Reliance Industries BUY. Performance Highlights CMP. `987 Target Price `1,160. 3QFY2011 Result Update Oil & Gas. Investment Period 12 Months

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1 3QFY2011 Result Update Oil & Gas January Reliance Industries Performance Highlights Y/E March (` cr) 3QFY11 2QFY11 % chg (qoq) 3QFY10 % chg (yoy) Net Operating Income 59,789 57, , EBITDA 9,545 9, , EBITDA Margin (%) (0.4) Adj. PAT 5,136 4, , RIL reported 28.1% yoy growth in bottom-line on account of higher refining and petchem margins. On a sequential basis, PAT grew by a mere 4.3% on account of the dip in natural gas output from KG-D6 and lower refining volumes. However, the numbers were below our expectations on the top-line and bottom-line fronts on account of the lower-than-expected refining margins and we had not taken into consideration the lower refining volumes on account of the refinery shutdown. We maintain a Buy on the stock. Earnings post sequential as well as yoy growth: Top-line increased by 5.2% yoy to `59,789cr (`56,856cr) primarily on the back of the 9.4% yoy growth in refining revenues to `52,5242cr (`48,00cr) and 8.2% yoy increase in petchem revenues to `15,962cr (`14,756cr). Despite planned shut down of one train of the crude distillation unit for 22 days during the quarter, the refining segment reported growth due to higher product prices. Crude oil processed during the quarter was lower by 3% yoy to 16.1mn tonnes (16.6mn tonnes). KG-D6 gas production fell qoq with average production at 54.5mmscmd (58.5mmscmd). Operating profit grew 21.7% yoy to `9,545cr (`7,844cr), which was 6.9% lower than our estimate on account of the lower-than-expected refining throughput and refining margins. Outlook and Valuation: Upside in the upstream business has increased on the back of the newer ventures and initiatives by RIL. Timely ramp up in the producing fields is expected to improve investor sentiment and aid them factor in other prospective basins also. Nonetheless, the macro headwinds would persist owing to which we expect the refining and petchem margins to stabilise around current levels. We maintain a Buy on RIL, with a SOTP-based Target Price of `1,160. Key Financials (Consolidated) Y/E March (` cr) FY2009 FY2010 FY2011E FY2012E Net sales 151, , , ,665 % chg Net Profit 14,969 15,897 19,835 22,305 % chg EPS (`) EBITDA Margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/ Sales (x) EV/ EBITDA (x) ; Note: No of shares is 297.8cr BUY CMP `987 Target Price `1,160 Investment Period 12 Months Stock Info Sector Oil & Gas Market Cap (` cr) 322,825 Beta Week High / Low 1187/841 Avg. Daily Volume Face Value (`) 10 BSE Sensex 19,008 Nifty 5,697 Reuters Code RELI.BO Bloomberg Code RIL@IN Shareholding Pattern (%) Promoters 44.7 MF / Banks / Indian Fls 15.2 FII / NRIs / OCBs 22.2 Indian Public / Others 17.9 Abs. (%) 3m 1yr 3yr Sensex (6.2) RIL (8.6) (6.4) (22.5) Vinay Nair Tel: Ext: 6816 Vinay.nair@angelbroking.com Amit Vora Tel: Ext: 6839 amit.vora@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 3QFY2011 performance (standalone) Y/E March (` cr) 3QFY2011 2QFY2011 % chg (qoq) 3QFY2010 % chg (yoy) 9MFY2011 9MFY2010 % chg (yoy) Net Operating Income 59,789 57, , , , COGS 45,008 43, , , , Total operating expenditure 50,244 48, , , , EBITDA 9,545 9, , ,283 21, EBITDA Margin (%) Other Income ,135 1, Depreciation 3,359 3,377 (0.5) 2, ,221 7, Interest (0.2) 1,632 1, Extraordinary Items PBT 6,378 6, , ,565 14, PBT Margin (%) Total Tax 1,242 1, ,655 3, % of PBT PAT 5,136 4, , ,910 11, Exceptional items Adj. PAT 5,136 4, , ,910 11, PAT Margin (%) Exhibit 2: Segmental break-up (standalone) Y/E March (` cr) 3QFY2011 2QFY2011 % chg (qoq) 3QFY2010 % chg (yoy) 9MFY2011 9MFY2010 % chg (yoy) Revenues Petrochemicals 15,962 15, , ,961 55,251 (18.6) Refining & Marketing 52,524 49, , , ,249 (6.4) Oil & Gas 4,178 4,303 (2.9) 3, ,146 12, Others Gross Revenue 72,844 69, , , ,547 (8.8) EBIT Petrochemicals 2,429 2, , ,359 8,581 (25.9) Refining & Marketing 2,436 2, , ,025 6,011 (33.0) Oil & Gas 1,504 1,706 (11.8) 1, ,711 5,413 (31.4) Others (18.2) (27.9) Total EBIT 6,378 6, , ,126 20,048 (29.5) EBIT Margin (%) Petrochemicals Refining & Marketing Oil & Gas Others Total January

