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Sell Reliance Industries – Increaed Risk – UBS

July 9, 2009

UBS Investment Research in a note on Reliance Industries Ltd has recommended a SELL as they see increased business and regulatory risks.

The government has now allowed tax holiday under section 80-IB(9) of the IT Act to be extended to natural gas only for NELP VIII. The value of RIL’s E&P segment accrues from blocks from NELP I-VII. If we were to assume no tax benefits on gas production, UBS estimates for RIL’s EPS in FY10 would be lower by 12% at Rs104 and price target would be lower by 9% at Rs1,640, all other things being equal. The increase in MAT to 15% led to lower EPS estimates for RIL by 4.5%/3.3%/2.8% to Rs119.3/154.8/172.4 for FY10/FY11/FY12.

A lower light-heavy crude differential has also reduced RIL’s complexity premium. With 1.3mmbpd of new capacity and around 1.8mmbpd of capacity back from maintenance in Asia, UBS sees further downside risk to GRMs in 2H2009. They estimate that every US$1/bbl fall in RIL’s GRMs would impact its SOTP by Rs90/share or 5%.

UBS has set a price target of Rs 1,800.

BOFA-Merrill has an UNDERPERFORM Rating on Reliance with a target price of Rs 1,814.

Comment:
However,the finance bill presented after the budget is not yet passed in the parliament. RIL lobbyists are very strong in the corridors of Delhi and pending clarification on certain tax issues, they may have their way as the Chairman is hungry for money for his yet to take-off Retail and SEZ dreams which are in the back burner.

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