Reliance Industries – No Tax Holiday – Underperformer

The finance ministry’s refusal to extend the 7-year tax holiday to gas production, as reported in media [Yet to be confirmed], to be negative for RIL’s earnings and valuations. Fair valuation for RIL will also decline by Rs45/share due to removal of tax holiday.

Kotak Sec in a somewhat Bold move maintains SELL rating on RIL in view of (1) a weak business environment, (2) several potential negative developments and (3) lack of positive triggers.

Core Business: Refining margins have declined sharply from 2QFY10 and is at – US$2.8/bbl in the recent week. Expect refining margins to remain subdued over FY2010-11E given large supply-demand imbalance. Additionally, expect chemical margins to be very weak due to the large surplus; CY2010E will likely see the lowest rates for global capacity utilization for base polymers in the past 15 years.

Kotak’s Sum of the Parts Valuation of RIL
Chemicals – 214
Refining – 334
Oil & Gas – 31
Gas Developing – 252
Retail + SEZ + Investments – 40

Kotak’s price target based on the above SOTP valuation is Rs 900.

This does not mean you have to SELL, but you have to wait to BUY at lower levels than what it is already quoting. Long Term investors can continue to HOLD.