Reliance Industries - Core Biz lacks Triggers; Uncertainty Prevails in E&P - Karvy

RIL is expected to be more core biz centric on the valuation front as upstream uncertainties mount up. Domestic gas price is likely to improve sentiment; however production is unlikely to get a boost soon. We are positive on a gas price hike from FY14 to $6.7/mmbtu, which is reportedly not rewarding enough to develop additional high cost deepwater resources in KG basin. Thus there is no near term visibility on volume ramp up from Eastern offshore basins awaiting regulatory clearances.

Margins in Core Biz Expected to be under pressure

We expect both the refining and the petchem margins to be under pressure in the next couple of years on account of global headwinds, especially in the developed economies. The Heavy Light spread is expected to be narrow as incremental crude supplies are likely to be contributed more by lighter crude from Non Opec regions. The Asian GRMs have been under pressure since last 8-10 quarters. Incremental complex refineries in the Asian Region will pressurize the margins further. The petchem margins are expected to stabilize at current levels.

Upstream business; pricing in all the potential

We have accounted for all the potential resources in KG basin despite regulatory and pricing uncertainties. Even though the quantum of price hike meets their requirement, they will need further time to develop those deep water blocks. We have expected a gas price hike of $ 2.5/mmbtu factoring in potential resources of 10TCF (KG D6 2TCF) at EV/BOE of $5.

Valuation & Outlook

We expect GRMs to stabilize at $9/bl and the upstream volumes to be restored until ~30 mmscmd in next 3-4 years. Although high on cash, the untapped potential in KG basin is subject to many caveats, and thus too early to price in. The new ventures being planned are in nascent stage to be valued. We believe the stock is fairly valued at 11xFY15E and we assign a HOLD rating on the stock with a target price of Rs. 800.

Source : Equity Bulls

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