1 (CMP/TP: `732/1,006) (Buying Range: `732 to `747) Core business margins to stabilise: RIL reported robust refining margins of US$10.2/bbl in 1HFY2012. However, during 3QFY2012, Singapore gross refining margins (GRMs) have declined to US$7-8/bbl. Nevertheless, we do not expect gross refining margins to fall below the current level consequent to higher demand from the emerging economies. RIL v/s Benchmark Singapore GRMs (US $/bbl) QFY09 3QFY09 4QFY09 1QFY10 2QFY10 RIL GRMs Source: Company, Angel Research 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 Singapore GRMs 1QFY12 2QFY12 Ramp-up in KG-D6 could re-rate the stock: RIL s upstream segment still has significant upside in store, considering the huge untapped resources. Although RIL is producing natural gas below its potential 80mmscmd from KG-D6 due to constraints over reservoir pressure, we believe it will ramp up its production over the medium term with the help of BP s technical expertise. Also, RIL has recently concluded several three-year exploration phases on the prospective eastern coast and is expected to commence with the development phase soon. RIL expects to commence significant E&P activities from CY2014. Foray into newer businesses: RIL has been eyeing inorganic routes for diversifying its asset portfolio by entering into newer ventures, such as retail and telecom, on the back of significant cash pile (`61,490cr as on September 30, 2011) and treasury stocks. Initiatives such as shale gas acquisitions, with in-place reserves of ~12TCF, could prove to be a potential trigger for the stock in the long term.
2 Outlook & Valuation: RIL s extant businesses (refining and petrochemicals) continued to perform well during the quarter. However, there are some concerns on the KG basin gas output. t Nevertheless, ertheless we believe RIL s deal with BP is a positive one, as the combined expertise of both the parties will result in optimization of producing blocks and enhancement of resources in exploratory blocks. Thus, the ramp-up in producing fields would improve investor confidence. We maintain our Buy view on RIL with an SOTP-based target price of `1,006. Valuation Snapshot Valuations based on SOTP Business segment `/share Refining (EV/EBITDA 7x) 432 Petrochemical (EV/EBITDA 7x) 92 KG-D6 Gas (DCF) 168 KG-MA Oil (DCF) 45 NEC-25 (EV/boe 5.5x) 5 54 D3 (EV/boe 5.5x) 60 D9 (EV/boe 5.5x) 35 Shale Gas ventures (EV/boe 3.5x) 60 Other prospective basins 30 Retail 15 Investment/Others 36 Total EV 1,029 Net debt (23) Equity Value (`) 1,006 Y/E Sales OPM PAT EPS ROE P/E P/BV EV/EBITDA EV/Sales March (` cr) (%) (` cr) (`) (%) (x) (x) (x) (x) FY2012E 316, , FY2013E 328, ,
3 Profit & Loss Statement (Consolidated) Total operating income 203, , , ,147 % chg Balance Sheet (Consolidated) SOURCES OF FUNDS Equity Share Capital 2,978 2,981 2,981 2,981 EBITDA 30,894 38,961 40,969 44,172 Reserves& Surplus 138, , , ,038 (% of Net Sales) Shareholders Funds 141, , , ,021 Depreciation& Amortisation 10,946 14, ,967 12,542 Total Loans 64, ,106 62,500 54,830 Interest & other Charges 2,060 2,411 2,150 1,792 Deferred Tax Liability 10,678 11,071 12,714 14,839 Other Income 2,185 2,543 3,450 3,795 Total Liabilities 216, , , ,492 (% of PBT) APPLICATION OF FUNDS Recurring PBT 20, ,972 30, ,633 Gross Block 224, , , ,371 Extraordinary Income/Exp 8,606 (917) - - PBT (reported) 28,680 24,055 30,302 33,633 Tax 4,256 4,783 7,272 8,072 (% of PBT) PAT (reported) 24,424 19,272 23,029 25,561 Minority interest (MI) PAT after MI (reported) 24,503 19,294 23,063 25,602 ADJ. PAT(core) 18,572 18,976 23,063 25,602 % chg Less: Acc. Depreciation 63,934 80,193 92, ,702 Net Block 160, , , ,668 Capital Work-in-Progress 17,034 29,742 15,000 17,172 Investments 13,112 21,596 21,596 21,596 Current Assets 69,106 98, , ,100 Current liabilities and provisions 42,586 57,445 61,085 62,046 Net Current Assets 26,520 40,634 51,047 58,054 Mis. Exp. not written off Total Assets 216, , , ,492
4 Cash Flow Statement (Consolidated) Profit before tax 28,680 24,055 30,302 33,633 Depreciation 14,001 16,820 11,967 12,542 Change in Working Capital (5,939) (13,501) (260) 654 Less: Other income (1,786) (1,722) (1,300) (2,003) Direct taxes paid (3,140) (4,243) (7,272) (8,072) Cash Flow from Operations 31,815 33,338 33,437 36,755 (Inc.)/ Dec. in Fixed Assets (23,017) (33,604) (1,938) (22,570) (Inc.)/ Dec. in Investments 2,645 (8,102) - - Key Ratios Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV EV/Sales EV/EBITDA Per Share Data (`) EPS (fully diluted) (Inc.)/ Dec. in loans & adv. (19) - 16 Cash EPS Other income 2,160 9,666 3,450 3,795 DPS Cash Flow from Investing (18,231) (32,040) 1,511 (18,759) Book Value Issue of Equity Returns (%) Inc./(Dec.) in loans (5,822) 20,701 (21,606) (7,670) ROCE (Pre-tax) Dividend Paid (Incl. Tax) (2,219) (2,431) (2,683) (2,981) Angel ROIC (Pre-tax) Others (14,907) (8,378) (507) 317 ROE Cash Flow from Financing (22,436) 14,950 (24,796) (10,334) Turnover ratios (x) Inc./(Dec.) in Cash (8,851) 16,248 10,152 7,661 Inventory / Sales (days) Opening Cash balances 22,742 13,891 30,139 40,291 Receivables (days) Closing Cash balances 13,891 30,139 40,291 47,953 Payables (days)
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