>RELIANCE INDUSTRIES:better days ahead (NOMURA)

■ Dawn replacing darkness — better days ahead
In our note, Increased darkness before dawn? on 27 November, 2009, we highlighted that RIL’s offer to acquire LyondellBasell (LB) added to near-term uncertainties. Refining margins were also among the lowest then. Reliance is now nearly out of the LB race. Refining margins have sharply improved from lows in 4Q09. The Supreme Court verdict on the long pending gas litigation is expected soon. The period of darkness is abating, in our view.

■ Focus to shift on earnings growth in FY11F
Despite the large base, we expect RIL’s earnings to grow 44% in FY11F (consensus is marginally lower at 39%). Growth will be driven by refining (the new refinery will see its first full year of operations and margins have recovered sharply) and exploration and production (KGD6 gas volumes will reach initial peaks in 2H FY11F).

■ Large E&P upsides remain
With the group focused on KG-D6 (both development and litigation), there has been relatively less exploration effort in other blocks and little news flow on RIL’s plans for its large inventory of discoveries. Exploration is scaling up and after the Supreme Court ruling the company could surprise with more concrete plans for other KG-D6 discoveries and other discovered blocks, in our view.

■ Upgrade to BUY with price target of INR1,275
We have rolled forward valuations to end-FY12F. Valuations for core refining, petrochemical and currently producing E&P assets (PMT, KG-D6) are largely unchanged. We are more optimistic than ever on E&P upside and assign a significantly higher value of INR421 (earlier INR167) for other discovered blocks and exploration upsides.

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