Reliance Industries - event update-Apr-10-EDELsmartinvestor.business-standard.com/BSCMS/PDF/reliance_120410_01.pdf · Reliance Industries (RIL) has announced a JV with Atlas Energy

RIL’s JV with Atlas Energy; to acquire 40% in core Marcellus acreage Reliance Industries (RIL) has announced a JV with Atlas Energy (Atlas), in which

RIL is to become 40% partner in ~300,000 acres of undeveloped Marcellus Shale

leasehold land in SW Pennsylvania; Atlas holds undeveloped recoverable

resources of 13.4 tcf. Total acquisition cost to RIL is USD 1.7 bn, of which, it will

pay USD 339 mn upfront and carry forward the remaining USD 1.36 bn to fund

Atlas’ capital cost for the next 5.5 years. In addition, the JV will be spending USD

8.5 bn over next 10 years to develop the shale gas assets. Other highlights of the

deal are:

• RIL has the option to be the operator in later years in certain regions.

• RIL has option to acquire 40% stake in all Atlas’ further new acreage (at

cost).

• Further, in case Atlas decides to sell its another ~280,000 Appalachian acre,

RIL will have the right to first offer (at USD 8,000/acre).

Outlook and valuations: Acquisition a positive; SOTP up by INR 23/share We consider this acquisition a positive for RIL, as it enables the company to: (a) find investment opportunities; (b) enter the US market; (c) operate the shale gas business; and (d) acquire further shale acreage in future.

Going by Atlas’ guidance and our discussion with the RIL management, we

consider the Marcellus shale business a good business opportunity. Reducing

capital costs for wells and increasing ultimate recovery from each well, reaffirm

our view.

We have valued this acquisition using NPV and believe that the NPV of acquisition

is INR 23/share or USD 1.5 bn. Hence, we are increasing our SOTP of RIL to INR

1,230/share. At CMP of INR 1,124, RIL is trading at 16.2x FY11E and 12.6x FY12E

our consolidated estimates. We maintain ‘HOLD’ on the stock and rate it ‘Sector

Outperformer’ on relative returns basis.

April 10, 2010

Reuters : RELI.BO Bloomberg : RIL IN

Absolute Rating HOLD

Rating Relative to Sector Outperformer Risk Rating Relative to Sector Medium

Sector Relative to Market Overweight Note: Please refer last page of the report for rating explanation MARKET DATA CMP : INR 1,124

52-week range (INR) : 1,245 / 802

Share in issue (mn) : 3,270.1

M cap (INR bn/USD mn) : 3,675 / 82,044

Avg. Daily Vol. BSE/NSE (‘000) : 8,841.2 SHARE HOLDING PATTERN (%)

Promoters* : 46.6

MFs, FIs & Banks : 9.8

FIIs : 16.8

Others : 26.8

* Promoters pledged shares : Nil (% of share in issue) PRICE PERFORMANCE (%)

Stock Nifty EW O & G Index

1 month 10.2 3.5 4.0

3 months 0.3 1.1 (4.6)

12 months 29.1 58.7 30.3

Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Niraj Mansingka, CFA

+91-22-6623 3315

[email protected]

Ruchi Vora

+91-22-6623 3365

[email protected]