3 Exhibit 3: 3QFY2011 Actual v/s Estimates (` cr) Estimates Actual Variation (%) Net Operating Income 68,347 59,789 (12.5) EBITDA 10,252 9,545 (6.9) EBITDA Margin %) (1.0) PBT 6,833 6,378 (6.7) Adj. PAT 5,535 5,136 (7.2) Top-line below estimates on lower-than-expected Refining volumes: RIL's top-line was below our estimates on account of lower-than-expected refining volumes as we had not considered the refinery shut down for 22 days during the quarter. Top-line increased by 5.2% yoy to `59,789cr (`56,856cr) primarily on the back of the 9.4% yoy growth in refining revenues to `52,5242cr (`48,000cr) and 8.2% yoy increase in petchem revenues to `15,962cr (`14,756cr). Despite planned shut down of one train of the crude distillation unit for 22 days during the quarter, the refining segment reported growth due to higher product prices. The petrochemical segment registered 8.2% yoy increase in top-line driven by higher polymer and polyester prices. Crude oil processed during the quarter was lower by 3% yoy to 16.1mn tonnes (16.6mn tonnes). KG-D6 gas production fell qoq with average production at 54.5mmscmd (58.5mmscmd). Exhibit 4: Sales growth trend 61,000 60, (` cr) 59,000 58, (%) 57,000 56, , QFY10 4QFY10 1QFY11 2QFY11 3QFY11 Operating Revenues Operating Revenues growth (RHS) Higher refining and petchem margins leads to improvement in OPM yoy: During the quarter, RIL reported GRMs of US $9/bbl (US $5.9/bbl), marginally lower than our expectation of US $9.3/bbl. Benchmark complex Singapore margins, during the quarter, stood at around US $5.5/bbl. Thus, RIL managed to earn a spread of US $3.5/bbl. On the petchem side, it was the best-ever quarter for the company. Petrochemical EBIT margins improved by 66bp qoq to 15.2% (14.6% in 2QFY2011) during 3QFY2011 due to higher polymer and polyester margins owing to tighter cotton market. The oil and gas segment's EBIT margin declined by 584bp yoy and 365bp qoq to 36% (39.6% in 2QFY2011) due to higher proportion of KG-D6 production compared to production from the PMT field. As a result, overall OPM expanded by 217bp yoy 16% (13.8%). Operating profit grew by 21.7% yoy to `9,545cr (`7,844cr). However, margins stood lower January

4 on qoq basis by 38bp due to lower capacity utilisation of the refinery and dip in production of natural gas at the KG basin. Exhibit 5: EBIT break-up Exhibit 6: Operating performance trend 100% 12, % 60% 40% 20% (` cr) 10,000 8,000 6,000 4, (%) 0% 2, QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11-3QFY10 4QFY10 1QFY11 2QFY11 3QFY Petrochemicals Refining Oil and gas Others Operating Profit Operating Margins (RHS) Depreciation, other income increase: Depreciation during the quarter increased 20.2% yoy primarily on account of higher depletion charge in the oil & gas segment and increased depreciation in the refining business. Interest expenditure stood flat both on qoq and yoy basis. Other income increased by 45.9% yoy to `741cr (`508cr) and 10.3% qoq on account of higher cash balance. PAT grew 28.1%: PAT grew 28.1% yoy to `5,136cr (`4,008cr), which was below our expectation of `5,535cr. The deviation was mainly on account of the lowerthan-expected refining volumes and margins. Exhibit 7: PAT growth trend 6,000 5, (` cr) 4,000 3,000 2, (%) 1, QFY10 4QFY10 1QFY11 2QFY11 3QFY11 - PAT PAT growth (RHS) January

