>RELIANCE INDUSTRIES (CITI)

■ E&P valuation factors meaningful premium to NAV — The D9 dry well is not significant per se but assumes importance given a) E&P value roughly factors Rs350-400 premium from potential exploration upsides over and above the NAV of known reserves, which largely comprise 21tcf of recoverable reserves from D6, and b) there are high expectations from D9 as it is adjacent to D6 (see Figure 1) and c) it brings to fore risks due to the probabilistic nature of the E&P business.

D9 Dry Well – Part of Life but Valuations Leave Little Room for Error

■ E&P being valued as a going concern — Our valuation of E&P in the SOTP is based on PER of 12x FY11E earnings from D6 and therefore indirectly factors reserve upsides from D6 and new blocks (primarily D3, D9, KG-D4 and MND4). This in fact translates to over 60% premium to NAV of D6 (21tcf), NEC and CBM. Incremental news flow from D9, D3 (which has had 2 discoveries so far), Cauvery and later on from the potentially huge MN-D4 (in 3Q2010) is critical to sustain this valuation approach.

■ It’s not over for D9 by any means — RIL will drill 3 more wells in the block after incorporating the data from the first well. The first well encountered sands but with some background gas.

■ Refining recovery need not be V-shaped — While present levels of refining margins are unsustainable, we see a weak case for a very sharp rebound in FY10. We build in a moderate recovery over the next 2 years - $8.6 and $9.5 in FY11 and FY12 from $7.5 this year.

To read the full report: RIL