Dalal Street Investments

Reliance Petroleum Bubble – Book Profits

November 5, 2007

Reliance Petroleum implies an asset value of $4,129/complex-bpd – 2.4x those of its US-peers and a 50-70% premium to even the most expensive refinery new-build quotes in the market ($2,500). While such a premium recognizes its superior earnings potential because of lower capital costs and taxes, even on earnings-based multiples RPL appears fully priced relative to its peergroup at 10.9x P/CE and tax-benefit-adjusted 9.9 EV/Ebitda calculated on FY10 estimate.

CLSA in its research report said, RPL trades at a further 20-50% premium to these multiples calculated on our top-of-consensus FY10 estimate. DCF-based fair value estimate for RPL is Rs158/share but the market is likely to look at alternate methods like earnings multiples, replacement costs, asset valuations, and M&A benchmarks. Depending on the framework chosen, CLSA finds a wide-range of “fair-values” at Rs103-233/share but even the highest estimate implies a 14% downside. Target price of Rs195/share is based on an average of the earnings-multiples and replacement cost benchmarks.

Book profits only if you hold the stock. Do not short as the markets are volatile and expected to remain so.


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