>RELIANCE INDUSTRIES: FY10 Annual Report Analysis

�■ Commissioning of mega projects leads to doubling of balance sheet size in three years: RIL’s balance sheet size has doubled in three years, led by its investments in KG-D6 and the RPL merger. Its gross block has more than doubled in the last two years, led by commissioning of the KG-D6 project and the merger of RPL. Capitalized cost of KG-D6 is ~Rs390b while that of RPL is ~Rs330b.

�■ RoE depressed due to higher DD&A and increased tax rate: RIL’s RoE for FY10 was depressed at 13.4% v/s an average of 20% in the last three years, led by higher DD&A charge, reduction in interest capitalized, and higher tax rate (21% in FY10 v/s an average of 16% in last three years).

Expanding gross block, contracting RoE

�■ Average interest cost down 390bp to 4.4%: Gross interest cost for FY10 was 4.4% v/s 8.3% in FY09. As 85% of RIL's total debt is forex-denominated, its interest cost is partly a reflection of LIBOR rate, which declined from 2.9% to 1.3%. Despite 15% reduction in gross debt, net interest cost increased 14% to Rs20b, led by lower interest capitalization (33% in FY10 v/s 66% in FY09).

■ 1P reserves remain almost flat over the last four years: Though RIL has reported large number of discoveries in the last few years, its 1P (only reports 1P) reserve numbers have not increased significantly. Total reserves remained flat in FY10 at 1.5bboe. We expect RIL to upgrade its reserve numbers once the appraisal of the pending blocks is completed and approved by DGH (Director General of Hydrocarbons).

■ E&P has highest share in capex and depreciation: KG-D6 production start has lead to significant increase in the depletion charge for RIL, resulting in highest share in the overall company depreciation. Also, in terms of capex share, E&P capex was highest in FY10 at Rs118b as against total capex of Rs219b.

■ Key things to watch: We believe investors should focus on: (1) ramp-up of KGD6 volumes; (2) clarity on 7-year income tax holiday for KG-D6 gas (we model tax holiday); (3) margin trend in refining and petchem and (4) any announcements in terms of new projects, acquisitions, discoveries. (We estimate US$8b of FCF over next 2 years).

■ Valuation and view: We value RIL on SOTP basis to arrive at a price target of Rs1,133 (incl E&P upside potential of Rs205/share). Adjusted for treasury shares, RIL trades at 11.7x FY12E EPS of Rs87.9. Maintain Buy.

To read the full report: RIL