Accumulate Reliance Industries - BP enters India as RIL renews E&P focus - Event Update - Elara Capital

• Reliance Industries
• Rating: Accumulate
• Target Price: INR1,110
• Upside: 15%
• CMP: INR956 (as on 21 February 2011)

BP enters India as RIL renews E&P focus

Event synopsis:

- BP and RIL have announced a partnership wherein BP will take a 30% share in 23 oil and gas production sharing contracts of RIL in India

- These 23 blocks include RIL's landmark KG D6 gas block

- Both companies are also forming a 50:50 joint venture for sourcing and marketing gas in India

- BP will be paying RIL an aggregate consideration of USD7.2bn for the participating shares in all 23 blocks.

- Future performance payments of up to USD1.8bn would be based on the success of exploration as well as commercial discoveries

- The above payments and E&P investments in the blocks could amount to an overall aggregate of USD20bn

Concall takeaways

- RIL's intent seems unambiguous – Single partner for all 23 blocks is a big positive

- BP enters India as part of its strategy on emerging markets, to pay USD7.2bn through its current cash balance of ~USD18bn

- Approval from the Indian government is needed, but the process is likely to be smoother as all 23 blocks are under NELP, unlike the pre-NELP Rajasthan block involved in the Cairn-Vedanta deal

- Gas marketing and trading JV to be India-focused

Technical expertise, E&P focus - Positives for RIL

We believe that the announcement definitely comes across as a positive for RIL in terms of the technical expertise that BP will bring to the table as one of the most experienced offshore players in the world. RIL currently owns majority of the offshore exploration blocks in the prolific East Coast basins of Krishna-Godavari and Mahanadi. From an investors' perspective, RIL's renewed focus on its E&P business will be welcome as we see a significant value accretion potential from this segment. We also draw comfort from the fact that the rally in RIL's shares was largely driven by the investor confidence in its E&P segment focus.

Maintain Accumulate: Valuation likely to improve

We had upgraded RIL in January due to the turnaround in its cyclical businesses of refining and petrochemical. While the ramp-up in KGD6 remains a concern, as mentioned above, RIL's renewed focus on the E&P segment is a positive that would help improve its valuations in the short to medium term. We maintain our Accumulate rating and TP of INR1,110/share. We continue to value refining and petchem segments at an EV/EBITDA of 8x, due to its sustained momentum.

Source : Equity Bulls

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