Sample Research Report (Reliance Petroleum)

7/28/2019 Sample Research Report (Reliance Petroleum)

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Reliance PetroleumRs269.60 - UNDERPERFORM

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Somshankar [email protected](9122) 66505071

Dheeraj Vaidya(9122) 66505064

Financials

Year to 31 Mar 09CL 10CL 11CL 12CL 13CL

Revenue (Rsm) 389,647 666,538 679,901 687,042 680,706

Ebitda (Rsm) 69,529 117,003 113,879 104,040 80,214

Net profit (Rsm) 57,019 96,085 93,673 84,741 61,901

CL/consensus(NP%) 247 118 110 99 -

EPS (Rs) 12.7 21.4 20.8 18.8 13.8

EPS (% YoY) 68.5 (2.5) (9.5) (26.9)

ROAE (%) 34.9 48.9 45.4 39.4 27.8

Net gearing (%) 41.4 32.4 21.2 11.1 2.0PEx (@Rs269.6) 21.3 12.6 13.0 14.3 19.6

Price/book (x) 6.3 6.0 5.8 5.5 5.4

EV/Op Ebitda (x) 18.6 10.9 11.0 11.9 15.2

Source: CLSA Asia-Pacific Markets

3 November 2007

IndiaPetroleum & Chemicals

Reuters RPET.NSBloomberg NRPET IN

Priced on 2 November 2007

India Sensex @ 19,976.2

12M hi/lo Rs295.00/58.10

12M price target Rs195.00

±% potential -28%

Target set on 05 Nov 07

Shares in issue 4,500.0m

Free float (est.) 20.0%

Market cap US$30,861m

3M average daily volume

Rs5,176.4m (US$128.9m)

Major shareholders

Reliance 75.0%Chevron 5.0%

}}Stock performance (%)

1M 3M 12M

Absolute 69.1 145.3 319.0

Relative 46.7 84.0 174.6

Abs (US$) 71.1 151.7 377.8

56

102

148

194

240

May-06 Nov-06 May-07

0

50

100

150

200

250

Reliance Petroleum (LHS)

Rel to Sensex (RHS)

(%)(Rs)

Source: Bloomberg

www.clsa.com

Barrels and bubblesAfter quadrupling since our initiation in April-07, RPL now trades at an asset value

of $4,129/complex-bpd – 2.4x that of its peers in the US and a 50-70% premium

to even the most expensive refinery new-builds quotes. While such a premium

recognizes its superior earnings potential because of lower capital costs and taxes,

even on earnings-based multiples RPL appears fully priced relative to its peer-

group at 10.9x P/CE and tax-benefit-adjusted 9.9 EV/Ebitda calculated on our

upgraded top-of-consensus FY10 estimate. Risk reward is unfavourable. U-PF.

RPL trading at 2.4x the asset valuations of US peer-group

Reliance Petroleum has quadrupled since our initiation in Apr-07 and now implies an

asset value of $4,129/complex-bpd – 2.4x those of its US-peers and a 50-70%

premium to even the most expensive refinery new-build quotes in the market

($2,500). Its premium valuations ($57,800/bpd) are justified to an extent, however,

given its higher earnings potential because of (a) lower capital costs ($740/complex-

bpd, reflected in lower interest, depreciation), (b) tax savings due to SEZ-unit status

and (c) savings from substitution of liquid fuels with lower priced natural gas.

Upgrading estimates to build in higher GRM potential of RPL

In hindsight, our Apr-07 earnings estimates now appear too low and we are upgrading

FY09-12CL EPS by 52-71% to reflect higher GRMs ($16.2/bbl in FY10) albeit offset by

a stronger rupee (Rs40/$). The refinery remains well-ahead of schedule as well and

our FY09CL estimate builds in a phased start-up from 2QFY09 (60% overall utilization).

The risk to refining margins is on the downside

While a delay in start-up poses a near term risk, the most significant earnings variable

remains refining margins – each $/bbl change impacts EPS by 9-10%. Our forecastsbuild in a $0.5/bbl moderation in GRMs each year till 2010 but the GRM trajectory may

over-react downwards as fundamentals weaken. Primary capacity additions in 2008-9

will exceed oil demand growth by 25-30%, upgrading capacity at refineries is rising

and the risk to demand growth remains on the downside.

RPL is richly valued on all parameters, downgrading to UNDERPERFORM

In this context we find 2008E global refining valuations high at 11x PE, 8x P/CE and

6.5x EV/Ebitda. RPL trades at a further 20-50% premium to these multiples calculated

on our top-of-consensus FY10 estimate. Our DCF-based fair value estimate for RPL is

Rs158/share but the market is likely to look at alternate methods like earnings

multiples, replacement costs, asset valuations, and M&A benchmarks. Depending on

the framework chosen, we find a wide-range of “fair-values” at Rs103-233/share but

even the highest estimate implies a 14% downside. Our target price of Rs195/share isbased on an average of the earnings-multiples and replacement cost benchmarks. Both

methods overstate value, in our view, but still imply a 28% downside. Downgrade to

U-PF.

U p gr a d i n g e ar ni n g s an d

t ar g e t pr i c e , d own gr a d i n g

r e c omm en d a t i on



Barrels and bubbles Reliance Petroleum - U-PF

2 [email protected] 3 November 2007

Reliance Petroleum is thrice as expensive as ValeroReliance Petroleum (RPL) has quadrupled since out initiation in April-2007 as

its earnings and cashflow potential were factored in (consensus earnings

upgrades) and on anticipation of an earlier than target commissioning of the

580kbpd 14x-Nelson refinery. Resilient global refining margins, buoyant

sentiment towards refiners (led by continued delays to some announcedprojects) and ample liquidity support in the Indian markets have also helped.

