Reliance Industries Ltd’s (RIL) results for FY08 have exceeded our expectations. Net sales increased 19.5% y-o-y to Rs1,334.4 billion, driven by a robust performance across all segments.
The company is aggressively expanding in the E&P business and has invested Rs134.4 billion in the segment during FY08. It made nine oil and gas discoveries in the country and has entered into various international production sharing contacts.
For FY09, RIL plans to undertake drilling in 8 out of the 26 blocks (excluding new blocks from NELP-VI) and operationalize six new rigs, thereby adding to its resource base.
Gross refining Margins (GRMs) continue to outperform the international benchmarks due to Jamnagar refinery’s superior configuration, which allows the flexibility of producing high-margined middle distillate products.
Moreover, with Reliance Petroleum Ltd’s (RPL) refinery at Jamnagar expected to commence operations in FY09, the Company’s GRMs will get a further boost.
During the year, the company entered into an agreement with Hualon (now Recron Malaysia), Malaysia’s leading polyester producer, and increased its manufacturing capacity by 25% to 2.5 mtpa. With this, RIL’s global market share in polyester fibre and yarn is around 7%.
Further, RPL’s refinery will add 0.9 mtpa capacity. Despite rising demand and increasing capacities, the segment’s margins are expected to remain under pressure due to rising naphtha prices and increasing global capacities.
At the current market price, the stock trades at a forward P/E of 15.7x for FY09E and 10.9x for FY10E. Based on our valuation, we arrive at a target price of Rs2,567 for FY09E and maintain BUY rating on the stock.