>RELIANCE INDUSTRIES LIMITED (IDFC SSKI)

Reliance Industries (RIL) is well on its way to be a fully integrated energy major with a growing upstream portfolio complementing the refining and petchem businesses. KGD6 start-up is set to transform RIL’s business profile with 12% share in revenues and 49% in EBITDA in FY11E from E&P. Commissioning of the new refinery at Jamnagar and the ongoing economic revival would likely support margins in the refining and petchem space. Notably, the next leg of growth could come through an inorganic initiative; the latest bid for Lyondell provides a hint of RIL’s intended strategy in this direction. Though an adverse Supreme Court verdict on pricing could depress KGD6 value, we remain optimistic on RIL’s long-term prospects. Reinitiating coverage with Outperformer and a price target of Rs1,207.

New frontiers await…

Integration adds tremendous value: A 1.24m bpd refining hub at a single location and 2bn boe deepwater gas play combine to make RIL one of world’s largest global integrated energy players. E&P should provide a hedge to revenue cyclicality of refining and petchem, while usage of KG gas for captive use is likely to help margins in the refining and petchem business as well. We expect 36% CAGR in RIL’s PAT over FY09-11.

Market undervaluing E&P upside: Besides the producing assets, we see ~23bn boe (4bn risked) of resources in RIL’s exploration assets, a part of which should be proved up (booked as reserves) over the next 3-5 years. We see significant upside from these assets going forward, and attribute Rs243 per share of value to the same in our SOTP valuation, over and above the value from the producing assets.

Valuation upside from E&P and margins: We have valued RIL using the SOTP method with refining & petchem delivering Rs532 per share and E&P Rs631 per share to our valuation. The current stock price, we believe, does not fully capture the strength of RIL’s E&P portfolio, while pricing in too much pessimism around the refining and petchem business. Our target price of Rs1,207 per share implies a 13% upside from here.

To read the full report: RIL

>STATE BANK OF INDIA (AVENDUS)

New norms that require all banks to reach 70% specific provision cover by Sep10 could catalyze merger activity within Indian public sector banks. In particular, SBI stands to gain if the amalgamation of its associate banks were to revive and accelerate. At end of Mar09 the provision cover of the standalone bank was 38.5%, 10.8% below that in the consolidated bank. The new norms would erode net profit for FY10f and FY11f by up to 18%. The erosion for the consolidated bank would be capped at 13%. Two associate banks have been merged with the parent and this experience could help to quicken the process for the other five. While these mergers may not have material impact on the numbers used in valuing the stock they could potentially re‐rate the P/E. We value the stock using a combination of P/E, P/B and DCF method. We maintain ‘Hold’ rating on the stock with Dec10 target price of INR2,123.

Provisioning norm may erode standalone pre‐provision profit by 18% The additional specific provisions required to raise the cover to 70% are estimated at INR72.5bn. If equally distributed over FY10 and FY11 they would erode our current forecasts for pre‐provision profit by 18% and 15%, respectively. Due to higher loan loss provisions, we had downgrade EPS forecast for FY10f and FY11f by 12% and 22%, respectively in our report dated 18th Nov09 “Rising concern on NPL provisions’’.

Accelerated NPL provisioning could catalyze mergers

Higher provision cover in consolidated book would cut burden by c5%: At the end of Mar09, the provision cover of standalone SBI, including writeoffs, was c57%. That for the consolidated bank, assuming the amount of writeoffs stays unchanged was 61%. So, the additional provisions required to reach the mandated 70% level would be INR69bn. Consequently, the potential erosion in pre‐provision profit would be capped at 13% and 10% for FY10f and FY11f, respectively. The erosion would be even lower if we consider the additional write‐offs made by the associate banks.

Merger with associate banks would cut the provisioning burden: Over the past two years two of the smaller associate banks were merged into SBI. The natural corollary of extending the mergers to the other five associates is taking a pause due to opposition from the bank unions. Now, the mandated surge in NPL provisioning adds to the argument for rapid progress of mergers with these banks. We value SBI using the consolidated numbers. So, the actual merger is likely to have little material impact on the valuation of the stock. However, these mergers have potential to re‐rate the P/E in the near term.

We value the stock using a combination of P/E, P/B and DCF method. We maintain ‘Hold’ rating on the stock with Dec10 target price of INR2,123.

To read the full report: SBI

>GREAT OFFSHORE (ICICI DIRECT)

Open offer battle draws to a close with ABG exiting its stake...

■ Bharati revises bid to Rs 590 per share: The open offer battle came to an abrupt end with ABG Shipyard (ABG) exiting its stake in Great Offshore Ltd (GOL) by offloading its 8.27% stake in GOL at an average price of Rs 576 per share. Meanwhile, Bharati Shipyard (BSL) has revised its open offer price to Rs 590 per share for acquiring an additional 20% stake in GOL. Both open offers i.e. of ABG as well as BSL will run simultaneously from December 3 to December 22 and shareholders can tender their shares to either of them. ABG’s open offer price of Rs 520 per share is irrelevant now for obvious reasons but BSL’s offer price at Rs 590 is 15% more than the current market price. However, with an acceptance ratio of 25.8%, only one-fourth of the shares tendered would be accepted in the open offer. Hence it would be prudent for investors to sell their shares in the open market as our target price of Rs 429 is much lower than the current market price of GOL and the market price could correct further post the conclusion of the open offer.

To read the full report: GREAT OFFSHORE

>LIBERTY SHOES LIMITED (FIRST CALL)

SYNOPSIS: • Liberty Shoes is the flagship company of the Liberty Group, a leading footwear company in India and one of the largest manufacturers of leather footwear in the world with a turnover exceeding U.S. $100 million.

• The company is now focusing on the domestic market in a big way. “Liberty Shoes is bullish about retail. It is now ramping up retail and distribution channel in India.”

• Liberty launches Autumn-Winter 2009 Collection.

• Credit rating agency, ICRA has revised the rating assigned to the Rs.300 million Commercial
Paper/Short Term Debt (STD) programme of Liberty Shoes (LSL) from A1 to A2+. The revised rating indicates above-average-credit quality in the short term1.

• Foot Mart Retail, the joint venture between Pantaloon Retail and Liberty Shoes, seems to be on
shaky grounds due to a couple of operational issues. The JV did not take off as planned, and Future Group may pump in more funds and up its stake in the venture. While Liberty Shoes will continue to be a stakeholder in the business, the operational control could move to Future Group.

To read the full report: LIBERTY SHOES