Monetisation of the KG-D6 is likely to generate incremental free cash flow of $1 billion by FY11E.
More importantly, we believe that it sets the stage for exploratory upside arising from the other blocks currently held by RIL.
Our analysis of the company’s E&P portfolio implies a resource base of 20 billion boe, translating to $4.1/boe based on our SOTP of $31.6 billion for the E&P business. Litigation with RNRL and NTPC would be an overhang on the stock in the short-term.
We expect the extant business to post EBITDA of Rs160 billion in FY11E (Rs180bn in FY09) with RPet contributing Rs80 billion.
The lower profitability reflects significant refining/petchem capacity addition in CY09-10 attendant with flattish product demand; and lower light-heavy differential of $2.3/bbl ($5.6/bbl in FY09).
Based on SOTP methodology to value RIL we arrive at a target price of Rs2,020 (March ‘10). This implies 6% upside from current levels and constitutes the basis of our Hold recommendation.
Our base case fair value assumes7-7.5x EV/EBITDA FY11E earnings for the refining and petrochemical divisions; and implied $4/boe for the E&P division.
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