Reduce Reliance Industries - No surprises as expected - Elara Capital

• Reliance Industries
• Rating : Reduce
• Target Price : INR1,075
• Downside : 2%
• CMP : INR1,096 (as on 29 October 2010)

No surprises as expected; Reduce

Flat QoQ earnings; Better GRMs offset by Panna Mukta shutdown

RIL reported its Q2FY11 results in-line with our estimates with net revenue coming in at INR575bn vs our estimate of INR590bn while the PAT was INR49.2bn as against our estimate of INR48.8bn. There was no major surprise in earnings from any business segments as the results proved to be marginally a non-event (Street expectations were also in a similar range). RIL reported GRMs of USD7.9/bbl (our estimate was USD7.8-8.0/bbl), up from USD7.3/bbl in Q1 driven by better middle distillates yields. The E&P earnings were impacted on a QoQ basis due to the Panna/Mukta fields being shut down for two months. Petchem margins declined QoQ marginally to 14.6% from 14.8% in-line with our estimates due to the slight weakness in product pricing.

Earnings outlook sluggish for next 2-3 quarters

With the KGD6 ramp-up to 80mmscmd pushed out to H2FY12 yet remaining uncertain, GRMs remains the biggest variable to RIL's earnings. With Q3FY11 refining earnings already expected to be weak due to the month-long planned shutdown for 20% of RIL's capacity, we do not expect any big surprise in the subsequent two quarters as well. The US and European refiners have been curtailing their throughputs in the last two quarters to maintain margins as the driving season has been unable to drive up the expected demand growth. Similarly, Asian refining outlook also remains subdued due to slight oversupply issues. Petchem and E&P earnings are also expected to be flattish over the next 2-3 quarters. To sum up, we do not see any significant earnings trigger unless the refining cycle reverses.

Maintain Reduce; expect the stock to move sideways

RIL shares have outperformed the Sensex by 11% during the last month expecting a positive corporate announcement, wherein some buying has been seen from investors who went underweight on the stock after Q1. However, with no big announcement coming in, and earnings sluggishness spilling over the next 2-3 quarters, we expect the stock to perform sideways in the medium term. We maintain our Reduce rating and our SoTP-based TP of INR1,075 on RIL.

Source : Equity Bulls

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