India Equity Research | Oil, Gas and Services Event Update

RELIANCE INDUSTRIES

RIL’s Shale gas acquisition, a positive

EDELWEISS 4D RATINGS

Financials

Year to March FY09 FY10E FY11E FY12E

Net revenues (INR mn) 1,512,240 2,148,298 2,420,853 2,554,629

Revenue growth (%) 1.2 0.9 0.9 0.3

EBITDA (INR mn) 234,222 306,238 413,584 494,515

Net profit (INR mn) 149,503 166,948 232,385 297,695

Share outstanding (mn) 3,339 3,339 3,339 3,339

Diluted EPS (INR) 44.8 50.0 69.6 89.1

EPS growth (%) 1.2 11.5 39.2 28.1

Diluted P/E (x) 25.1 22.5 16.2 12.6

EV/EBITDA (x) 17.8 13.0 9.1 7.1

ROAE (%) 14.6 12.2 14.2 15.8

2 Edelweiss Securities Limited

Oil and Gas

RIL to acquire 40% in Atlas’ Marcellus acreage for USD 1.7 bn Event: RIL (through its subsidiary, Reliance Marcellus LLC) on April 09, 2010, announced its JV with the US-based Atlas Energy Inc (Atlas). RIL will acquire 40% interest in Atlas' core Marcellus Shale acreage position (gross of ~300,000 acres). The acreage has a recoverable reserves of 13.4 tcf of shale gas. The transaction is anticipated to close by the end of April 2010. Acquisition cost: Total acquisition cost to buy out 40% interest in the shale JV is USD 1.7 bn. Of this, USD 339 mn will be paid upfront (in a month) and the remaining USD 1.36 bn will be paid by RIL under a carry arrangement. Under the arrangement, RIL will pay 75% of Atlas’ share of future capital expenditure in the next 5.5 years (extendible by another two years). Future capital commitments: The JV will spend USD 8.5 bn over next 10 years to develop the resources. Under the development programme, ~3000 wells will be drilled in the next 10 years. RIL’s share of the capex is USD 3.4 bn (40% of USD 8.5 bn). Total cash outflow from RIL in next 10 years, including USD 1.7 bn of acquisition cost, is USD 5.1 bn. Future options for RIL: The acquisition makes RIL a 40% partner in ~300,000 acres of undeveloped Marcellus Shale leasehold land in SW Pennsylvania. There are three additional parts to the deal:

• While initially, Atlas will be the operator, RIL could take up the role in the later years in certain regions.

• RIL has option to acquire 40% stake in all new acreage acquisition by Atlas at the acquisition cost.

• Further, in case Atlas decides to sell (all or part of) its another ~280,000 Appalachian acre (controlled by Atlas; not in this JV), RIL will have the right to first offer (at USD 8,000/acre).

Outlook and valuations: Acquisition a positive; increasing SOTP by INR 23

We believe this acquisition is beneficial for RIL due to the following reasons:

• While not large, the acquisition provides visibility of utilizing RIL’s large cash flows, as peak cash outflow for the next five years (including the acquisition cost) is USD 1.5 bn. We have always believed that the biggest challenge for RIL is to generate investment opportunities for its large future cash flows.

• The acquisition provides RIL an entry into the US market. Shale gas business requires low peak investments and provides RIL control of 5.4 tcf of natural gas resources in the US.

• Upsides from being an operator in non-developed acreage: RIL will get an opportunity to learn the shale gas business, thereby, opening up options to enter other regions globally (including India).

• Upsides from the future acquisition of shale acreage at reasonable cost of USD 8000/acre: By controlling 800,000 acres, the JV can become the 3rd largest player in the shale gas business.

Atlas benefits from getting funds for its future capital requirements. Going by Atlas’ guidance in its various presentations and our discussion with the RIL management, we believe Marcellus Shale business is a good opportunity. Key drivers for

Edelweiss Securities Limited 3

Reliance Industries

its attractiveness have been the reducing capital costs for wells and increasing ultimate recovery from each well. Probably, RIL has also taken a view that technological improvements will make the business more profitable. We have valued this acquisition using NPV and believe that the NPV of acquisition is INR 23/share or USD 1.5 bn. Key parameters used by us for valuing the shale resource are:

• Natural gas price of USD 5.0/mcf with escalation of 2%: While the current prices are ~USD 4.5-4.7/mcf, the forward curves indicate upsides to our assumptions.

• Capital cost per well assumed is USD 3.75 mn: This is after our discussion with the management. This is a key driver to value shale business. NPV of the business becomes zero at capital cost of USD 7.0 mn per well.

• EUR (recovery) from well at 4.0 bcf: Atlas had earlier guided EUR of USD 3.1 bcf/well. However, recent EUR rates from horizontal wells have been as high as 5.6 bcf/well. This leads to cumulative production from shale gas to plateau at 28-30 mmscmd in 2016.

• No increase in taxation: While other regions have ad-valorem taxes, South Pennsylvania has none. However, if introduced, the impact is unlikely to be significant.

