Reliance Industries - Can it "crack" the growth conundrum? - IDFC

Reliance Industries (RIL) aims to transform the scale/ scope of its downstream business over the next 15-18 months. A US$12bn investment would nearly double its Petchem capacity via a refinery off gas cracker (ROGC) even as the LNG used at its Jamnagar complex is being replaced via a Petcoke Gasifier. Also, upstream business could gain traction with regulatory clearances and higher gas prices. We estimate RIL's consolidated EBITDA to increase by ~45% over FY13-16E with the downstream expansion, while replacement of LNG by Synthetic gas could lend a US$1-1.5/bbl advantage in GRMs. At CMP, we believe the full impact of these expansions is not factored in. Upgrade to Outperformer with a 12-month price target of Rs1013.

Benefit of US$12bn expansion to reflect from FY16E: Replacement of the LNG used (~8 mmscmd) in refining and use of refinery off-gas to produce ~1.4m tpa of additional Ethylene could add ~Rs130bn to sustainable EBITDA by FY16E. This, we believe, does not reflect in the current stock price. Consolidated EBITDA could reach ~Rs480bn by FY16E (Rs330.5bn in FY13), which implies EV/E of only 6x (FY16E). Resultant, consolidated EPS could expand at 11% CAGR over FY13-16E to reach ~Rs88/share.

Weak rupee and positive E&P news flow additional triggers: A higher gas price from FY15E, coupled with better regulatory environment for upstream, will see accelerated activity in this segment, helping boost volumes FY16E onwards. The weak rupee also helps earnings, considering that pricing of key products is USD-denominated and ~40% of overall revenues are exported (every one rupee movement boosts earnings by ~2%).

We see upside potential; Outperformer: Our estimates build in flat GRMs, 2-4% decline in integrated Petchem spreads and KG D6 volumes of 14-15 mmscmd for FY14/15E, with gradual revival to ~40 mmscmd by FY19E. We introduce our FY16E estimates. At 11.2x FY15E EPS and 7.6x EV/ EBITDA, valuations are at the lower end of 5-year bands and at a marginal discount to peers. Current valuations offer an attractive entry point, with our FY15E EV/E + DCF-based SoTP of Rs1013/share impliying ~14% upside from here.

Source : Equity Bulls

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