5 Segment-wise performance Refining and marketing (R&M): During the quarter, crude processing stood at 16.1mn tonnes (16.6mn tonnes), down 3% yoy, with the refinery reporting capacity utilisation of 104%. Crude processing was lower on account of the planned shut down of one train of the crude distillation unit for 22 days during the quarter. Despite the lower crude throughput, higher petroleum product prices led to 9.4% yoy increase in R&M revenues to `52,524cr (`48,000cr). On the margins front, RIL reported GRMs of US $9/bbl (US $5.9/bbl) as against our expectation of US $9.3/bbl. Thus, refining margins were marginally lower than our expectations. Singapore margins during the quarter averaged at US $5.5/bbl. Thus, RIL managed to earn a spread of US $3.5/bbl over the same. Improvement in the refining margins could be traced to improved product spread of middle distillates on account of cold weather in the US and higher Chinese demand for diesel. Moreover, the increase in heavy-light crude oil spread by US $1/bbl (primarily due to weak fuel oil cracks and higher demand for lighter products resulting in higher demand for lighter crude) also increased refining margins during the quarter. Refined product exports stood at 28.4MMT (US $20.1bn) in 9MFY2011 as against 23.6MMT (US $14.3bn) in 9MFY2010 on incremental export volumes from the SEZ refinery. Exhibit 8: RIL v/s Benchmark Singapore GRMs (US $/bbl) QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 RIL GRMs Singapore GRMs January

6 Exhibit 9: Capacity utilisation trend QFY08 2QFY08 3QFY08 4QFY08 1QFY09 (%) (mn tonnes) 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 Capacity Utilisation Crude Processing (RHS) Petrochemicals: The petrochemical segment revenues grew 8.2% yoy to `15,962cr (`14,756cr) due to higher polymer and polyester prices yoy. Blended product deltas were higher on yoy as well as qoq basis on account of strength in PP and polyester margins. Polymer margins were higher on account of higher Asian demand, and the polyester cracks were higher due to tighter cotton market. EBIT margins of the segment increased by 66bp qoq to 15.2% (14.6%). PP delta, which stood at US $94/MT during 2QFY2011, surged to US $239/MT during the quarter on account of strong demand growth and stable propylene prices lending a boost to petchem margins. However, margins were flat in the HDPE-naphtha segment at US $485/MT v/s US $485/MT during 2QFY2011 and PVC-EDC segment were also stable, with a margin of US $395/MT as against US $410/MT in 2QFY2011, as increase in EDC price tracked that of PDC. Oil & Gas: Oil and Gas EBIT registered qoq de-growth of 11.8% to `1,504cr (`1,706cr) on account of slower ramp up in KG basin and oil production. The gas production at KG basin was lower due to reservoir pressure constraints in the fields. RIL s KG-D6 gas production during the quarter averaged at 54.5mmscmd as against 58.5mmscmd in 2QFY2011. Crude oil production from the KG basin decreased to 19,400bpd from ~22,229bpd in 2QFY2011. After the shut down in the previous quarter, PMT resumed production during the quarter. Thus, owing to lower production from KG-D6, EBIT margins of the segment declined by 365bp qoq to 36% (39.6%). January

7 Investment Arguments Ramp up in KG-D6 could allay many concerns over valuation: RIL is still producing natural gas below its potential 80mmscmd due to constraints over reservoir pressure. However, we are confident about RIL ramping up its production in the coming quarters. The upstream segment still has significant upside in store, considering huge untapped resources. Timely ramp up in the producing fields would improve investor sentiment and aid them factor in other prospective basins also. We expect KG-D6 to ramp up to its full potential during FY2013. Core business margins to stabilise: We expect refining and petchem margins to stabilise at current levels. The recent spurt was consequent to higher demand from the emerging economies and stimulus led recovery in the OECD economies. Going forward, we expect margins to stabilise due to tightening of emerging economies and high spare capacity to meet incremental demand. Newer ventures could be a long-term catalyst: RIL has been actively eyeing inorganic routes for diversifying its asset portfolio by entering into newer ventures. Significant cash pile and treasury stocks could see RIL venturing into on more inorganic routes for growth and prove to be an upside trigger for the stock. Out of all the company s recent initiatives, we find the shale gas venture the most promising one on account of the in-place reserves of ~12TCF. January

