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Reliance Industries Ltd (updated - 23 Jan 2010)
A depressed market saw something to cheer as Reliance Industries’ (RIL) revenues came in on the higher side of analysts’ estimates. High global inventories and lower demand had hit gasoline and distillate realisations, so the market expected revenue growth for December 2009 quarter to be relatively more muted — volume growth was expected to be strong due to higher capacities. The 92 per cent year-on-year growth reflected the additional revenues from the SEZ refinery numbers, which was commissioned end-December 2008 and displayed in RIL’s numbers post the merger of Reliance Petroleum.

Refining and marketing segment revenues were up 21 per cent sequentially (140 per cent year-on-year) to Rs 48,000 crore, as the RPL’s (SEZ) refinery operated at 115 per cent and the domestic refinery at 100 per cent capacity. RIL’s gross refining margins (GRMs) were virtually flat (sequentially) at $5.9 per barrel for the December 2009 quarter but fell by 40 per cent year-on-year. This is in contrast to a sharp dip seen in benchmark Singapore GRMs, which according to analysts touched its lowest levels in six years, averaging $1.13 per barrel for the December quarter as supply clearly outstripped demand. Lower margins resulted in the segment’s profits falling 27 per cent yearon-year to Rs 1,379 crore for the quarter.

The upstream (exploration and production) business has seen consistent news flow on new discoveries in the Krishna Godavari (KG) D6 block and segment revenue is up 20 per cent sequentially and more than triple over December 2008 numbers, to Rs 3,530 crore.

Petrochem revenues also clocked in good growth and the company saw a volume boost based on strong domestic demand, in conjunction with low industry inventories allowing better realisation in December 2009 quarter. This pushed through a 17 per cent yearon-year increase in revenues to Rs 14,756 crore. The numbers looked good, positioned against the lower base of the previous year’s quarter.

Overall, expenses for the company doubled year-onyear, mainly because of higher crude oil inputs for the new SEZ refinery. However, the company has felt the pinch of the lower GRM environment and higher depletion rate in KG D6 fields compared to PMT. Cumulatively, these factors pulled operating profit margins down considerably (by 4.36 percentage points year-onyear) to 13.8 per cent for the December 2009 quarter, though in absolute terms, operating profits were higher by 46 per cent at Rs 7,844 crore. A dip in other income, higher interest charges and tax outgo meant that post tax profits increased by only 16 per cent year-on-year to Rs 4,008 crore.

The outlook for the company is relatively better, according to sector analysts, as GRMs are expected to trend upwards over the year. This is on the back of expected distillate demand growth in Asia and supply rebalanced by refinery capacity rationalisations and shutdowns globally.

The stock has underperformed the Sensex by 3.7 per cent in the last 3 months and closed flat in the day’s trading at Rs 1,053.15, outperforming the Sensex marginally, which was down 1.14 per cent for the day.

Reliance Industries Ltd (updated - 06 Jan 2010)
The sale of a part of Reliance Industries’ (RIL) treasury stock through a block deal on the bourses inaugurated trading in 2010. RIL garnered almost Rs 2,675 crore by selling 25.85 million shares (held by a trust, owned by aRIL subsidiary) to LIC at an average price of Rs 1,035 per share or a 5 per cent discount to the previous closing price. The discount isn’t unusual, say analysts, given the size of the deal.

However, the price is lower than the sale price of Rs 2,125 (pre-bonus and pre-dividend) of the earlier deal done in mid-September 2009, when RIL had raised Rs 3,188 crore by selling treasury stock to institutional investors.

With the latest move, RIL has added to its cash kitty (of Rs 19,421 crore as on September 2009), which it could use for its estimated $12 billion bid for petrochemicals’ major Lyondell Basell and exploration projects. If required, RIL could also tap the remaining treasury stock of 333.85 million, valued at Rs 36,000 crore.

The markets, however, were not impressed. Over two days, the stock lost 1.8 per cent as against 1.3 per cent gain in the Sensex. Notably, the stock has also underperformed the markets since mid-September - down by about 2 per cent as against Sensex’s 7.5 per cent rise. The underperformance can be attributed to factors like pending gas dispute with RNRL, overhang of its bid to acquire Lyondell and uninspiring performance.

