>RELIANCE INDUSTRIES (MACQUARIE RESEARCH)

Event
■ RIL reported a 16% YoY rise in 3Q FY3/10 PAT to Rs40bn, marginally beating both our and market expectations. A 24% YoY surge in petrochemical EBIT and a doubling in upstream profits offset a 27% drop in refining profits and a 5% rise in tax due to an increased minimum alternative tax (MAT).

■ More important, in our view, RIL looks poised to strongly accelerate growth from this quarter (4Q FY10). Key drivers include a 30–40% QoQ rise in gas volumes, a sharp rebound in GRMs and switching to sharply cheaper in-house gas.

Inflection point has been reached

Impact

■ Our analysis suggests a 54–90% QoQ rise in 4Q FY10 profits. (1) RIL looks poised to increase gas volumes by 30–40% QoQ. (2) Our regional refining team is becoming more positive, as GRMs have doubled over the last quarter to US$3.9/bbl from near ten-year lows with evidence of a further recovery. Reliance’s recently doubled capacity looks well-timed to capitalise on our forecast rise in refining margins from US$3.5 in 2009 to mid-cycle levels of US$6/bbl in 2010. Moreover, we believe a potential widening in the light-heavy crude price differential would be a further significant benefit given that it is one of the most complex refineries in the world. (3) RIL has switched over from LNG for in-house use to KGD6 gas, saving it between US$3– 5/mmbtu. Our scenario analysis shows that PAT may rise by Rs22–36bn QoQ during 4Q FY10 due to the above (see Fig 1).

■ RIL’s 3Q FY10 refining EBIT fell 27% YoY. GRMs were US$5.9/bbl during 3Q FY10 vs US$10/bbl in 3Q FY09. The spread over Singapore complex fell to US$4/bbl from US$6.4/bbl in 3Q FY09 as light-heavy differentials narrowed.

■ Oil & Gas EBIT +145% YoY, contributing toward 30% of EBIT from 15% in 3Q FY09. KG-D6 production kicked in, averaging 45mmscmd for gas and 9,150bpd for oil. RIL realised US$4.2/mmBTU for gas. RIL is currently producing at 60mmscmd. Production ramp-up to plateau of 80–89mmsmd is likely to be partly delayed to end-CY10, once GAIL’s expanded HBJ pipeline is fully commissioned. During the quarter RIL made one oil discovery in the CB-10 block and one gas discovery in KG-D3. RIL is on target to drill 8–10 more exploratory wells during 4Q FY10 in addition to the 13 drilled in 9M FY10.

■ Petrochem EBIT increased 24% YoY, driven by a 20% rise in volumes from the PP start-up in 1Q. Domestic demand for polymer surged 24% and polyester 17%. The company expects the new PP plant to achieve 10–15% higher production.

Earnings and target price revision
■ No change.

Price catalyst
■ 12-month price target: Rs1,250.00 based on a Sum of Parts methodology.
■ Catalyst: New oil and gas finds and revival in GRMs.

Action and recommendation
■ RIL is one of our top regional picks, as we believe it is best levered to rebounding GRMs.

To read the full report: RIL