8 Outlook and Valuation We believe that the macro headwinds will continue to surround refining and petchem business and any incremental demand will be absorbed by surplus capacities globally. Thus, we expect RIL s refining and petchem margins to stabilise around current levels. A significant cash pile and treasury stocks could see RIL venturing into more inorganic avenues, which could provide upside triggers for the stock. We believe that RIL has already made significant investments in new businesses like shale gas and telecom, and is likely to crystallise its plans to foray into other segments. Thus, this could address the cash redeployment concerns to a large extent. Moreover, the proposed plans to increase capacity of the petrochemical segment and addition of the coker in the refining segment are likely to further consolidate the company s position in its existing businesses. Timely ramp up in the producing fields would improve investor confidence and aid them factor other prospective basins also. The high potential exploratory fields would provide further visibility once the DGH approvals are in place. Valuations would receive further boost on any improvement in the distillate and polymer cracks consequent to recovery in global demand. We maintain a Buy on RIL, with a SOTP-based Target Price of `1, 160, translating into an upside of 17.6% from current levels. Exhibit 10: SOTP valuation (FY2012E) Business segment (` cr) `/share Refining (EV/EBITDA 7x) 376 Petrochemical (EV/EBITDA 7x) 272 KG-D6 Gas (DCF) 182 KG-MA Oil (DCF) 45 NEC-25 (EV/boe 5.5x) 66 D3 (EV/boe 5.5x) 73 D9 (EV/boe 5.5x) 43 Shale Gas ventures (EV/boe 3.5x) 70 Other prospective basins 68 Retail 30 Investment/Others 44 Total EV 1,270 Net debt (110) Equity Value (`) 1,160 January

9 Exhibit 11: Key Assumptions Particulars FY2011E FY2012E Exchange rate (`/USD) Refining capacity (MMT) Production (MMT) Capacity Utilisation 107% 108% Blended GRMs (US $/bbl) KG -D6 Gas production (mmscmd) KG -D6 Gas realisations (US$/mmbtu) Oil Production (kbpd) Exhibit 12: Angel EPS forecast v/s consensus Angel Forecast Bloomberg Consensus Variation (%) FY2011E FY2012E Exhibit 13: Recommendation Summary Company Reco CMP (`) Target Price (`) Upside (%) Mkt Cap (` cr) FY2012E P/BV (x) FY2012E P/E (x) FY09-12E CAGR in EPS (%) FY2012E RoCE (%) FY2012E RoE (%) Cairn India Neutral (6.5) 64, GAIL Buy , GSPL Buy , Gujarat Gas Accumulate , IGL Accumulate , ONGC Buy 1,105 1, , Petronet LNG Reduce (5.9) 9, RIL Buy 987 1, , Shivvani Oil Buy , January

10 Exhibit 14: One-year forward P/E 1,800 1,600 1,400 Share price (`) 1,200 1, Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Share Price 7x 10x 13x 16x 19x Dec-10 Exhibit 15: Premium/Discount in RIL (P/E) v/s Sensex (P/E) (%) Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 Prem/Disc to Sensex Historic Avg Disc January

11 Profit & Loss (Consolidated) Y/E March (` cr) FY07 FY08 FY09 FY10 FY11E FY12E Total operating 113, , , , , ,665 income % chg Total Expenditure 93, , , , , ,202 Net Raw Materials 77,072 89, , , , ,225 Purchases of finished goods 1,945 9,851 7,202 7,538 8,959 10,518 Personnel 2,591 2,738 3,018 2,791 3,317 3,895 Other 12,034 11,501 12,358 15,452 18,366 21,563 EBITDA 20,128 23,145 23,422 30,894 38,376 42,463 % chg (% of Net Sales) Depreciation& Amortisation 4,899 5,004 5,651 10,946 13,653 15,049 EBIT 15,228 18,140 17,771 19,948 24,723 27,414 % chg (2.0) (% of Net Sales) Interest & other Charges 1,232 1,087 1,816 2,060 2,311 1,992 Other Income 651 1,223 1,914 2,185 2,290 2,290 (% of PBT) Recurring PBT 14,647 18,277 17,869 20,074 24,702 27,712 % chg (2.2) Extraordinary Income/Exp - 4,734-8, PBT (reported) 14,647 23,011 17,869 28,680 24,702 27,712 Tax 2,572 3,488 2,919 4,256 4,922 5,467 (% of PBT) PAT (reported) 12,075 19,523 14,950 24,424 19,780 22,245 Minority interest (MI) 0.1 (1.9) PAT after MI (reported) 12,075 19,521 14,969 24,503 19,835 22,305 ADJ. PAT(core) 12,075 14,788 14,969 15,897 19,835 22,305 % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg Note: No of shares is 297.8cr January

