Is it time to buy Reliance Industries Scrip?

For a variety of reasons we think it is. Reliance has generally moved in line with the indices. This is evident from the last thirty months chart shown below. You will observe that whenever in the short term Reliance has outperformed or underperformed the markets it has always tended to move back to the index linked movements after a few months. In the first phase of the present bull run (March to June), Reliance outperformed and generated higher returns than the broader benchmark indices. This has been followed by a lull where Reliance has not just reversed the earlier outperformance but has in fact started underforming the overall sensex movement over the last couple of months. Historical trends suggest that soon this would get corrected and Reliance would once again start generating at least index linked returns. With the market poised to take another leap forward this would mean a good leg up in the short run. 

Reliance Industries vs. Sensex

Reliance Industries (RIL) currently holds 14.0% and 10.4% weightage in Sensex and Nifty respectively and we expect this scrip to lead the expected short term rally.

Apart from this there are many fundamental reasons which call for an investment in RIL.

Reliance Industries is the largest private conglomerate in India in terms of revenue and is engaged in a wide range of business activities. The company along with its subsidiaries is also the largest private player in the oil and gas sector, with a significant presence in both upstream and downstream operations. RIL continues to move forward on its high growth trajectory with the commencement of gas production from Krishna Godavari (KG) Basin and commissioning of its new refinery.

Lyondell Basell Acquisition: The company has offered to buy a controlling stake in the world’s third largest chemical company Lyondell Basell. The acquisition will take RIL higher up in the Fortune 500 list, where it is currently ranked 264th. The acquisition would not just make RIL one of the world’s largest petrochemical companies but will also enable it to penetrate developed markets. Moreover, if the deal goes through, RIL would have a global monopoly in polypropelene.

KG Basin gas production - A boost for E & P business: RIL operates the block KG-D6 in the KG basin, which is the largest natural gas discovery in India. The company has started production of natural gas from KG- D6 block on April 2, 2009. The exploration business is expected to enhance the valuation of the company on back of expectation of significant reserves of oil and gas from the blocks under exploration or yet to be explored.

Refining earnings are expected to improve post stabilization of new refinery: After the merger of RPL with RIL, RIL's refining capacity has increased from 33 mn tonnes per annum to 62 mn tonnes per annum. The new refinery i.e. RPL has a distillation capacity of 580,000 barrels per day (bpd). Such a large scale of operations should provide economies of scale, leading to a relatively lower operating cost base. The new refinery has been designed to have a Nelson Complexity Index of 14.0, which makes it amongst the most complex refineries in Asia. Since, the new refinery is located in special economic zone (SEZ); it will have significant tax benefits.

The above ventures speak about RIL’s successful execution capability as KG D6 has been one of the fastest deepwater developments across the globe, while the RPL refinery is one of the most complex refineries. Thus, we remain positive on RIL’s future growth prospects. At current market prices of Rs 2190, RIL is currently trading at 17.9x and 13.3x of FY10E and FY11E earnings respectively. We expect RIL to deliver 30.8% CAGR in earnings over next two years (FY09 – FY11E).