Saturday, May 2, 2009

>Reliance Industries (MACQUARIE RESEARCH)

All cylinders have just been fired up

■ RIL not only beat 4Q FY3/09 PAT forecasts by 9%, but is poised to double earnings within three years as it is has just fired up two new sizeable operations. Maintain Outperform with a TP of Rs2,035.

Hedged operations. A 17% rise in petchem profits, a 6% rise in upstream profits and a sharp 25% INR/US$ YoY depreciation offset a 36% YoY fall in GRM to US$9.9/bbl, demonstrating the benefits of being highly integrated.

New SEZ refinery kicks off. RIL commissioned one of its two CDUs achieving 100% utilisation straightaway. It earned a small profit of Rs840m within the first quarter of start-up. Full start-up is scheduled for 1Q FY3/10, including the start-up of FCCU converting bottom-of-the-barrel distillates into high-value propylene and PP, triggering a profit surge. New refinery operating cost is lower than the existing refinery’s US$1.75/bbl (industry at US$5/bbl). Euro V diesel production has also just started, kicking off its first high-margin product.

Innovative tax planning. RIL guided that its tax shall remains near MAT of 9-10% for at least the next two years. First, RIL commissioned its new SEZ refinery prior to March 2009 year-end to avail itself of tax-free status for another six years (seven including FY3/09) for even the portion of products sold domestically (only refineries started by March 2009 have this option available). This is in addition to tax-free exports. Second, we believe RIL’s KGD6 capex of US$12.7bn (US$7.2bn spent already and US$5.5bn proposed for nine satellite developments), not only allows a 7-year tax holiday on KGD6 profits, but additional tax depreciation on these assets can also be used to lower tax on other businesses.

Stage set for FY3/10E take-off… RIL’s low-tax massive refinery triggering growth is the smaller part of the kicker in FY3/10E. RIL’s KGD6 gas has already reached 9.5mmscmd of production. Management is confident it will achieve peak production of 550,000boe, which will double India’s gas production add to 0.4% of global oil equivalent of production.

…with even more. Yet, this is the tip of the iceberg. RIL expects regulatory approval within three months for plans to raise KGD6 production by 50% and NEC-25 development. Also as RIL moves its three deepwater rigs after shortly completing KGD6 development , it plans to drill 17 exploratory wells in FY3/10 compared with only two in FY3/09. Another deepwater rig is expected to arrive in July 2009, with two more to follow in 2H CY10. Three prolific basins of KG, Cauvery and Mahanadi are key exploratory targets. Moreover, RIL plans to increase 3D seismic studies twenty-fold during FY3/10E. During our recent Oil Yatra (Tour) Forensics, the upstream regulator (DGH) demonstrated India’s potential to surpass the Gulf of Mexico or even Brazil’s upstream capabilities.

Earnings revision
■ No change.

Price catalyst
■ 12-month price target: Rs2,035.00 based on a Sum of Parts methodology.
■ Catalyst: New oil and gas finds and enhanced clarity on organised retail.

Action and recommendation
Reiterate Outperform. RIL is our top pick in the India oil & gas sector.

To see full report: RIL