UBS Investment is bullish on Reliance Industries and has maintained buy rating on the stock with target price of Rs 2745.

UBS Investment research report on Reliance Induustries

E&P to be the main driver; accounts for 38% of the value

We value RIL’s E&P portfolio at USD33billion or Rs1,091/share. We include the value of reserves in the KGD6, NEC25 and CBM blocks. We also include risk-weighted potential upside from RIL’s exploration prospects.

New oil find in KG basin confirms upside risks in E&P

RIL announced an oil discovery (Dhirubhai 36) in the deepwater block KG-DWN- 98/1 (KG-D4) located in the KG Basin. RIL holds 100% participating interest in this block, which spans an area of 8,100 sq kms. This new find, along with the ones in Cauvery basin and Gujarat Saurashtra basin, confirms our opinion that the risks in RIL’s E&P portfolio are to the upside. 

Stake in RPL is worth Rs445/share to RIL

With a 75% stake, RPL accounts for 14% of RIL’s value. We value RPL at Rs190/share using a DCF (assuming a WACC of 10.1% and a long-term growth rate of 2%). We assume long-term Reuters Singapore refining margin of USD4.5/bbl. Raising price target We raise our SOTP-based 12-month price target from Rs2,340 to Rs2,745. We include the value for RIL’s prospective resources in E&P. We risk-weight the potential upside from RIL’s exploration prospects (in KGD6, D3 and D9 blocks) at 30%; exploration prospects are likely an accretion to reserves based on further block exploration by the company.

We now value RPL based on our price target (instead of market price earlier) for the stock. Further exploratory upside in RIL’s E&P portfolio Continuing with its strong performance in hydrocarbon exploration, Reliance has reported discoveries in GS-OSN-2000/1 (GS-01) in Gujarat Saurashtra basin, CY-DWN-2001/2 (CY-III-D5) in Cauvery Basin and KG-DWN-98/1 (KG D4). RIL holds 90% interest in GS-01 with Hardy Oil holding the rest. In CY-III-D5 and KG-D4 RIL holds 100% interest. These discoveries confirm our opinion that in RIL’s E&P portfolio risks are to the upside.

Valuation

At the current price of Rs2,320, RIL trades at 20.8x FY09E earnings and 12.4x EV/EBITDA. We base our target on a sum-of-the-parts valuation, including the potential upside in E&P and retail. We raise EV/EBITDA multiples for the existing businesses (from 6.4x for petrochemicals to 6.5x and from 6x for refining to 6.5x) aligning it with regional peers. With an upside of 18.3%, we reiterate our Buy rating on the stock. New business initiatives (E&P, Reliance Retail and RPL) now account for 61% of our sum-of-the-parts valuation.

This reduces the impact of a cyclical downturn in Reliance’s core business on its valuations. With more clarity and a reduction in project execution risk, we expect the share of new businesses in the sum-of-the-parts to increase. We also risk-weight the potential upside from RIL’s exploration prospects at 30%; exploration prospects are likely an accretion to reserves based on further block exploration by the company.