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Reliance Inds. (RIL) - Co. Report - Dtd. - January 17, 2013




Axis Capital Limited


17 Jan 2013





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 RIL’s best performance (~60% pa) has been during a period when its earnings growth was ~30% pa  Its current phase of underperformance well reflects its stagnant earnings. As we show in this report, RIL’s stock return has ‘actually’ moved quite in tandem with its earnings growth  With 23% earnings CAGR over FY14E-17E, we expect the elephant to dance again! Importantly, ~70% of this growth will come from new projects in refining and petchem which are NOT dependent on regulatory approvals. The balance is from price and production hikes in gas. And there are additional triggers we have not considered! We upgrade RIL to BUY with March ’14 SOTP-based target price of Rs 950, which implies 10% 1-year upside from CMP of Rs 860. However, over the next 3 years (March ’16), we expect SOTP value to increase to Rs 1,350, implying 16% stock CAGR. Regulatory environment NOW conducive  Several back-to-back E&P approvals by oil ministry in the last few months  RIL would submit an integrated FDP for its KG-D6 block in Q4FY13, which could potentially unlock ~40 mmscmd of gas production over the next few years Gas price hike imminent; our assumption of US$ 6/mnbtu is lower than Street (~US$ 8/mnbtu)  Higher gas price required to support domestic E&P industry as deep-water fields unviable at US$ 4.2/mnbtu  Our assumption is conservative as we believe the government may not hike gas price steeply due to elections in May 2014 Upside triggers NOT factored in: (1) implementation of Rangarajan committee report which would imply US$ 9+/mnbtu gas prices in FY15, (2) recovery in cyclical margins, (3) positive contribution from telecom and retail ventures, and (4) recovery in US natural gas prices. At CMP, the stock trades at 13x FY14E EPS of Rs 66 and 12x FY15E EPS of Rs 74. Key Assumptions: Crude at USD 110/ bbl for FY14 and USD 90/ bbl for FY15. INR/USD at 53 for FY14 and 51.4 for FY15. Regards, Amit Mishra, CFA (Sr VP – Energy) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1142 Prashant Tarwadi (AVP – Energy) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1113

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