downstream looks set to deliver on the growth front. We see upstream continuing to grow robustly with KG D6 on track to hit 80 mmscmd by H1FY11E, while other exploration assets (NEC 25, CBM and KG D9) are well on the way to reach appraisal status. Current valuations of 11.6 FY12E earnings and 7x EV/EBITDA, we believe, are undemanding. Our SOTP-based valuation of Rs1,233 per share offers 25% upside from CMP. Reiterate Outperformer.

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