I-Sec update on Reliance Industries Ltd (RIL)
Reliance Industries’ (RIL) stock price has fallen 53% in the past three months and has underperformed the Sensex 12% on account of falling refining and petchem margins. This was mainly owing to global demand slowdown, concerns over the RIL-Reliance Natural Gas Resources (RNRL) court case and the delay in production from Reliance Petroleum (RPL) refinery. We lower FY09E, FY10E & FY11E refining margin estimates 36%, 24% & 19% to US$9.5/bl, US$10.3/bl & US$10.5/bl respectively owing to the recent fall in product spreads and fears of a global recession. We have reduced our petchem margin estimates. We have also cut our target price to Rs1,499/share from Rs2,778/share due to lower earnings & exit multiples for extant petchem & refining businesses, risks to special economic zone (SEZ) & retail, and falling reserve valuations globally on significant correction in commodity prices. Though the stock offers 33% upside from the current levels, it may remain under pressure due to strain on margins & risks to future earnings. Maintain BUY.
· Petchem & refining demand lacklustre and has significantly fallen in the wake of global slowdown – Indian refining margins have dipped 79% from the recent highs. New capacities in the next 12-18 months will further strain margins.
· RPL refinery, KG-D6 gas production will likely commence in H2FY09. However, due to tax holidays for both the projects, the actual date is yet to be finalised. As refining margins have collapsed recently, we expect RPL’s operations to be delayed to April ‘09. However, we expect KG-D6 production to begin in Q4FY09 owing to acute domestic shortage of natural gas.
· We have reduced FY09E-11E earnings 22-35% on: i) lowered petchem & refining margins, ii) delayed capacity ramp-up in RPL refinery, iii) slight delay in KG-D6 production and slower ramp-up to peak volumes and iv) lower crude price realisations from Panna-Mukta-Tapti (PMT) and MA oil fields.
· RIL’s fair value lowered to Rs1,499/share. We value RIL’s extant business at Rs542/share, retail at Rs28/share, E&P at Rs749/share, SEZ at Rs43/share and the stake in RPL at Rs200/share.
· RPL’s fair value reduced to Rs89/share. Given the overcapacity in the global markets, we have excluded the option value of the additional refinery. We have also accounted for lower refining margins and delayed ramp-up of the refinery. We expect full ramp up by FY10 end.
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