>RELIANCE INDUSTRIES: Share buyback to provide only near-term support to valuations; Neutral

■  Business fundamentals to drive long-term stock performance: RIL's 2012 share buyback announcement of INR104b (120m shares; 3.7% of outstanding equity and 7% of free float) "to increase shareholder value" is meaningful, though we will have to wait to know the actual buyback (25% mandatory; 1.7% till date) quantum. We expect the buyback to act as a support to valuations in the near term. However, over the long term, stock performance would be driven by (1) business fundamentals, and (2) cash utilization.


■  Outlook for core businesses not very encouraging: Refining and petchem margin performance will be primarily governed by the global economic environment (particularly Europe). We remain cautiously optimistic on refining margins, primarily due to increased refinery closure rate in US and Europe. On the petchem front, we believe that the margins have bottomed out. Gas production at RIL's flagship KG-D6 block is declining. While BP's stake purchase is positive for the E&P business, RIL has not shared any concrete ramp-up plans yet.


■  RoE-accretive cash deployment a key challenge: Cash deployment has been a key challenge for RIL post the completion of the new refinery and KG-D6 development. Apart from annual cash generation of USD6b, RIL has ~USD22b for deployment. The company has made investments of over USD8b in new ventures, but we do not expect meaningful positive contribution from these businesses before end-FY14. Though the most tax efficient way to reward shareholders, we believe share buyback is only a short-term solution.


■  Cutting estimates; maintain Neutral: We are cutting our FY12/FY13 EPS estimates by 3%/4% to factor in lower GRM in FY12 and cut in KG-D6 production assumptions from 43/35mmscmd to 42/28mmscmd in FY12/FY13. The stock trades at 10.8x FY13E adjusted EPS of INR66.9 and at an EV of 7.3x FY13E EBITDA. Maintain Neutral with a target price of INR800.


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