Sharehan Research updates on Reliance Industries
Key points:
In line with the declining trend in Singapore gross refining margin (GRM), we have revised downwards our assumption for Reliance Industries Ltd’s (RIL) GRM to US$11.7 per barrel for FY2009 and US$10.7 per barrel for FY2010. We have also factored in the delay in the commissioning of Reliance Petroleum Ltd’s (RPL) refinery and a lower throughput initially.
The margins of the core business of petrochemicals will be dented by a significant decline in the prices of polymer and polyester products. However, this will be partially offset by the decline in the raw material prices. Moreover, the depreciation in the rupee will also have a positive impact on the margins of the petrochemical business.
The exploration and production (E&P) division is expected to drive the company’s growth as oil production starts from KG basin and as gas production is expected commence in Q4FY2009. Furthermore, the oil ministry’s decision on gas price of US$4.2 per million British thermal unit (mmbtu) for all the customers strengthens RIL’s case against the ongoing dispute with Reliance Natural Resources Ltd (RNRL) for the supply of gas at a lower price of US$2.34 per mmbtu.
To factor in the deterioration of business environment in both refining and petrochemical businesses, we have revised our fully diluted earning per share (EPS) estimates to Rs100 for FY2009 and Rs130.9 for FY2010. At the current market price, the stock trades at a price/earnings ratio of 9.4x FY2010E consolidated earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.5x FY2010E. Considering the fully diluted equity, the price target works out to Rs1,710 per share. We maintain our Buy recommendation on the stock.
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,710
Current market price: Rs1,227
Price target revised to Rs1,710
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