>RELIANCE INDUSTRIES (MORGAN STANLEY)

F1Q10: Refining Disappoints, but Gas Is Full Steam Ahead

Investment conclusion: We reiterate our Overweight stance on Reliance Industries (RIL) but lower our earnings by 8% and 2% for F2010/11. Post F1Q10 results, we have 1) increased our effective tax rate from 17% to 21% and 20% in F2010/11, respectively; 2) lowered our refining estimates for RPL due to synchronization-related issues; 3) improved our Petrochemical EBITDA due to stronger-than-expected netbacks. We maintain our target price, however, since we are largely maintaining F2011 estimates and our SOP, which is based on our F2011E earnings.

F1Q10: EBITDA was in line with our estimates but refining margins at US$7.5/bbl were 0.5/bbl lower than expected, although this was compensated for by higher petrochemical and gas divisions. Petrochemical EBIT grew an impressive 21% sequentially and E&P division EBIT more than doubled. RPL margins were a low US$ 5.4/bbl, with the company still not having synchronized all its units. Management expects to fully reach its complexity of 14x by September 2009. Gas volumes were an impressive 19 mmscmd from KG D6 this quarter, and the company is already operating about 30 mmscmd and has clients tied up for 40 mmscmd. Higher effective tax rate of 22% led to 43% increase in taxation and 3% lower profits than we estimated.

We expect RIL to grow 34% p.a. F2009-11, against Sensex growth of 11% during the same period. We estimate RIL will be FCF positive in F2010 with cash earnings increasing from US$4.5bn in F2009 to US$7.4bn in F2010 and US$9.4bn in F2011, and capex hovering in the US$3.5-4.5bn per annum levels.

Our quarterly forecast suggests RIL’s EP business should enable the company to grow 8% per quarter for each of the next three quarters despite lower GRMs and petrochemical netbacks.

To see full report: RIL