>RELIANCE INDUSTRIES: RIL can take on another ~US$30bn of projects but has been reticent (CLSA)

After its recent 15% correction, 2012 is now Reliance’s fifth straight year of relative under-performance. We foresee some triggers emerging by year-end but singular variables, such as a gas price hike or the telecom foray, may not be enough for a sustained re-rating. Reliance needs to create a deep portfolio of projects to rekindle investor interest. Further, these may need to be in the energy chain; its ~US$8.5bn non-core portfolio has been a drag on performance. Reliance has been more reticent here than we had expected clouding its long term outlook.


■ Reliance has now been under-performing for five years
After its 15% correction since mid-Feb, Reliance’s stock is now under-performing the Sensex in 2012 – the fifth year in succession. Over this time, FY09-14 earnings have been cut 18-44%. This is continuing; we recently cut FY12-14 EPS by 2-7% to factor in lower KG-D6 volumes and SOTP by Rs25/sh to factor in a 30% cut in D1-D3 reserves to 7tcf. Our current FY13 estimate (~Rs69/sh, similar to consensus) implies a ~30% rise in EPS over the 4Q run-rate. This is predicated on a weaker currency (Rs53/US$), a US$1/bbl rebound in GRMs and higher other income but we concede downside risks.


■ Triggers may emerge by end 2012 but may be short-lived
We expect the EPS momentum to start rebounding when the polyester expansions begin to come on-stream from early 2013. By this time, we expect the 4G telecom launch, indications of higher gas prices and more detail on the retail foray to help. These triggers are likely to short-lived, however, as singular variables may not be enough for a re-rating. For example, while higher gas prices will renew the E&P thrust, NAV impact is limited (US$1 = 1.5%) while EPS impact (US$1 = ~3%) will accrue only from FY15. Similarly, our telecom analyst cautions that infra challenges and lack of a 4G device eco-system may force Reliance to bundle 2G voice implying higher capex. 


■ Reliance needs to build a deep portfolio of projects in the core energy chain 
In our view, therefore, Reliance needs to create a portfolio of +15-20 projects like its global energy peers have, to rekindle investor interest. Historically, sustained project growth has driven stock performance by driving EPS growth across cycles. This is now sorely missing; ten year profit Cagr has dipped below 20% for the first time in history.


■ Reliance can take on another ~US$30bn of projects but has been reticent
Reliance has been more reticent on new projects than we had expected it to be, though; perhaps because of poor returns from the US$17bn KG-D6, RPET projects and the +50% fall in US gas prices since the time it acquired its shale gas assets. For example, gross block will be flat over FY10-15 despite US$12bn outlay on downstream projects as the olefins, IGCC projects are yet to commence in earnest. Indeed, given its cash (US$15bn), operating cashflow (US$6-7bn annually) and capital serving needs, it can easily invest an additional ~US$30bn without stressing its balance sheet.


■ Non-core investments have been a drag on returns and stock performance
Further, these projects may need to be in the core energy chain. Its ~US$8.5bn noncore investments (~20% of balance sheet) across multiple verticals have been a drag shaving off ~3ppt from ROACE; the retail venture, for example, is still incurring losses even after five years of operation. Nonetheless, with the stock trading at 11x PE and a 25% discount to our NAV and triggers emerging by end-2012, we maintain O-PF.


RISH TRADER