[T.S.R:11053] why shud buy-- big bhai

Buy Reliance Industries Ltd.

INVESTMENT RATIONALE

RIL is the largest private player in the refining, petrochemical, and E&P sectors in India. Historically, the refining and petrochemical segments have been contributing ~90% to its total revenues; this is, however, set to change, as the company scales up its E&P business and emerges as an integrated E&P player. RIL is also venturing into consumer retailing and urban infrastructure. RIL is set to commence production from its Krishna-Godavari (KG)-D6 block from April 2009. The fixed price of gas at $4.2/mmbtu is expected to provide stability to the company's earnings. The bottomline is expected to be boosted by Rs 8,402 crore in FY10E due to KG-D6's gas production. The firm will also step up its oil and gas exploration from mid-2009, having contracted eight deepwater rigs for varying time periods at competitive rates.

Disclosures by partners indicate 21bnboe of prospective resources in only nine key blocks in its 39-block portfolio across India. The promise is undeniable. Reliance's past exploration success rate (60%) is exemplary. RIL is positioned to benefit from huge investment in RPL and KG-D6 in FY10.The net profit is  expected to increase to Rs 22,257 crore in FY10. The strong cash flows would give the company the leeway to purse inorganic growth as no major capital expenditure is planned.

Key Developments

Hon'ble High Court sanctions scheme of amalgamation Of Reliance Petroleum with Reliance Industries Reliance Industries has announced that the Hon'ble High Court of Judicature at Bombay has sanctioned the scheme of amalgamation of Reliance Petroleum (RPL or the Transferor Company) with Reliance Industries (RIL or the Company). The Hon'ble High Court of Gujarat at Ahmedabad has also sanctioned the scheme. The High Court Orders have been filed with the respective offices of the Registrar of Companies and the scheme has become effective on 11 September 2009 with appointed date being 01 April 2008 and consequently RPL stands dissolved without winding-up.

Other Developments

RPL refinery posted Rs 105 crore of profit with GRM of $5.4/bbl; we expect profitability to improve with the full utilization. Expect to achieve KG D6 gas
production at 80mmscmd by March'10. Considered MAT rate of 15% for the KG D6 gas basin. FY10 will be 2nd year of its operation for tax purpose.

Valuations

Key projects like RPL refinery and KG D6 gas have already commissioned and been largely factored into the current rally. Global refining sector are still going through a tough time and don't expect to improve until supply-demand balance normalize and global economy improves. Current petchem margin are highest in last 4 years, and we expect it to stabilize in the 13%-15% range.

We estimate RIL to report strong earnings (CAGR of 27%) over FY2009-FY2011E, primarily driven by the gas business. We expect strong and stable cash flow from gas as well as the rising exploration intensity from mid-2009 to be a key re-rating trigger. Cash flow generation of ~Rs 53,000crore in next two years will help in funding inorganic and organic growth.

Key risk for the stock can be

1) Adverse court ruling in RIL-RNRL and RIL-NTPC case

2) Regulatory changes in taxation

3) Negative surprise in E&P activities

4) major slowdown in refining margins.

Currently, a stock is trading at 22.6x of TTM EPS of Rs 96.6. We recommend Buy on the stock with a price target of Rs 2,510, which representing upside potential of 15%.

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