>RELIANCE INDUSTRIES (MORGAN STANLEY)

Investment conclusion: We believe Reliance is poised to show CAGR of 21% p.a, F2009-11, against the expected growth of 10% amongst the SENSEX constituents with both its major projects fully commissioned – its new 58kbpd high complexity refinery, as well as it E&P project from its D6 field. This is despite our expectation of a tough environment in the refining and petrochemical business. The stock has underperformed the market by 22% in the last six months, and trades at 14x F2011e earnings against 15x market multiple, making valuations attractive in our view. We increase our target price to Rs2463/share and maintain our Overweight rating. Key triggers we see are: 1) RIL producing 80mmscmd of gas and the government allocating customers for the gas; 2) the court case between RNRL and RIL getting resolved.

High Growth Ahead, Despite Tough Business Environment

What’s Changed?: We are lowering our F2010/11e EPS by 18%/11%, largely on the back of lower Gross Refining Margin (GRM) estimates; lower gas from KG D6 in F2010 and higher depreciation. RIL’s GRM has been negatively impacted due to oversupply in region, backed with squeeze in Arab light - heavy spreads.

One more quarter of pain ahead: RIL produced 33.5mmsmcd of gas and 10kbpd of oil from the KG-D6 field in F2Q10.The field is currently producing 46mmscmd of gas and awaits government allocation to increase further production. With 18 wells drilled, we believe the company is in a position to produce 60mmscmd of gas by y/e and 80mmscmd of gas by April 2010, at minimal capex. In the interim, Singapore Complex GRMs are currently hovering at US$1-1.5/bbl, which could lead to flat profits in F3Q10. Thereafter, we estimate an 11% sequential growth in net profits.

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