Friday, January 29, 2010


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

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