>RELIANCE INDUSTRIES (CITI)

Hold: News Flow a Bigger Driver than Crude Prices

■ Dependent on gas — Since most of RIL’s E&P revenues are dependent on gas, the company is not materially affected by changes in our global crude price forecasts.

■ Downside to fair value after the court verdict — Our current fair value of Rs1,835 incorporates a value of Rs729 from E&P assets based on 12x FY11E EV/FCF. Following the court verdict on the RIL-RNRL case, this E&P value could decline to Rs544/share assuming that RIL begins its supply of 28mmscmd of gas FY11E onwards (which is clearly a worst-case scenario given ADAG’s non-readiness of power plants to intake gas). FY11E EPS could decline to Rs151 in this case from our base case of Rs165. If 12mmscmd gas to NTPC is also sold at US$2.3/mmbtu, then E&P valuation reduces to Rs465 and EPS to Rs145.

■ NAV erosion is lesser — Based on this judgment, we estimate that our NAV of RIL’s E&P business would be reduced to Rs467/share from Rs521 earlier. If gas to NTPC is also sold at lower prices, we estimate the NAV to drop to Rs452.

■ D6 under control, new exploration will have to wait — The company is aiming at 40mmscmd by end-Jun and 80mmscmd by end-FY10. Exploration wells in other blocks would be in 2HFY10 – with one rig from D6 and one new delivery. Entry in domestic oil retailing is likely to be gradual and at a controlled pace.

■ Balance sheet — Net debt was Rs280bn. FY10E capex guidance at US$4.5- 5.0bn includes RPL’s remaining capex of US$0.5bn (total project cost of US$6.5-7.0bn).

To see full report: RELIANCE INDUSTRIES