12 Balance Sheet (Consolidated) Y/E March (` cr) FY07 FY08 FY09 FY10 FY11E FY12E SOURCES OF FUNDS Equity Share Capital 1,453 3,136 1,444 2,978 2,978 2,978 Reserves& Surplus 70,188 86, , , , ,412 Shareholders Funds 71,641 89, , , , ,390 Total Loans 33,651 50,696 76,257 64,606 72,500 62,500 Deferred Tax Liability 6,991 7,798 9,551 10,678 10,678 10,678 Total Liabilities 112, , , , , ,568 APPLICATION OF FUNDS Gross Block 103, , , , , ,620 Less: Acc. Depreciation 38,480 45,119 50,138 63,934 77,587 92,636 Net Block 64,823 64, , , , ,984 Capital Work-in-Progress 29,324 49,884 73,846 17,034 10,000 15,000 Goodwill Investments 5,268 9,523 6,436 13,112 13,112 13,112 Current Assets 33,116 51,489 58,746 69,106 82,610 92,404 Cash 1,937 4,474 22,742 13,891 28,544 29,687 Loans & Advances 14,888 21,748 11,002 10,647 10,647 10,647 Other 16,291 25,267 25,002 44,568 43,419 52,070 Current liabilities and provisions 20,252 26,867 38,872 42,586 43,657 51,935 Net Current Assets 12,864 24,622 19,874 26,520 38,953 40,469 Mis. Exp. not written off Total Assets 112, , , , , ,567 January

13 Cash Flow Statement (Consolidated) Y/E March (` cr) FY07 FY08 FY09 FY10 FY11E FY12E Profit before tax 14,647 23,011 17,869 28,680 24,702 27,712 Depreciation 6,896 6,785 7,713 14,001 13,653 15,049 Change in Working Capital (1,514) (4,565) (5,771) (5,939) 2,220 (373) Less: Other income (582) (5,827) (1,330) (1,786) 21 (298) Direct taxes paid (1,936) (2,475) (1,926) (3,140) (4,922) (5,467) Cash Flow from Operations 17,512 16,929 16,555 31,815 35,675 36,624 (Inc.)/ Dec. in Fixed Assets (27,946) (26,640) (27,732) (23,017) (26,363) (23,098) (Inc.)/ Dec. in Investments 2,431 4,335 3,366 2, (Inc.)/ Dec. in loans and advances (4,239) (8,623) (102) (19) - - Other income ,364 2,160 2,290 2,290 Cash Flow from Investing (29,245) (30,426) (23,103) (18,231) (24,073) (20,808) Issue of Equity 5,262 1,682 15, (0) - Inc./(Dec.) in loans 10,545 17,652 16,514 (5,822) 7,894 (10,000) Dividend Paid (Incl. Tax) (3,274) - (1,908) (2,219) (2,531) (2,680) Others (1,479) (3,301) (4,954) (14,907) (2,311) (1,992) Cash Flow from Financing 11,054 16,033 24,817 (22,436) 3,052 (14,673) Inc./(Dec.) in Cash (679) 2,537 18,268 (8,851) 14,653 1,143 Opening Cash balances 2,616 1,937 4,474 22,742 13,891 28,544 Closing Cash balances 1,937 4,474 22,742 13,891 28,544 29,687 January

14 Key Ratios Y/E March FY07 FY08 FY09 FY10 FY11E FY12E Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) Working capital cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT/Interest) January

15 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement RIL 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock Yes 3. Angel and its Group companies' Directors ownership of the stock Yes 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) January