Reliance Industries Limited
Post Merger Analysis of Earnings
Brokerage Views -
Prabhudas Lilladher has recommeded a Buy rating on Reliance Industries with a target price of Rs 1,422.
A report released on January 23 said: "RIL’s performance during Q3FY09 was commendable, amidst the headwinds faced by the oil and gas sector. With its high complexity and superior product slate, we believe RIL will be able to post double digit GRMs for FY10. Furthermore, KG D6 gas production and RPL refinery commercialization will provide fillip to the earnings. The stock is available at 6.2x FY10 EV/EBITDA and 10.1x FY10 EPS of Rs114.3. We believe that the risk reward is favourable now and hence recommend ‘BUY’ with a target price of Rs 1,422."
Edelweiss has maintained its Buy rating on Reliance Industries with a target price of Rs 1,525.
A report released on March 2 said: "Overall, the impact of the merger (RIL_RPL) is neutral due to lower dilution of RIL's equity. We are surprised at the timing and the pace of announcement — all announcements (merger intent, Chevron stake buy back and swap ratio) were completed before the market opened.
We are introducing RIL's post-merger consolidated financials (with RPL), as we
believe, risks (if any) to completion of the merger are minimal. Post introduction of
consolidated (post-merger financials), we have broadly maintained our earlier estimates (neutral impact of merger). Also, we have maintained our SOTP valuation for RIL at INR 1,525/share. At CMP of INR 1,225, RIL trades at FY09E and FY10E P/E of 13.3x and 10.1x, respectively, and at FY09E and FY10E EV/EBITDA of 9.9x and 6.9x, respectively. We maintain our ‘BUY’ recommendation on the stock."
Goldman Sachs has maintained its Buy rating on Reliance Industries with a target price of Rs 1,425.
A report released on March 2 said: "Reliance Industries (RIL) has announced the RIL-Reliance Petroleum (RPL; Sell, on Conviction list) merger to be an all-share deal with a ratio of 1:16 (1 RIL share for every 16 RPL shares), at 3.5% premium to RPL’s Feb 27 closing share price. RIL will extinguish the treasury stock from the merger and issue additional 69 mn (4.4% of current RIL share base) for minorities in RPL. The deal will be effective from April 1, 2008, and subject to regulatory approvals.
"We believe the deal is strategically positive for RIL due to the following factors: (1) It gives RIL access to about US$1.5 bn-US$1.8 bn of RPL's annual cash flows (on full ramp up) for its various planned projects. RPL's cash flows are worth more in RIL than in RPL, which has no clarity on future projects, in our view, (2) We believe that the consolidated entity, with 1.24 mn b/d of refining capacity, would have more leverage in crude sourcing, exporting products and also managing refinery utilization during the cyclical downturn without governance issues. The possible risk of cannibalization of products also comes down, (3) Chevron’s concomitant exit from RPL (at Rs60/share) adds marginally to RIL’s valuation and also gives RIL’s promoters full control of the future direction of the company.
"The deal also adds about 3% to our consolidated FY10E EPS of RIL (Rs124.2/share). Moreover, it is a technical positive for RIL since its weightage in the benchmark indices is likely to go up, in our view.
"Reiterate Buy (on Conviction list) for RIL with P/B-based 12-m TP of Rs1,425, implying 13% potential upside. We like RIL for the volume growth in gas business that should: (1) reduce cyclicality of RIL's earnings (2) improve RIL's ROE and EBIT margins.
"Key risks: 1) Delay in gas production, 2) weaker-than-expected refining margins."
ICICI Securities has maintained its Buy rating on Reliance Industries post the proposed merger with Reliance Petroleum.
A report released on March 2 said: "Proposed RIL-RPL merger (at swap ratio of 1:16) would be earnings-accretive for RIL. We expect RIL's FY10E and FY11E earnings to improve 0.5% and 1.5%, respectively, post merger (assuming RIL’s holding in RPL is cancelled while share-swapping). However, if RIL does not cancel its holding in RPL, the merger would be earnings-dilutive by 10-11%.
"We continue to favour RIL on the back of its impressive E&P portfolio, improvement in earnings post commissioning of KG D6 production as well as RPL's commercial commissioning. With delivery of deep water rigs and start-up of gas production in KG D6, we expect RIL to commence exploring MN D4, KG D9 and KG D3 fields, which could further improve reserves and support our expectations from RIL’s upstream assets. Moreover, the merger would provide significant cashflow for RIL shareholders to invest in their capex-intensive ventures (upstream, retail, SEZ)."
Before the announcement of Merger
Khandwala Securities has assigned an Outperformer rating to Reliance Industries with a target price of Rs 1,540.
A report released on January 23 said: "We expect company to report sustainable margins post Q3FY09 for next 4-5 quarters in existing businesses if crude oil price stabilizes. Singapore (Dubai) refining margins was reported at $7 per barrel on 21st January 2009 indicating some kind of spurt in the demand side and improvement in the product spreads. Any delay in commissioning of expected new capacities in global refining as well as petrochemical industry due to high cost of capital and slowdown fears could add to valuation of both RIL and RPL.
"We have reduced our EPS estimate for RIL by ~9.4% for FY09E on account of lower GRM and petchem spreads, and by 7.8% for FY10E on account of lower GRM, loss of tax incentives to the existing refinery, delay in ramp up of KGD6 gas and MA oil. We have reduced our average GRM estimates for RIL at $11 per barrel from $14 per barrel for FY10. We have reduced our production volumes from KGD6 by ~10% for FY10. We have reduced EV/EBITDA for refining and petrochemical segment to 4x considering global macro headwinds. We have withdrawn CBM, other miscellaneous blocks and new petrochemical complex from our valuation and reserved it as an upside to our current target price. RPL refinery is set to commission on schedule. We expect MA fields and KGD6 gas to ramp up its full production (550,000 boepd OEG) till July 09 and March 09 respectively. We are optimistic on the scope for value unlocking value in exploration and retail business. We assign OUTPERFORMER rating to the stock with target price of Rs 1,540."
Our Research Team Views :
Reliance CMP on 1170 on 6th March 2009 The stock has been underperforming the indices for the last couple of months. On a bad it can touch the previous low of Rs.930 its 52 weeks high happens to be Rs.2700 at the peak of the market. If the overall markets continue to slide one can get an opportunity to buy the share at new low.
It is prudent to trigger your purchases from Rs.1100 levels.
The following are some of the technical points to note.
5 day moving average = Rs.1190
20 days moving average = Rs.1250
200 days MA = Rs.1720
Support - 1 Rs.1120
Support - 2 Rs.1240
Resistance - 1 1350
Resistance - 2 1430
This report is bought to you by
Equity Research Team
Intelligent Investor - Investor Advisory arm of
Bangalore - 560048
Follow us on twitter - www.twitter.com/smartinvestor