Thursday, April 1, 2010


Our global refining team believes that gross refining margins should improve faster than consensus forecasts. We believe RIL shall be a key beneficiary, given its recently doubled capacity and highly complex facilities. We raise our target price for RIL by 3% to Rs 1,293/share. RIL is one of our top regional sector picks.

The global refining team is bullish on GRMs due to an anticipation of improvement in middle distillate balances, led by the economic recovery. While Asian gasoline demand is driving gasoline cracks currently (~US$13/bbl, up 2.5x from Oct-Dec 2009), middle distillate cracks are expected to rise from the present US$7/bbl levels to US$15/bbl by 2013.

RIL stands to benefit heavily from the spurt in crack spreads. Reliance’s high-complexity refinery has a high proportion of light and middle distillates (especially diesel) in its product slate (~75% in total). Thus, RIL is poised to take maximum advantage of the anticipated rise in distillate cracks, through a larger positive impact on its GRMs vis-à-vis Singapore Complex margins.

Above consensus earnings forecasts. We are raising our GRM forecasts for RIL by US$0.8/bbl for FY11, and forecast a corresponding 3.7% increase in FY11 earnings for RIL. We now stand ~25% above consensus.

Earnings and target price revision
We are hiking RIL’s earnings forecasts by 3.7% for FY11 and 2.2% for FY12, and our target price by 3% to Rs 1,293/share.

Price catalyst
12-month price target: Rs1,293.00 based on a Sum of Parts methodology.
Catalyst: Exploratory upsides, and a decision of RIL-RNRL court case.

Action and recommendation
We anticipate a strong 4QFY10 for Reliance, and maintain our Outperform rating on the stock. We recommend RIL as one of our top sector picks, as it benefits from the upswing in GRMs (see fig 2) apart from the volume ramp-up of KG basin gas.

To read the full report: RIL