RPL: single location refinery in the world

In its Report Dated 10th October,2006 SBI Capital Markets Ltd (SBI) has initiated a Market performer Coverage on Reliance Petroleum Limited (RPL) with CMP of Rs 67 and 12 Months Target Price of Rs 70.7.

SBI Capital Market Ltd (SBI) makes us aware that, Reliance Petroleum Limited (RPL) refinery will be the 6th largest single location refinery in the world based on current capacities. SBI further states that, RPL is expected to benefit from the positive outlook for refinery margins and its higher nelson complexity will enable the company to earn higher refinery margin by processing sour/heavy crude and produce more of value added products like alkylates, polypropylene etc fetching significantly higher realisation and provide product mix flexibility to take advantage of seasonal change in demand.

Due to underinvestment in refining capacity, global refinery utilization rate has increased from 75% in 1980 to 86.3% in 2005. SBI expects world refinery utilization rate to remain higher resulting in higher refinery margin going forward.

SBI anticipates that RPL to become a debt free company in the first 5 years of its operations due to robust free cash flow generation because of its large scale, higher refinery margin and income tax exemption (RPL will get 100% income-tax exemption for the first five years and 50% exemption thereafter for 10 years). RPL is likely to become a good dividend yield stock, once it commences production in Dec 08.

SBI''s 1 year target price for RPL is based on 8.2x its FY10E earnings discounted by one year cost of equity (12.5%). SBI assigns Marketperform rating to the stock with a target price of Rs. 70.7, implying 5.5% upside from the current levels. SBI initiates a coverage on Reliance Petroleum limited (RPL) with a rating and have a 12 month target price of Rs. 70.7.