Accumulate Reliance Industries - Alok Deshpande, Elara Capital

• Reliance Industries
• Rating : Accumulate
• Target Price : INR1,150
• Upside : 9%
• CMP : INR1,053 (as on 27 July 2010)

In-line Q1, KGD6 ramp-up delay a concern

No surprises in Q1 - E&P and refining offset petchem softness

Reliance reported an in-line Q1FY11 with revenue coming in at INR582bn vs our est. of INR567bn and Street at INR590bn. The net profit was INR48.5bn, up 3% sequentially, while we had expected a slight QoQ decline at INR46.7bn. The marginal QoQ growth was driven by E&P and refining segments, which offset the softness in the petchem segment. The petchem segment was weak due to lower production as well as a dip in product prices during May and June driven new capacities coming on-stream in the ME. The GRMs, though down QoQ to USD7.3/bbl from USD7.5/bbl, were less impacted than Singapore GRMs which fell to USD3.7/bbl from USD4.9/bbl.

KGD6 ramp-up to 80mmscmd likely to be delayed

The KGD6 gas production averaged 60mmscmd during Q1FY11. Though the design capacity for 80mmscmd has been tested, the management has voiced its concern about production ramping up to 80mmscmd in Q4FY11 as guided earlier. Reliance has commenced a detailed reservoir study at KGD6 to assess the potential and methodology to increase the reserve life. Typically these studies take anywhere between 3-4 quarters which effectively rules out the KGD6 ramp-up from 60 to 80 mmscmd in Q4FY11, in our opinion.

Neutral view over the next two quarters, reducing TP to INR1,150

While we maintain our Accumulate rating for a 12-month time horizon, we have a more neutral view for the next two quarters. We think that the next two quarters are unlikely to yield any earnings surprises as KGD6 production remains constant and refining and petchem margins remain stable. Secondly, we believe that there will be some earnings cuts as the Street adjusts its estimates for delayed KGD6 production ramp-up and slightly subdued GRMs. Also, we feel the Street is unable to attribute any reasonable value as yet to Reliance's new initiatives. We think more transparency about these ventures is likely to emerge only post-FY11. Factoring in delay in KGD6 ramp-up and slower-than-expected refining demand pick-up, we have reduced our estimates and our TP from INR1,170/sh to INR1,150/sh.

Source : Equity Bulls

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