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Please refer to the important disclosures and analyst certification on inside back cover of this document, or on ourwebsite www.macquarie.com.au/research/disclosures.
 
INDIA
RIL IN Outperform
Stock priceAs of 11 Nov 09
Rs2,107.95
12-month target
 
Rs
 
2,400.00
 
Upside/Downside
 
%
 
13.9
 
Valuation
 
Rs
 
2,400.00
 
- Sum of Parts
 
GICS sector
 
energy
 
Market cap
 
Rsbn
 
3,464
 
30-day avg turnover
 
US$m
 
210
 
Market cap
 
US$m
 
74,486
 
Number shares on issue
 
m
 
1,643
 
Investment fundamentals
Year end 31 Mar
 
2009A 2010E 2011E 2012ETotal revenuebn 1,492.6 1,739.3 2,145.5 2,291.6EBITDAbn 234.3 353.1 401.3 446.1EBITDA growth% 1.3 50.7 13.7 11.2EBITbn 183.3 270.4 314.7 355.7EBIT growth% 1.0 47.5 16.4 13.0Reported profitbn 152.2 210.9 257.9 307.7Adjusted profitbn 155.5 210.9 257.9 307.7EPS repRs 92.65 128.36 156.99 187.32EPS adjRs 94.65 128.36 156.99 187.32EPS adj growth% 0.7 35.6 22.3 19.3PER adjx 22.3 16.4 13.4 11.3Total DPSRs 12.60 17.46 21.36 25.48Total div yield% 0.6 0.8 1.0 1.2ROE% 14.6 16.4 18.2 18.6EV/EBITDAx 16.8 11.1 9.8 8.8Net debt/equity% 36.5 35.6 18.8 2.1P/BVx 2.7 2.7 2.3 1.9
RIL IN rel BSE Sensex performance, &rec history
Note: Recommendation timeline - if not a continuous line, then there was noMacquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, October 2009(all figures in INR unless noted)
Jal Irani
 
91 22 6653 3040
 
 jal.irani@macquarie.com
 
Amit Mishra, CFA
 
91 22 6653 3051
 
amit.mishra@macquarie.com
 12 November 2009
 
Reliance Industries
Shopping in America
Event
 
Recent press reports suggest RIL may be looking to acquire refining and oilproduct marketing (R & M) assets in the US. We continue our thematic series
on RIL’s acquisition potential.
 
 
We believe that
RIL’s stated strategy for inorganic growth, coupled with its
increased need for a distribution and marketing network for its high-endproducts, has enhanced the potential for acquisitions, especially in the quality-discerning large US market.
Impact
 
RIL’s need for overseas acquisition.
RIL has commissioned its 580kbpdhigh-end refinery earlier in the year and hence requires a large discerningconsumer base. Given its larger share of Euro IV/V compliant gasoline in theproduct slate, the US would be the natural market for the new refinery. Giventhe unattractiveness of the domestic retail fuel market, superior quality of
RIL’s products and
its large production capacity, we believe RIL will benefitfrom greater control of overseas distribution network to maximise its returns.
 
Types of assets that fit the bill.
Product differentiation, especially brandedproducts, is essential to enhance the returns in the auto-fuel retailing market.In addition, RIL will likely be looking for a captive product storage anddistribution network in the US. Mid-sized auto-fuel marketers with distributionassets could be primary targets. In our view, US-based R & M companies,Tesoro or Delek could be a good fit for RIL (Fig 8). Valero and Sunoco arealso a good fit, but quote at the highest 1-year forward EV/EBIDTA (Fig 11).
 
Build or buy? GRM plunge provides opportunity.
Weak demand, coupledwith increased capacity, has plunged GRMs to US$ 1.3/bbl (Singaporecomplex, Fig 5), well below the average operating cost of most refineries.Valero has shut the 235kbpd Aruba refinery. Sunoco has announced plans toshut its 145kbpd Eagle Point refinery. Tesla refinery was recently transactedat a fraction of the price it cost RIL to build its highly competitive exportrefinery (Fig 6). We feel buying is currently a better opportunity than to build.
 
Does RIL have the financial muscle?
RIL holds US$4bn in cash, US$8bn intreasury stock and if it doubles its current net debt-to-equity of 0.35x it canborrow another US$10bn, ie, a total potential of ~US$22bn. The largest R & Mcompany in the US has a US$12bn EV; the others are less than US$7bn.
Earnings and target price revision
 
No change.
Price catalyst
 
12-month price target: Rs2,400.00 based on a Sum of Parts methodology.
 
Catalyst: Gas pricing settlement and new growth initiatives.
Action and recommendation
 
Reiterate Outperform.
We believe RIL is poised for sizeable volume-drivenprofit growth, despite cyclical pressure on margins.
 
