Macquarie - Reliance Industries

Macquarie Research is bullish on Reliance Industries and has recommended an outperformer rating on the stock with 12-month target price of Rs 1815.

Macquarie Research report on Reliance Industries:

Reliance Industries is one of our top regional petrochem picks. RIL is not only one of the world’s largest petrochem plays, but it is also poised to nearly double its cracker capacity based on waste gases, challenging the Middle East majors as the lowest-cost producer. We believe that a proposed doubling in refining capacity at the world’s largest refinery complex and large oil/gas finds could triple profits for this USD 60 billion (market cap) giant over the next five years.

Impact:

Integrated petrochemical players such as RIL are best-positioned.

Scott believes that the risks outweigh the rewards for commodity plastics utilisation rates globally. However, integrated producers in refining and intermediates, such as RIL, are the best-positioned.

Polyesters may rebound from all-time lows.

Moreover, we believe that polyester margins (~two-fifths of petrochemical sales), which have hit all-time lows , could rebound. ICAC has forecast a sharp decline in the useto- inventory ratio and a rise in the price of the competing fibre, cotton, for the next two years.

Paradigm shift in global petrochem leadership.

RIL is already among the largest and most-competitive petrochem producers globally. It focuses on significant capacity expansions to drive volume growth and improve economies of scale. Its proposed 2 mt pa cracker will use waste gases from its refinery, which we think will make it as competitive as the Middle East majors.

Refinery poised to double, among three most complex.

RIL’s existing refinery is the third-largest in the world (market share: 0.8%) and has consistently outperformed the Singapore complex by USD 3–7/bbl (Fig 9). Its new 27mmt pa refinery will be among the three most-complex refineries globally , further improving margins and economies of scale.

Huge upside potential from the upstream.

RIL has drilled 23% of the KGD6 block so far, resulting in 27 discoveries with estimated in-place reserves of 35.4tcf. Moreover, the current estimated production of 2.8 bcf/d from only five wells will contribute 0.4% of global oil equivalent. The remaining 22 wells could be exploited further. In fact, although the D-6 block provides further upside potential, we believe that the Mahanadi D-4 block may present muchgreater potential than the D-6.

Price catalyst:

12-month price target: Rs 1,815.00 based on a Sum of Parts methodology.

Catalyst: New oil and gas finds and improved clarity on organized retail.

Action and recommendation:

RIL is our top Indian oil & gas sector pick. A staggering USD 20 billion capex and reserves potentially as large as ONGC’s could triple earnings over five years. RIL may look rich at PER of 18x, but looks attractive at PEG of 0.8.