We are increasing our SOTP of RIL by INR 23/share, to INR 1,230/share. At CMP of INR 1,124, RIL is trading at 16.2x FY11E and 12.6x FY12E our consolidated estimates. We maintain ‘HOLD’ on the stock and rate it ‘Sector Outperformer’ on relative returns basis.

Chart 1: Shale gas production to plateau at 28-30 mmscmd starting from 2016

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Estimated RIL share of shale gas production

Estimated RIL share of shale gas production (RHS) Source: Edelweiss research


Oil and Gas

Chart 2: Shale gas production to reach 17% of RIL’s gas production in CY15

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Total RIL's gas production

Shale gas as % of total (RHS) Source: Edelweiss research

Chart 3: Peak cashflow requirement lower than USD 2.0 bn; FCF positive CY15 onwards

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Operating CF RIL's share of development capexCarry for Atlas Buyout cost for RILFCF

Source: Edelweiss research


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Table 1: RIL—Sum-of-the-parts (fair target value)

Segment detailsBase value

(USD bn)Base value

(INR bn)Base value

(INR/share)Value of E&P from firm reserves 22.0 1,000 334

Exploration upsides 13.7 623 208

RIL R&M (@ EV/EBITDA = 6.5x) 28.4 1,293 432

Chemicals (@ EV/EBITDA = 6.5x) 12.9 586 196

Retailing (@P/BV = 0.5x) 0.4 20 7

SEZ (@P/BV = 0.5x) 1.7 12 4

NPV of RIL's tax benefit for refining 3.1 140 47

NPV of Marcellus shale 1.5 69 23

Total Enterprise value 83.7 3,743 1,251

Investments (FY11) 3.4 153 51

Cash & Cash equivalents (FY11) 4.1 186 62

Gross debt (FY11) 8.9 403 135

Net debt (FY11) 1.4 64 21

Equity value (SOTP) 82.3 3,679 1,230

CMP (INR) 1,124

Return on CMP (%) 9.4

Source: Company, Edelweiss research Table 2: Sensitivity of Shale gas NPV to gas price assumptions

Gas price (USD/mcf) NPV of Marcellus shale (INR/share)

4.0 6

4.5 15

5.0 23

5.5 31

6.0 40

6.5 48

7.0 57

Source: Edelweiss research

Shale gas is a new and unconventional resource play

What is shale gas?

Shale gas is natural gas produced from shale. It is a fine-grained sedimentary rock comprising mud (mix of clay minerals flakes and small fragments of other minerals).

Fig. 1: Natural gas resource formations and shales

Source: EIA, energy techstocks


Oil and Gas

Shale gas areas are called resource plays (as opposed to exploration plays), as the geological risk of not finding gas is low in resource plays. Yet, the potential profits per successful well also may be lower due to its higher costs (hydraulic fracturing and horizontal drilling). Monetisation of shale gas Shale has low matrix permeability, so commercial gas production requires fractures (hydraulic fracturing). Horizontal drilling is largely used for shale gas wells, for maximum surface area contact with shale. Fig. 2: Horizontal drilling

Source: Horizontal drilling

Economic success of the Barnett Shale (Texas) has encouraged the development of other shale plays in North America. Shale gas development in US Shale formations across the US have been developed to produce natural gas, with the first producing well in US drilled in 1821 in New York. Shale gas is present across much of the lower 48 states (refer chart below). The most active shales till date are Barnett Shale, Haynesville/Bossier Shale, Antrim Shale, Fayetteville Shale, Marcellus Shale and New Albany Shale. Typically, each of these gas basin is unique and has its own exploration/operational criteria.


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Fig. 3: US Shale basins

Source: US Dept. of Energy

What is Marcellus Shale? Marcellus Shale is the most expansive shale gas play, across six states in the northeastern US. It extends through the Appalachian Basin. Estimated production depth is 4,000-8,500 feet. They are unit of marine sedimentary rock (may contain limestone beds/iron pyrite/siderite). While Marcellus is lower in relative gas content at 60-100 scf/ton, larger area of this play leads to higher original gas in- place estimate of ~ 1,500 tcf. The shale contains largely untapped natural gas reserves, and its proximity to the high-demand markets (East Coast) makes it an attractive target for energy development.