Macquarie Research
 
Reliance Industries12 November 2009 2
Fig 1 Other stocks mentioned in the report
Company BloombergCodeCurrent price(lcy)Upside/DownsideRecommendation Macquarie analyst
Delek US DK US 7.0 - NR -Alon USA Energy ALJ US 7.3 - NR -Western Refining WNR US 5.0 - NR -Holly Corp HOC US 28.4 20% OP Jason GammelTesoro TSO US 13.4 -10% UP Jason GammelFrontier Oil FTO US 13.4 57% OP Jason GammelSunoco SUN US 27.5 2% N Jason GammelValero VLO US 17.3 21% N Jason GammelSource: Bloomberg, Macquarie Research, November 2009
Why a potential acquisition in the US?
 
Reliance owns two of the three largest and most complex refineries in the world. It owns 25% of
the world’s most complex refining capacity. The new refinery is capable of producing Euro V
compliant gasoline that would have a quality premium in the US market. Also, RIL would like tohave control over the distribution network as it looks to place its products in a very competitivemarket.
Fig 2 RIL owns two of three largest complex refineries
Company Location CDU kb/d Nelson Complexity
BP Texas City 433 14.2
RIL SEZ Jamnagar 580 14.0RIL EOU Jamnagar 660 11.3
CITGO Lake Charles 320 11.2Exxon Mobil Baytown 428 10.9Exxon Mobil Beaumont 320 10.8Source: IEA, RIL, Macquarie Research, November 2009
Fig 3
RIL owns 25% of world’s most complex refining capacity
 
Company Location CDU (kb/d) Nelson complexity
Conoco Immingham 170 16.8Ultramar Diamond Martinez 108 16.6Shell/Texaco Martinez 151 15.1Exxon Mobil Torrance 130 14.9BP-Amoco Tex City 433 14.2
Reliance Petroleum Jamnagar 580 14.0
CITGO (PDVSA) Corp Cristex 133 13.8Chevron USA Richmond 229 13.7BP-Amoco Corp Toledo 137 13.4Oberrheinische Karlsruhe 116 13.4Valero Energy Corp Benicia 128 13.3Shell/Tex/ S Aramco Del City 140 13.1Maraven Cardon 286 12.8Phillips Co. Borger 125 12.7Lyondell CITGO Houston 265 12.7Chevron USA Pascagulamss 295 11.9Shell Oil Co. USA Deer PK 268 11.4
RIL - EOU Jamnagar 660 11.3
CITGO Petroleum Corp Lake Charlou 320 11.2KOCH Refining Company Rosemount 262 11.1
Total 4,936
Source: IEA, RIL, Macquarie Research, November 2009
 
The US is by far the largest
oil products
market, consuming one-fifth of global refinery products.It also has amongst the toughest environmental norms. RIL's large, high-end refinery would needan avenue to sell in a market that is willing to pay a premium for its products. The US ideally fitsthe bill.
 
Macquarie Research
 
Reliance Industries12 November 2009 3
 
Also, RIL has a high-quality back-end, ie, a large refinery. Now it needs to enter a market thatprovides significant value for these high-end products. Moreover, non-fuel retail content boostsIRRs. Non-fuel organised retail presents some synergies with its recent foray into this space.Outlets with a higher mix of non-fuel content results in a higher IRR, as can be seen in the moremature markets such as the US (see chart below).
Fig 4 Contribution from non-fuel retail could boost returns earned
Source: McKinsey and Co, Macquarie Research, November 2009
Refining margins are below operating costs
Last week, Singapore gross refining margin (GRM) continued to decline to US$1.27/bbl, down 22%WoW. The gasoline-crude oil spread was down, as demand could not absorb incremental supply andthe market expects China exports to increase in November. Naphtha widened the negative margin,as downstream margins remained weak and supply from the Middle East increased. Diesel andkerosene margins were up on reduced supply, as oil refineries have cut utilisation rates.
Fig 5
 
Singapore gross refining margin* trends
*32% Gasoline, 19% Kerosene, 16% Diesel, 7% Naphtha, 3% LPG, 23% Fuel OilSource: Bloomberg, Reuters, Macquarie Research, November 2009
Recent refinery acquisitions in US happened below capital cost
Holly Corp’s acquisition of Sinclair Oil Corporation’s Tulsa refinery
 
 
Holly will pay a total consideration of US$128.5m, comprising US$54.5m cash and 2.789m HOCcommon shares (valued at US$74m based on the 15-day average price before the closing of thetransaction). Incremental to the purchase, Holly will acquire inventory on hand at the refinery,estimated to be about 500k bbls, which would add ~US$40m of working capital.
 
Taking full capital expenditures into account for both the Tulsa acquisition and future expansionsand modifications, the company has spent US$232m for 125k bpd of distillation capacity, orUS$1,856/bpd of capacity. The combined refineries have a Nelson Complexity Index rating of14.0, making it one of the most complex refining systems in the Mid-Continent region. Adjustingfor complexity, the aggregate transactions cost US$133/complexity barrel day of capacity, at thelow end of transactions entered into since 2000.
Fuel/ non fuel sales mix100%80%100%<40%100% Typical IRR4-7%7%13-25%Market examples-India-Brazil-US-China-Italy-France-Fuel-FuelValue proposition-Vehicle related-Basic convenience-Strong non-fuelproduct/ serviceimpulse non-fuelvalue propositionproducts
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