Reliance Industries : A great wealth being created.

Scrip Code: 500325 / RELIANCE

CMP:  Rs. 992.05; Buy at Rs. 930 - Rs.950 for LT.
Short term Target: Rs. 1030.00, LT – Rs. 1350
Market Cap: Rs. 3,24,659.03 cr.
52 Week High/Low: Rs. 1149.70 / Rs. 885.10

Total Shares: 327,26,07,533 shares; Promoters : 146,39,23,343 shares – 44.73 %; Total Public holding : 58,60,93,502 shares – 17.91 %; Book Value: Rs. 392.21; Face Value: Rs. 10.00; EPS: Rs. 59.95; Div: 70 % ; P/E: 16.54 times; Ind P/E: 17.80; EV/EBITDA: 11.72 .

Total Debt: Rs. 62536.25 cr; Enterprise Value: Rs. 3,87,195.28 cr

Reliance Industries out put is of 1.8 bn cubic feet of gas a day which is equal to 1,25,000 barrels of oil production per day a nearly 40 % of India’s total gas production, all comes from D6. RIL owns 2,7o,000 Sq Kilometers of exploration circles or 28 blocks.

British Petroleum (BP) global oil major has announced an historic deal with India’s largest private sector oil major Reliance Industries to buy RIL’s 30% stake in 23 oil and gas blocks on 21^st February 2011. As per the partnership deal, BP will buy 30% stake in 23 oil & gas production sharing contracts that RIL operates in India, including the producing KG-D6 blocks at $7.2 billion (Rs.44.99/$) Rs. 32400 cr, and will also form 50:50 JV for sourcing and marketing gas in India. This JV is also an attempt to accelerate the creation of infrastructure for receiving, transporting and marketing natural gas in India. RIL will get $7.2bn in 3 trenches - $2 bn as upfront payment, further $2.3 bn on completion of deal & the final payment of $3 bn in October 2011. BP could invest US $20bn in RIL which would go to Reliance Gas Transportation Infrastructure Ltd. This deal is positive for RIL as the combined expertise of both the parties would result into optimisation of producing blocks and enhancing the resources in exploratory blocks. The transaction amount gives a value of Rs. 363/share to the east coast blocks, as BP is expected to incrementally incur its share of capital expenditure into the commercialisation and development of blocks, which have already been factored in for valuation.

Outlook and Valuation

The deal is an earnings & value accretive in the long term, considering the technical expertise BP brings on table. Once the deal goes through, dip in valuation on account of shedding 30% share in east coast blocks will be offset by cash consideration and re-rating of blocks on account of synergy arising out technical expertise of both the proficient parties. This deal will put RIL in a position to be “DEBT FREE”. My view on the stock is of BUY with a price target of Rs. 1,160 when the share price is at Rs. 957.00

Y/E March (Rs. Cr)	2009	2010	2011E	2012E
SALES (Rs. crs)	1,51,224	2,03,740	2,43,815	2,83,665
NET PROFIT (Rs. crs)	14,969	15,897	19,835	22,305
EPS (Rs.)	50.3	53.4	66.6	74.9
PE (x)	19.0	17.9	14.4	12.8
PRICE/BOOK (x)	2.3	2.0	1.8	1.6
EV/EBITDA (x)	15.6	11.8	9.3	8.1

Evaluation of RIL’s east coast blocks

Prospective Basins	Estimated 2P Reserves (mmboe)
KG - Basin	2,413
MA - Oil	150
NEC - 25	793
D3	884
D9	512
Total	4,751
Value given by British Petro.
Deal Value (Rs. Cr @ Rs. 45/$)	1,08,000
EV/Share (Rs.)	363

Union Budget 2011-12 -

In this budget finance minister proposed the Minimum Alternate Tax (MAT) on Special Economic Zones (SEZ) & Limited Liability Partnership (LLP) from 1^st April 2012. LLPs will have to pay MAT at 18.5 % but will be exempted from Dividend Distribution Tax of 17 % on the dividend declared. In LLPs MAT will be known as Alternate Minimum Tax (AMT). AMT will be applicable to LLPs @ 18.5 % AMT will apply to the adjusted income & not on adjusted book profit. AMT credit is available to an LLP for 10 years. The LLPs was used by some promoters of cooperates to save tax on dividends declared by their companies. RIL promoters created 29 LLPs in August 2010 which will own 32.75 % of Reliance Industries. These 29 LLPs collectively earned Rs.750.77 cr as dividend last year saving both MAT & DDT.  But when the new AMT norm becomes affective these LLPs will have to pay tax of Rs.139 cr if the RIL maintains the same dividend rates.

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