While analysts believe that RIL’s gross refining margins (GRMs) have in all probability bottomed out and should stay above the lows touched earlier, the petrochemical business may remain under pressure in the medium term till demand picks up.

The buffer for the stock is, however, on the exploration front. Last month, RIL hit a gas gusher with three reservoir zones in the D-3 block of Krishna-Godavari (KG) basin. This heralds its third consecutive find in this block, in which RIL owns 90 per cent stake and UK-based Hardy Oil 10 per cent.

While the regulators’ decision on commerciality of the block is awaited, analysts say that Hardy had earlier indicated prospective resources of 695 million barrels of oil equivalent. Based on RIL’s stake in the D3 block, analysts have pegged its value at Rs 21-30 per share.

This find emphasises eastern India’s offshore potential where RIL has 10 blocks in the KG basin and 8in the Mahanadi basin. Currently, RIL has one rig operational in an exploration block in Oman and three rigs in India (in D6, D3 and Cauvery Basin). It is expected to add two more in 2010, which indicates that RIL’s exploration activities are likely to pick up in the current year.

This find emphasises eastern India’s offshore potential where RIL has 10 blocks in the KG basin and 8in the Mahanadi basin. Currently, RIL has one rig operational in an exploration block in Oman and three rigs in India (in D6, D3 and Cauvery Basin). It is expected to add two more in 2010, which indicates that RIL’s exploration activities are likely to pick up in the current year.

The ramp-up in production from the KG-D6 block is the main focus currently; it recently achieved aflow rate of 80 million standard cubic metres. The KG-D6 block is valued at Rs 241 per share in terms of oil production and potential upsides. RIL’s other fields such as NEC-25, CBM Sohagpur and D9 are valued at Rs 226 per share, as per an India Infoline report.

At Rs 1,069.55, the stock trades at about 14 times 2010-11 estimates. Two key factors loom over the stock -the outcome of the court case judgement due in the next couple of months and the Lyondell acquisition bid. Positives on these fronts and new oil and gas discoveries will act as a trigger for the stock in the nearto-medium term.
source - BS

Reliance Industries Ltd (updated - 27 April 2010)
Reliance Industries Limited (RIL) reported net revenues of Rs 57,570 crore, up 120.73 per cent yearon-year (y-o-y), for the fourth quarter ended March 2010. Gross refining margins (GRMs) were 27 per cent higher quarter-on-quarter at $7.5/bbl, but were around $1 below analysts’ expectations. They are pegged at $8/bbl for 2010-11.

Increased volumes with additional commissioned capacities boosted refining revenues in the fourth quarter of the financial year 2009-10 (up 165 per cent y-o-y). Petrochemicals business reported an improved performance, helped by low inventory levels, rise in prices and polymer and polyester product margins. Exploration and production (E&P) revenues jumped six fold due to ramp up of KG-D6 gas production.

Total expenditure rose 138 per cent as the raw material costs jumped 146 per cent. Consequently, operating profit growth came in at Rs 9,136 crore in the March quarter. With commissioning of two new projects, depreciation costs more than doubled and ate into the net profit growth that stood at 30 per cent to Rs 4,710 crore.

Going ahead, analysts remain unconvinced about the sustainability of the strong rebound of refining and petrochemical margins. “Though, in the short term, GRMs may improve due to large scale maintenance shutdowns in Asia. We do not expect them to increase much in the medium term,” states areport from Motilal Oswal.

Petrochemical margins are also expected to be under pressure due to new capacity additions in the Middle East and China. Rupee appreciation could further aggravate the situation. Outlook for E&P business remains strong with further ramp up in production and new discoveries.
With E&P going strong and refining possibly past the worst, analysts expect the petrochemicals capacity glut and possible RNRL case judgement as the key factors weighing on valuations. However, its joint venture with US-based Atlas Energy is a positive move, as it will enable entry into the high-potential US market.

The stock closed at Rs 1,071.25, down 1.6 per cent from previous closing and trades at price to estimated earnings multiple of 15x and 13x for FY11 and FY12 earnings estimates.
source - business standard

On the flip side, the argument is that FY10 was a bad year for EIH, with poor tourist arrivals and properties being closed. EIH’s adjusted net profit dipped 61 per cent to `71 crore in FY10. However, with old properties coming on stream and new ones being launched at a time when there are robust tourist arrivals, the company is set to put up a better performance.

