Hold Reliance Industries; target Rs 879: Emkay

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Hold Reliance Industries; target Rs 879: Emkay

Emkay Global Financial Services has recommended hold rating on Reliance Industries (RIL) with a target of Rs 879, in its February 16, 2012 research report.

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Emkay Global Financial Services has recommended hold rating on Reliance Industries (RIL) with a target of Rs 879, in its February 16, 2012 research report.

"Reliance Industries (RIL), after disappointment on the Q3FY12 results on the back of margin pressure on its core business Refining and Petchem, RIL is facing another major concern on its gas production from KG basin. Recent media reports suggest that RIL has intimated DGH on lower gas production estimates from KG basin. It estimates production to fall to about 28mmscmd and 22mmscmd for FY13E and FY14E respectively. Current KG basin gas production stands at about 37mmscmd with D1-D3 production at about 30mmscmd and MA field contributing the rest. Based on various media reports, for FY13, D1-D3 is expected to have production of about 20mmscmd and MA field about 7.5mmcmd. And For FY14E it would be at 14mmscmd and 8.6mmscmd respectively."

"Any such decline in gas production would be negative for RIL as expectations were that production would not fall below 35mmscmd and would increase after 2015 as satellite fields are brought on stream for which approval was recently granted. We believe the decline in gas production does not consider any revival in production coming from the workover operations which RIL would do to revive sick wells in KG block. RIL-BP to start workover on 6 wells in D1-D3 fields of KG-D6 block to increase the flagging gas production."

"We believe KG D6 volume ramp up will take minimum two years, given the lead time required for data gathering, analysis, drilling, etc. Moreover in near term, we remain cautious on refining and petchem margins on the back of new capacities and/or weakening demand. Hence we believe further drop in volumes and a decrease in margins of its core business (Petrochemical & Refining) translates lower earnings growth for FY13E and FY14E. Given the facts and arguments we have reduces our earnings for FY12E and FY13E by 0.3% and 2.1% respectively."

"While the concerns on declining gas production in KG basin have remained, RIL stock under performed till Q3FY13 on the back of sharp correction in GRMs and weak petchem chain margins on the back of a weakening demand. The stock has gained recently on the back of buyback, which will act a support to the stock price in near term. However looking at the latest production estimates from KG basin, we believe the stock is likely to under perform until there emerges any positive development from the workover efforts taken by the company. The stock currently trades at FY12E and FY13E PE multiple of 13x and 12x respectively. We now factor in lower gas volume for FY12 and FY13 and Downgrade our reco to Hold from accumulate and cut our target price to Rs 879," says Emkay Global Financial Services research report.

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To read the full report click on the attachment