Reliance Industries – Refining performance dismal

Reliance Industries Ltd reported F2Q10 earnings in line with expectations. EBITDA was up 13% QoQ, 12% YoY; EBIT was up 9% QoQ however down 10% YoY due to higher depreciation which was up 30% QoQ and 92% YoY. Net profit grew 5% QoQ however declined
7% YoY.

Gross refining margins (GRMs) stood at US$6/bbl implying a spread of just under US$3/bbl, despite full commissioning of its new refinery. EBIT stagnated QoQ, and was down 51% YoY. Key reasons for the lackluster performance has been the reduction in light heavy spreads, higher supply world over and lower middle distillate demand.

A US$ 1/bbl reduction in GRMs would lead to about an 8% reduction in our earnings estimates, which in our eyes would be negated by higher petrochemical margins. However, a 5 mmscmd increase in gas volumes would lead to about a 4% increase in earnings assumptions and vice versa.

With D6 requiring less, company aims at 15-17 wells in 2HFY10 (5 appraisal, 10-12 exploration) from the available 24-25 drill months. Apart from D6 and D9, drilling is due in KG-D3, KG-D4 and Cauvery, where RIL has had discoveries in the past.

Citi expects RIL to report an EPS of Rs 115 and Rs 153 for FY10 and FY11 respectively and a target price of Rs 2200

Quick Gun Morgan expects RIL to report an EPS of Rs 110 and Rs 171 for FY10 and FY11 respectively with a target of Rs 2309.

JP Murugan expects RIL to report an EPS of Rs 113 and Rs 175 for FY10 and FY11 respectively.

All price target are CUM-Bonus [1:1]. We wouldrecommend Long Term Investors to ADD RIL on Decline and HOLD.

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