Reliance Industries Ltd.
Cut to Neutral on worsening
refining margins outlook
�� Cut FY12-14 EPS by 4-9% and PO by 9% to Rs860
Global oil demand growth was weak in 2Q (lowest in 7 quarters) and 3Q 2011.
We had concerns that refining margin (GRM) would weaken if demand weakness
coincides with large refining capacity addition in 2012 (Reliance Industries Ltd., 22
August 2011). In November 2011, Reuters’ Singapore GRM has collapsed. We
have cut Asian GRM (Oil Industry, 01 December 2011) and FY12-14 GRM of
Reliance Industries (RIL) by 6-11% to US$8-9/bbl. This has led to cut of 4-9% in
FY12-14 EPS and 9% in PO to Rs860. We now expect flat EPS in FY13. Revised
PO implies 8% potential upside. We therefore cut RIL to Neutral from Buy.
Singapore GRM weakens in November 2011; lowest in 2011
Reuters' Singapore GRM, which has been strong at US$8.7/bbl to date in FY12,
has slumped to US$6.6/bbl in November 2011 (lowest monthly GRM in 2011).
Singapore GRM for week ending 25 Nov is down to US$5.2/bbl (US$4.5/bbl in the
current week). We expect Singapore GRM to be US$4.2-4.3/bbl in 2012-13.
Neutral due to inexpensive P/E and strong balance sheet
RIL is not expensive. Its P/E on FY13 EPS is 11.4x, which is much lower than its
5-year average forward P/E of 16.8x. RIL will turn net cash in FY12, which will
boost its other income (main factor preventing FY13 earnings decline).
What would make us bullish or bearish on RIL?
We would turn more bearish on RIL if its FY13 GRM is lower (if oil demand
weaker) than assumed by us and/or rupee is stronger (Rs50 assumed). We would
turn bullish if GRM are higher (higher than expected refinery closure), RIL makes
significant oil or gas discovery and/or a value accretive acquisition.
Cut to Neutral on worsening
refining margins outlook
�� Cut FY12-14 EPS by 4-9% and PO by 9% to Rs860
Global oil demand growth was weak in 2Q (lowest in 7 quarters) and 3Q 2011.
We had concerns that refining margin (GRM) would weaken if demand weakness
coincides with large refining capacity addition in 2012 (Reliance Industries Ltd., 22
August 2011). In November 2011, Reuters’ Singapore GRM has collapsed. We
have cut Asian GRM (Oil Industry, 01 December 2011) and FY12-14 GRM of
Reliance Industries (RIL) by 6-11% to US$8-9/bbl. This has led to cut of 4-9% in
FY12-14 EPS and 9% in PO to Rs860. We now expect flat EPS in FY13. Revised
PO implies 8% potential upside. We therefore cut RIL to Neutral from Buy.
Singapore GRM weakens in November 2011; lowest in 2011
Reuters' Singapore GRM, which has been strong at US$8.7/bbl to date in FY12,
has slumped to US$6.6/bbl in November 2011 (lowest monthly GRM in 2011).
Singapore GRM for week ending 25 Nov is down to US$5.2/bbl (US$4.5/bbl in the
current week). We expect Singapore GRM to be US$4.2-4.3/bbl in 2012-13.
Neutral due to inexpensive P/E and strong balance sheet
RIL is not expensive. Its P/E on FY13 EPS is 11.4x, which is much lower than its
5-year average forward P/E of 16.8x. RIL will turn net cash in FY12, which will
boost its other income (main factor preventing FY13 earnings decline).
What would make us bullish or bearish on RIL?
We would turn more bearish on RIL if its FY13 GRM is lower (if oil demand
weaker) than assumed by us and/or rupee is stronger (Rs50 assumed). We would
turn bullish if GRM are higher (higher than expected refinery closure), RIL makes
significant oil or gas discovery and/or a value accretive acquisition.
No comments:
Post a Comment