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Reliance Petroleum Weak Refining Margins – Merrill

August 7, 2008

Reliance Petroleum, which is likely to add 1% to global gasoline and diesel capacity, is facing one of the biggest risks that refining margins may weaken further. Problems in stabilizing refinery cannot be ruled out despite the past impeccable track record. The refinery may well start in September 2008 but commercial operations are likely just for 3-4 months at best in FY09E.

RPL exporting more to Asian countries than originally envisaged is a threat to
Asian refining margins. RPL’s exports to US may be lower than the originally envisaged 30-40%. However, RPL’s exports to the US should still be significantly higher than 7%.

Commercial operations from April 2009 not ruled out due to the way the tax holiday works in India, is that if commercial operations start in January, the tax holiday will effectively be for four years and three months.

Additionally their are rumors that a MAT will be levied on RPL’s project, we don’t think Mukesh Ambani will like it and will keep quiet but will retaliate against the Government, if it moves to impose any tax on RPL.

Merill has rated RPL an underperformer with EPS expectations of Rs 3.6 and Rs 19 for FY09 and FY10 respectively. RPL’s DCF based fair value based on long term refining margin of US$12.3/bbl is Rs142/share.

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