Moreover, RIL is sitting on free cash worth `14,000. This purchase is too small to make an impact. EIH has a strong record of dividend payout and has seen its market capitalisation grow 30 per cent over the last year. So, from an investment perspective, EIH will be a decent bet, reckon analysts. In case RIL wants to foray into the hospitality business, then EIH’s presence is strong. However, the modalities are not yet clear. The use of free cash for investments is seen as a positive, but RIL’s move to invest in broadband, and now in hotels, could send awrong signal that the growth prospects in the core oil and gas business is not that lucrative.

According to Credit Suisse, “While the current investment is relatively small, it may indicate lack of core oil and gas growth opportunities, which, if persists, can cause further lacklustre stock performance.”
source - business standard

Reliance Industries Ltd (updated - 15 June 2010)
The entry of cash-rich Reliance Industries (RIL) into the broadband wireless access (BWA) space could well unleash a new wave of competition. The company has aggressive customer-acquisition plans and is targeting 100 million subscribers five years from the launch (currently Infotel has 500,000 subscribers), as it rolls out services through the more efficient long-term evolution (LTE) technology. It expects to break even in three years after the launch and is aiming for an asset light business model by sharing existing infrastructure.

The BWA market seems to be an attractive proposition, as it is a serious challenger to the present broadband services, which have just about nine million subscribers due to last mile connectivity problem, say analysts. Moreover, there is a strong correlation between broadband adoption rate and gross domestic product (GDP) for various countries. According to a World Bank report, a 10 per cent increase in broadband penetration resulted in 1.38 per cent increase in per capita GDP growth in developing economies, say analysts at Edelweiss. This is higher than the impact of mobile telephony. Also, the impact of broadband was 15 per cent higher in the developing than in the developed countries, they added.

Reliance Industries Ltd (updated - 13 April 2010)
Last Friday evening’s announcement of Reliance Industries (RIL) buying astake in US-based Atlas Energy’s Marcellus region suggests long-term benefits for the company. RIL will pay $339 million cash on the deal’s closing and an additional $1.36 billion under a carry arrangement for 75 per cent of Atlas’ capital costs over a sevenand-a-half year development programme.
Additionally, the joint venture will spend $8.5 billion over the next ten years (RIL’s share $3.4 billion) to develop shale gas assets.

For RIL, it will get 40 per cent stake in the 3,00,000 acres of undeveloped leasehold in the core area of Marcellus Shale in south western Pennsylvania with net resource potential of 13.3 trillion cubic feet; RIL’s share is pegged at 5.3 trillion cubic feet.

Considering the high quality of gas, analysts expect the joint venture to fetch $6 per million cubic feet, while low operating costs, proximity to markets and relatively lower levies should ensure higher margins.

However, the deal is likely to generate free cash flows only after four-five years of gas production. Ambit Capital’s analysts say, “Free cash flows are expected to become positive, with potential peak earnings before interest tax depreciation and amortization of $1 billion (RIL’s share) from the 6th year of operations (assuming gas price of $6 per mmbtu).” While the deal is expected to yield marginal results in the near term, it will substantially benefit RIL in the long run. First, it will enhance RIL’s technical capabilities (it allows RIL to act as development operator in later years), and notably give it the right to acquire 40 per cent stake in all new shale acreages of Atlas. Besides, RIL also gets the first right to acquire stake in Atlas’ 2,80,000 acres in the Appalachian basin whenever it comes up for sale, at $8,000 per acre. Regarding the valuation, analysts suggest that while it is somewhat higher than some recent shale acreage deals, it is largely in line with the valuation of peers that hold large Marcellus Shale acreage. Nevertheless, considering the longer-term benefits that accrue to RIL, the deal value appears fair.

Meanwhile, based on the outlook for RIL’s refining and petrochemicals businesses as well as rising gas volumes from the KG-basin, analysts expect its earnings per share to rise to about Rs 69 in 2010-11 from an estimated Rs 50 in 2009-10.

On Monday, RIL’s stock inched up Rs 1.70 to Rs 1,125.65 (against a 0.45 per cent decline in the Sensex), which translates into a oneyear forward price to earnings of 16.3. Given that analysts peg its sum-of-the-parts valuation around Rs 1,190 to Rs 1,230, there is little upside from current levels.
source - business standard