Reliance Industries - Rupee depreciation improves EBITDA - upgrade to BUY - JM Financial

Over the last one quarter, INR has depreciated by c.10%. Based on this, we revise FY15E forex to 55 (from 50). Since RIL's margins are mostly $ denominated, a 10% depreciation of the INR increases EBIDTA and improves valuations by similar 10%. We also include the impact of gas price hike ($8.4 from FY15) and update the petchem project expansion timelines to arrive at a TP of Rs. 943 (Mar'14) and upgrade the stock to BUY.

- Rupee depreciation improves valuation: During 1QFY14, INR has depreciated by c.10% (from c.54 to c.60/US$). Based on this, we revise our FY15E forex to Rs. 55 (previously 50) which improves RIL's Refining and Petchem business valuations (both are based on global US$ denominated margins) by c.10%. Similarly, E&P valuations (KG+shale) also improve due to higher forex.

- E&P valuations also improve due to gas price hike: Additionally, govt recently accepted the Rangarajan committee report which will increase gas price and E&P valuation. Based on a price of $8.4/mmbtu FY15 onwards, RIL's E&P valuation increases by c.10% after adjusting for increased govt share. We note that a higher gas price will also result into higher recovery factor (and therefore increase reserves) which is an additional upside to valuation.

- But interest cost/debt could take away some benefit: While INR depreciation is positive for the core business, higher interest outgo on forex debt could take away some of this benefit. RIL has gross debt (but is net debt positive) of c.Rs. 724bn out of which 91% (Rs. 658bn) is foreign currency denominated (AR FY13). However, it is difficult to estimate the impact of INR depreciation on debt because: 1) specific currency-wise break-up of forex debt is not available, 2) details of hedging by RIL are not available, and 3) RIL can use natural currency hedge (since RIL is cash positive, it can invest in cash or cash-equivalents in same currency). However, impact of any increase in debt is likely to be marginal.

- Upgrade to BUY with Mar'14 TP of Rs. 943: We revise 1) FY15E forex to 55, 2) gas production estimate to 15/13 mmscmd for FY14/15E, 3) gas price to US$8.4/mmbtu FY15 onwards and 4) defer the commissioning dates for some major projects to CY16 (previously FY15) which leads to a revised Mar'14 TP at Rs. 943 (Rs. 847 earlier). While contribution from new projects will start from FY15, we believe RIL will benefit in near-term from INR depreciation. Other near-term triggers include further updates on the new discovery in KG-D6 and monetization of existing discoveries.

Source : Equity Bulls

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