Fig. 4: Marcellus Shale in the Appalachian basin Fig. 5: Marcellus Shale outcrop

Source: US Dept. of Energy, ALL Consulting 2009

Unconventional gas production share in US to rise significantly According to EIA and US departments of energy, unconventional gas – shale gas, tight sands and coalbed methane (CBM) is expected to become a significant proportion of US proved gas reserves. This is especially critical, given the fact that conventional resources are declining. Though 1998-2007, unconventional gas production has jumped 65% to 8.9 tcf/year, which is ~46% of the US gas production.


Oil and Gas

Fig. 6: Natural gas production outlook by source (tcf/year)

Source: EIA 2008, US Dept. of Energy

US shale gas production/reserves at ~10-13% of total dry gas production According to EIA, US shale gas production was 2.0 tcf (~57 mmscmd) in CY08, up ~70% Y-o-Y, and constituted ~10% of the total US gas production. Proved reserves in US in Shale gas as on CY08 were 32.8 tcf, at ~13.4% of the US dry gas reserves in the same year). However, a shale gas report by the US Department of Energy indicated that growth in unconventional resource plays may have not been adequately captured by EIA. The actual annual gas production has seldom exceeded EIA estimates. Hence, Navigant estimates shale gas comprises ~28% of the total US estimated technically recoverable gas resources.

Fig. 7: US unconventional gas outlook (bcf/d) Fig. 8: Trends in shale gas production (mmcf/day)

Source: EIA 2008, US Dept. of Energy, Navigant 2008

Atlas a leading producer of Marcellus Shale gas

a. Atlas is a leading producer in Marcellus Shale. It is also one of the largest producers in the New Albany Shale (Indiana), Antrim Shale (Michigan) and the Chattanooga Shale (Tennessee). Additionally, Atlas manages a midstream energy service provider - Atlas Pipeline Holdings.

b. Atlas has total gas proved reserves of ~1.0 tcfe, which largely constitutes its overall reserve base. Its reserve life is ~28 years. The company’s Q4CY09 gas


Reliance Industries

production of 102.8 mmcfd (~2.9 mmscmd). Through CY07-09, Atlas’ gas production increased at a CAGR of 6.2% to 98 tcf/d.

Fig. 9: Atlas Energy reserves

Source: Atlas Energy

Chart 4: Company’s gas production has grown at a CAGR of 6.2% through CY07-09

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Michigan Appalachia Source: Atlas Energy

c. Atlas and Marcellus Shale

i. Atlas controls 584,000 acres and 270,000 acres delineated in SW Pennsylvania. ~ 3,150 horizontal locations were identified and company expects to complete ~40 plus horizontal wells in CY10. The recent well results indicate lower decline rates and attractive well profiles. Further, the drilling inventory is located in low cost basins.

ii. This is primarily dry gas window with 97% methane.

iii. Atlas Energy indicates favorable Marcellus shale acreage of 160.4 acres per mn EV and 6.6 acres per 1000 shares, favorable compared to peers.

iv. Favorable interstate gas take way exists in southern Pennsylvania.

CY09 CY08 CY07

Proved reserves:-Natural Gas (bcf)

Appalachia 487 364 218

Michigan 522 627 667

Total 1,009 991 885

Proved reserves:-Oil Reserves (Mbbl)

Appalachia 1,864 1,726 1,972

Michigan 7 8 11

Total 1,871 1,734 1,983

Total oil and gas (mmcfe)

Particulars CY09 CY08 CY07

Appalachia 498 374 229

Michigan 522 627 667

Total 1,020 1,001 896


Oil and Gas

d. As per Atlas’ presentation dated Dec-2009, Atlas compares well with peer group on its low cost structure and reserve life.

Fig. 10: Low F&D costs (USD/mcfe)* Fig. 11: Higher reserve life

Source: Company presentation 2009

Notes: * Drill bit F&D, does not include acquisitions / divestitures; Drill bit F&D costs (net of

partnership mgmt. fees) with revisions

e. Atlas’ current market cap is ~USD 2.5 bn and total debt of USD 786 mn, taking its

EV to ~USD 3.3 bn.


