>RELIANCE INDUSTRIES: the SEZ business probably lost money before its termination

■  Conflicting signals on use of cash; ongoing buy-back program positive, others look negative
We note that RIL’s investments in non-core businesses like SEZs and retailing have not created meaningful value for shareholders (the SEZ business probably lost money before its termination and retailing continues to lose money). We are not optimistic about (1) telecom, given high license fees and a competitive business environment or (2) US shale gas, given very low gas prices in the US, which may result in low NPV of the business. Small investments in hotels and media show lack of focus, especially given limited progress in core businesses.


■  Confusing news about the E&P segment
(1) Media articles about a potential sale of Reliance Gas Transportation and Infrastructure’s East-West pipeline and (2) low gas reserves implied for the KG D-6 block, based on BP’s 2011 annual report, will probably raise concerns about RIL’s long-term volumes from the block. The proposed sale is in contrast to recent positive news about satellite fields, R-series fields and progress on new development plans for the MA field and likely submission of the same for D1 and D3 fields in October 2012. There is concurrently limited progress in other blocks (see Exhibit 1).


■  Core chemicals and refining businesses continue to struggle
Exhibits 2 and 3 show that current global refining and chemical margins are well below their
historical averages and our assumptions for FY2013-14. We do not rule out downside risks to our EPS estimates resulting from (1) lower-than-expected refining margins, (2) sustained weakness in chemical margins and (3) higher-than-expected decline in KG D-6 gas production.


■  Cut FY2013-14E earnings by 1-2%; retain REDUCE rating with a revised TP of `800
We have cut our earnings estimates again to `56.1 (-0.8%) for FY2013 and `58.1 (-2%) for
FY2014 to reflect modestly lower refining margins of US$8.4/bbl and US$8.7/bbl and other minor changes. We see risks to our fair value of RIL from (1) lower recoverable reserves from KG D-6 block and (2) structural decline in chemical margins for naphtha-based crackers due to lower cost structure for gas-based plants in the US and the Middle East.


To read report in detail: RIL
RISH TRADER