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Reliance Industries Update

Reliance Industries - RIL is not the best Indian play on global economic recovery theme.

RIL stock offers low leverage to the global economic recovery theme compared to other commodity plays given (1) the ‘converter’ nature of its business as opposed to pure resource
plays in India and (2) large incremental supply in the case of both chemicals and refining that will well- exceed even higher demand arising from stronger-than-expected global GDP growth.
Also, the current stock price is already discounting new discoveries of ~55 tcf of additional gas
reserves over the next six years (see Exhibits 2 and 3). This is hard to justify despite the
reported high prospectivity of several RIL blocks in various stages of exploration.

Limited scope for upward revision to margin assumptions given generous assumptions.

FY2010E and FY2011E earnings assumptions are based on (1) refining margins of US$7.8/bbl and US$9.8/bbl, (2) strong chemical margins of US$550-600/ton and US$450-500/ton and (3) gas production of 45 mcm/d and 80 mcm/d. On the contrary, one cannot rule out downside risks to the earnings estimates from continued weakness in refining margins.

Difficult to justify valuation despite best efforts.

As one can see it is difficult to justify RIL’s current stock despite generous assumptions. Hence investors can book profits at current levels given (1) RIL’s stock price offers significant downside based on target price of Rs1,600 and (2) weak prospects of cyclical chemical and refining businesses despite emerging signs of global economic recovery.