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Company Description

RIL is the largest private player in the refining, petrochemical, and E&P sectors in India. Historically RIL’s refining and petrochemical segments have been contributing ~90% to its total revenues, but that is set to change, as the company scales up its E&P business and is set to emerge as a integrated E&P player. RIL is also venturing into areas of consumer retailing and urban infrastructure.

Investment Theme RIL’s strength lies in its ability to build businesses of global size and scale and execute complex, time-critical, and capital-intensive projects, which will prove advantageous in its huge plans in the E&P sector, organised retailing, and SEZ infrastructure. Also, there could be a potential upward revision to our estimated in-place reserves. With its foray into consumer retailing and SEZ infrastructure, we believe, it is an ideal company to play the India story.

Key Risks RIL benefits from protected refinery margins in the Indian market ,due to duty differential between products and crude. Reduction in the duty differential will be negative for the company. Rupee appreciation may impact negatively as RIL is positively leveraged to the depreciating currency. Slow down in global demand could impact RIL’s refining and chemical margins.


Oil and Gas

Financial Statements Income statement (INR mn)

Year to March FY08 FY09 FY10E FY11E FY12E

Net revenues 1,371,467 1,512,240 2,148,298 2,420,853 2,554,629

Raw material costs 997,631 1,124,261 1,654,303 1,786,390 1,821,540

Gross profit 373,835 387,979 493,995 634,462 733,089

Employee expenses 27,382 30,176 42,966 48,417 51,093

Other expenses 115,008 123,582 144,791 172,461 187,481

Operating expenses 142,389 153,758 187,757 220,878 238,574

Total expenditure 1,140,021 1,278,019 1,842,060 2,007,269 2,060,114

EBITDA 231,446 234,222 306,238 413,584 494,515

Depreciation & amortisation 50,042 56,510 99,273 127,483 134,280

EBIT 181,404 177,712 206,965 286,101 360,236

Interest expense 10,865 18,163 19,056 21,618 7,412

Other income 12,235 19,142 22,958 21,268 20,878

Profit before tax 182,773 178,691 210,867 285,751 373,702

Current tax 25,721 12,082 31,919 41,366 64,007

Deferred tax 8,659 16,454 12,000 12,000 12,000

Fringe tax benefit 496 652 0 0 0

Total tax 34,876 29,188 43,919 53,366 76,007

Core profit 147,897 149,503 166,948 232,385 297,695

Extraordinary/ Prior period items 47,335 0 86,273 0 0

Profit after tax 195,232 149,503 253,221 232,385 297,695

minority interest 19 (184) 0 0 0

Profit after minority interest 195,214 149,687 253,221 232,385 297,695

Equity shares outstanding (mn) 2,907 3,286 3,288 3,300 3,316

EPS (INR) basic 50.9 45.6 50.8 70.4 89.8

Diluted shares (mn) 3,339 3,339 3,339 3,339 3,339

EPS (INR) diluted 44.3 44.8 50.0 69.6 89.1

CEPS (INR) 71.1 67.8 84.6 112.7 133.9

DPS 6.5 6.5 7.5 8.0 8.5

Dividend payout (%) 15.0 16.7 17.3 13.2 11.0

Common size metrics (% net revenues)


Cost of goods sold 72.7 74.3 77.0 73.8 71.3

Operating expenses 10.4 10.2 8.7 9.1 9.3

EBITDA margins 16.9 15.5 14.3 17.1 19.4

Depreciation & amortisation 3.6 3.7 4.6 5.3 5.3

Interest 0.8 1.2 0.9 0.9 0.3

Net profit margin 10.8 9.9 7.8 9.6 11.7

Growth metrics (%)


Revenues 20.5 10.3 42.1 12.7 5.5

EBITDA 15.0 1.2 30.7 35.1 19.6

PBT 24.8 (2.2) 18.0 35.5 30.8

Net profit 22.5 1.1 11.7 39.2 28.1

EPS 22.5 1.2 11.5 39.2 28.1


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Balance sheet (INR mn)


