Dalal Street Investments

Reliance Petroleum – Buy or Sell ?

June 4, 2008

Two big brokerages have come out with conflicting reports on reliance Petroleum one with a BUY – Can’t Wait to Start and see cash flow while the other with SELL – on weak gasoline spread forecasts. What do you do now ?

Lets first analyze the BUY Report:
Based on average product spreads and L-H differential over last 12 months, 6 months, and 1 week, RPL would have reported GRMs of US$16.6/bbl, US$19.5/bbl, and US$30.9/bbl respectively. This compares very favorably against our base case of US$16.3-16.5/bbl dor FY09-10E. The inherent cushion available to RPL’s GRMs justifies target EV/EBITDA at 7.0x (higher end of peers, but lowered from 7.5x).

It is also reported that, Landing price RPL’s exports will be cheaper in Europe. RPL is expected to report an EPS of Rs 12 for FY2009. [Somewhat bullish estimates]

The Sell Report:
RPL’s new 580Kpbd refinery, representing almost 50% of estimate of global oil demand growth in 2009E, is likely to impact refining margins globally, particularly gasoline spreads, when it comes on stream in 4Q2008E. Incremental RPL supply amid weak gasoline demand and tighter ethanol blending norms in the key US market are likely to keep gasoline spreads weak over the medium term, in our view. While RPL, despite high gasoline yield, will likely make healthy margins owing to feedstock advantage, its share price implies a much more bullish refining environment.

Dalal Street Analyst Views: It is highly unlikely that RPL will report an EPS of Rs 12 for FY09. Consensus estimate is Rs 6 while commissioning the refinery ahead of scheduled time Sept-2008, can see the EPS rise to as much as Rs 8. We stick to our previous coverage and still maintain a fair value of Rs 158 and a NEUTRAL recommendation on the stock.Then we had advised to Book Profits because the prevailing market price was Rs 225


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