Monday, January 19, 2009

CLSA puts Buy on Reliance Industries CMP: Rs1,080.90 Target : Rs1,550.00 12M price target

CLSA report Says:
Untapped wealth
The startup of oil and gas production in the Krishna Godavari (KG) Basin and subsidiary Reliance Petroleum’s refinery will allow Reliance to deliver a 21% EPS Cagr over FY09-11CL even as refining and petrochem profits contract sharply. A strong balance sheet augurs well for longer-term growth while new discoveries in its exploration fields, which could hold more than 21bnboe of untapped resources, are an added tailwind. Valuations, at 10x FY09CL PE, are attractive. BUY.

Boost from new projects
The commencement of oil and gas production in the KG-D6 offshore block by February 2009 and at 70.4% subsidiary Reliance Petroleum’s US$6bn 580kbpd export-oriented refinery, commissioned in December 2008, will allow Reliance to increase consolidated Ebitda by 71% in FY09-11CL to US$9bn. This will offset the impact of shrinking refining and petrochem margins in 2009-10. The earnings stream will become more diversified and resilient as well with the stable natural gas business forming 40% of Ebitda by FY11CL.
Growth beyond business cycles
Reliance’s ability to grow earnings consistently through business cycles has been its hallmark, with earnings growth over any 10-year period in the past 30 years always exceeding 20%. The next two years will mirror this trend, while a multipronged growth strategy spanning organic growth, acquisitions, partnerships and diversification is taking shape to maintain momentum beyond FY11. Funding risks are minimal given the strong balance sheet (51% net gearing) and strong operating cashflow (US$14bn over FY10-11CL).
Vast upstream opportunity
The firm will also step up its oil and gas exploration from mid-2009, having contracted eight deepwater rigs for varying time periods at competitive rates. Disclosures by partners indicate 21bnboe of prospective resources in only nine key blocks in its 39-block portfolio across India. The promise is undeniable. Reliance’s past exploration success rate (60%) is exemplary.

Favourable risk-reward
Several risks remain, especially the court battle with Reliance Natural Resources Ltd (RNRL), but even our extreme bear case suggests only 20% downside. Overall, we find the risk-reward ratio favourable and our sum-ofthe- parts Rs1,550 target price suggests 43% upside. Strong near-term earnings growth and cashflow generation, rising earnings stability, clarity on the court case and the likelihood of exploration success are all near-term rerating catalysts. BUY.

Sources CLSA
Dated: 19 January 2009


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