Total equity capital 14,534 13,747 29,789 29,912 30,069

Total equity share warrants/suspense 16,824 693 0 0 0

Reserves & surplus 823,747 1,198,126 1,496,764 1,709,680 1,995,261

Shareholder's equity (A) 855,105 1,212,565 1,526,553 1,739,592 2,025,330

Minority interest (B) 40,886 1,389 0 0 0

Secured loans 195,765 107,477 99,556 90,000 80,000

Unsecured loans 311,196 655,089 548,439 312,827 60,225

Total debt (C) 506,961 762,566 647,995 402,827 140,225

Deferred tax liability (D) 77,983 95,513 109,263 121,263 133,263

Sources of funds (A+B+C+D) 1,480,935 2,072,034 2,283,811 2,263,681 2,298,818

Gross fixed assets 1,091,802 1,571,824 1,786,287 1,854,972 1,942,753

Depreciation 451,191 501,382 592,130 719,613 853,893

Net fixed assets 640,611 1,070,442 1,194,157 1,135,359 1,088,860

Capital WIP 498,841 738,460 674,919 743,604 831,385

Total fixed assets (A) 1,139,452 1,808,902 1,869,077 1,878,964 1,920,246

Investments (B) 95,229 64,355 71,182 71,182 71,182

Inventories 191,261 201,096 216,121 233,085 246,463

Accounts receivable 60,683 48,450 65,866 72,256 73,939

Cash and cash equivalents 44,742 227,421 299,122 279,761 290,463

Loans and advances 217,477 110,018 130,000 120,000 110,908

Other current assets 726 476 500 500 500

Current assets (C) 514,889 587,461 711,609 705,602 722,273

Current liabilities 234,175 357,570 329,328 349,628 369,694

Provisions 34,492 31,150 38,729 42,439 45,188

Current liabilities & provisions (D) 268,667 388,720 368,057 392,067 414,883

Net current assets (E) 246,222 198,741 343,553 313,535 307,390

Miscellaneous expenditure (G) 33 36 0 0 0

Uses of funds (A+B+E+F) 1,480,935 2,072,034 2,283,811 2,263,681 2,298,818

Book value per share 288 369 464 527 611

Free cash flow


Net profit 195,214 149,687 253,221 232,385 297,695

Add: Depreciation 50,042 56,510 99,273 127,483 134,280

Add: Deferred tax 8,659 16,454 12,000 12,000 12,000

Add: Others (45,921) (2,052) 70,364 11,667 7,284

Gross cash flow 207,994 220,600 434,858 383,534 451,259

Less:Changes in working capital (45,663) (57,725) (53,129) 655 7,756

Opertaing cash flow 162,331 162,875 381,729 384,190 459,015

Less: Capex (266,403) (277,320) (159,448) (137,370) (175,562)

Free cash flow (104,072) (114,446) 222,281 246,819 283,453

Cash flow metrics


Operating cash flow 162,331 162,875 381,729 384,190 459,015

Financing cash flow 167,168 250,366 (148,515) (297,449) (302,721)

Investing cash flow (304,256) (231,034) (163,298) (106,102) (145,592)

NET CASH FLOW 25,244 182,207 69,916 (19,362) 10,702

Capex (266,403) (277,320) (159,448) (137,370) (175,562)

Dividends paid 0 (19,085) (28,849) (30,785) (32,865)

Share issuance/(buyback) 0 151,648 15,350 122 158


Oil and Gas

Profitability ratios (%)


Gross profit margin 27.3 25.7 23.0 26.2 28.7

EBITDA margin 16.9 15.5 14.3 17.1 19.4

ROACE 14.8 10.5 9.8 13.0 16.3

ROAE (%) 19.5 14.6 12.2 14.2 15.8

ROA 11.4 8.4 7.7 10.2 13.0

Current ratio 1.9 1.5 1.9 1.8 1.7

Quick ratio 1.2 1.0 1.3 1.2 1.1

Cash ratio 0.2 0.6 0.8 0.7 0.7

Receivable turnover (x) 27.7 27.7 37.6 35.1 34.9

Inventory turnover (x) 6.3 5.7 7.9 8.0 7.6

Payables turnover (x) 4.8 3.8 4.8 5.3 5.1

Receivables (days) 13 13 10 10 10

Inventory (days) 58 64 46 46 48

Payables (days) 76 96 76 69 72

Cash conversion cycle (days) (5) (19) (20) (13) (14)

Debt-equity (x) 0.6 0.6 0.4 0.2 0.1

Debt/EBITDA 2.2 3.3 2.1 1.0 0.3

Adjusted debt/Equity 0.6 0.6 0.4 0.2 0.1

Long term debt / Capital employed (%) 34.2 36.8 28.4 17.8 6.1

Total debt / Capital employed (%) 57.6 60.2 49.3 40.5 29.9

Interest coverage (x) 16.7 9.8 10.9 13.2 48.6

Operating ratios (x)


Total asset turnover 1.1 0.9 1.0 1.1 1.1

Fixed asset turnover 2.1 1.8 1.9 2.1 2.3

Equity turnover 1.8 1.5 1.6 1.5 1.4

Du pont analysis


NP margin % 10.8 9.9 7.8 9.6 11.7

Total assets turnover 1.1 0.9 1.0 1.1 1.1

Leverage multiplier 1.7 1.7 1.6 1.4 1.2

ROAE % 19.5 14.6 12.2 14.2 15.8

Valuation parameters


Diluted EPS (INR) 44.3 44.8 50.0 69.6 89.1

Y-o-Y growth (%) 22.5 1.2 11.5 39.2 28.1

CEPS (INR) 71.1 67.8 84.6 112.7 133.9

Diluted P/E (x) 25.4 25.1 22.5 16.2 12.6

P/BV (x) 3.9 3.0 2.4 2.1 1.8

EV/Sales (x) 2.7 2.8 1.8 1.6 1.4

EV/EBITDA (x) 16.0 17.8 13.0 9.1 7.1

Dividend yield(%) 0.6 0.6 0.7 0.7 0.8

EV/EBITDA (x)+1yr Forward 15.8 13.6 9.6 7.6


Reliance Industries RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

SECTOR RATINGS

Company Absolute Relative Relative

reco reco risk

GAIL India Buy SO L

Indraprastha Gas Buy SO L

Hindustan Petroleum Corporation Hold SU L

Bharat Petroleum Corporation Hold SU M

Indian Oil Corporation Hold SU M

Jindal Saw Hold SU H

Essar Oil Buy SO H

Company Absolute Relative Relative

reco reco risk

PSL Buy SO H

ONGC Hold SU L

Cairn India Hold SO M

Welspun Gujarat Stahl Rohren Buy SO H

Reliance Industries Hold SO M

Aban Offshore Buy SO H

Chennai Petroleum Corp. Reduce SU H


Oil and Gas

Edelweiss Research is also available on www.edelresearch.com ,Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: [email protected]

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Vikas Khemani Co-Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Head Research [email protected] +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): Oil and Gas, Petrochemicals Bharat Petroleum Corporation, Cairn India, Chennai Petroleum Corp., Engineers India, Finolex Industries, Hindustan Petroleum Corporation, Indian Oil Corporation, Indraprastha Gas, ONGC, PSL, Reliance Industries, Welspun Gujaraj Stahl Rohren

Reliance Industries EW Indices

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Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 101 56 9 169

* 3 stocks under review

Market Cap (INR) 103 53 13

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total05-Apr-10 Oil & Gas Shifting gears; long on crude and refining; Sector Update 23-Mar-10 Cairn Dollops of good news; 293 Hold

India Company Update; 04-Mar-10 Oil & Gas On thin ice; Monthly Update

Date Company Title Price (INR) Recos

Recent Research

Hold

Hold Hold Hold Hold

300

540

780

1,020

1,260

1,500

Apr-

09

May-0

9Ju

n-0

9Ju

l-09

Aug-0

9S

ep-0

9O

ct-0

9N

ov-0

9D

ec-

09

Jan-1

0Fe

b-1

0M

ar-

10

Apr-

10

(IN

R)

800

1,000

1,200

1,400

1,600

1,800

8-Apr-09 8-Oct-09 8-Apr-10

Reliance Industries Ltd.EW O & G IndexNifty

Documents

Reliance Industries - event update-Apr-10-EDELsmartinvestor.business-standard.com/BSCMS/PDF/reliance_120410_01.pdf · Reliance Industries (RIL) has announced a JV with Atlas Energy