After this surge, RPL now trades at an asset value of $57,800/bpd and

$4,129/complex-bpd making it the most expensive refinery asset in the

world. On complexity adjusted asset valuations, it now trades at 3.1x that of

the largest pure refiner in the world (Valero, 3.1mbpd, 11.2x Nelson).

Figure 1

Comparing Reliance Petroleum and Valero

RPL Valero Comments

Market Cap ($m) 30,839 38,590 Valero’s market cap is 25% higher

Price (local) 269 70

# shares (m) 4,500 554

Net Debt ($m) 2,684 4,585 Net debt for RPL is based on peal level as of end-FY08

EV ($m) 33,524 43,175

Adjustments 3,627 1,800

Tax benefits ($m)2,907 0

NPV of tax benefits on our margin profile is $2.6bn

(Rs23/share). On static margins, this is $3.6bn (Rs32/share)

Non refinery assets720 1,800

RPL has a 900kta PP plant while Valero runs 5800 fuel retailand wholesale outlets ($300m ebitda). Both at 6x EV/Ebitda

Adjusted EV ($m) 29,897 41,375

Capacity (mbpd)0.58 3.10

Valero's capacity is five times that of RPL. Its throughputaverages 2.8mbpd.

Nelson Complexity (x)14.0 11.2

Valero does not disclose complexity; calculated based onestimates for individual refineries

Asset valuation ($)

EV/bpd 57,799 13,927 RPL is 4.2x Valero

EV/complex-bpd 4,129 1,244 RPL is 3.3x Valero

Adjusted EV/bpd 51,546 13,347 RPL is 3.9x Valero

Adj EV/complex-bpd 3,682 1,192 RPL is 3.1x Valero adj. for tax-benefit, complexity.


A premium asset with premium profitability

Some of the premium complexity-adjusted asset valuation is justified because

of its higher earnings power because of its

Lower capital costs ($740/complex-bpd ex of utilities which are inprivate enteritis) which is reflected in lower interest costs, depreciation;

Income tax savings due to its SEZ-unit status which allows it a tax-

holiday for five years followed by concessional rates over next ten years;

Savings from substitution of liquid fuels (fuel-oil, naphtha) used for the

refinery’s power and steam requirement with lower priced natural gas.

Upgrading FY09-12CL estimates by 52-71%In hindsight, our original April-07 earnings estimates now appear too low and

we are upgrading FY09-12CL estimates by 51-71% to reflect 27-43% higher

GRMs on the back of a higher crude-advantage assumption and savings fromnatural gas usage ($1-1.9/bbl). Our terminal GRM assumption for RPL (in

FY13CL) is now higher by $3.6/bbl at $12.1/bbl reflecting a $6.9/bbl premium

to regional Singapore margins ($5.3/bbl based on 16-year averages).

RPL is up nearly 4x in thelast eight months

Asset valuation is 3.1xthat of Valero

A premium assetvaluation is justified to an

extent

Upgrading GRM estimatesby 29-43% due to RPL

specific reasons

RPL trades at thrice thecomplexity adjusted asset

multiples of Valero

Valero has five times thecapacity of RPL

Valero’s market cap is25% higher than RPL




3 November 2007 [email protected] 3

Figure 2

Upgrading RPL earnings estimates on higher GRMs

FY09CL FY10CL FY11CL FY12CL FY13CL

GRM ($/bbl)

Old 12.4 11.8 11.2 10.4 8.5

New 16.0 16.2 15.9 14.8 12.1

% change 29 38 42 43 43

Rupee/US$

Old 45.0 45.0 45.0 45.0 45.0

New 40.0 40.0 40.0 40.0 40.0

% change (11) (11) (11) (11) (11)

Throughput (kbpd)

Old 290 551 551 551 551

New 348 580 580 580 580

% change 20 5 5 5 5

Ebitda (Rsm)

Old 49,246 87,632 81,499 73,438 55,605

New 69,529 117,003 113,879 104,040 80,214

% change 41 34 40 42 44

Other Income

Old 1,000 1,000 1,000 1,000 1,000

New 3,412 5,021 6,399 8,036 9,503

% change 241 402 540 704 850

Profits (Rsm)

Old 37,029 63,256 57,692 49,483 31,709

New 57,019 96,085 93,673 84,741 61,901

% change 54 52 62 71 95

EPS (Rs)

Old 8.2 14.1 12.8 11.0 7.0

New 12.7 21.4 20.8 18.8 13.8

% change 54 52 62 71 95


The project remains well-ahead of schedule as well and our FY09CL estimate

builds in a phased start-up from 2QFY09 with a 60% overall utilization. We

have also increased other income estimates (based on 8% yield on cash).

While a delay in start-up poses near term risks to our estimates and the

every 1% rupee appreciation impacts earnings by 1.2%, the most significant

variable is the gross refining margin. Each $/bbl change in GRM impacts

earnings by 9-10% in the interim years and by 14% in the normalized year.

Figure 3

Sensitivities to key variables

FY09CL FY10CL FY11CL FY12CL FY13CL

CLSA Base Case

GRM ($/bbl) 16.0 16.2 15.9 14.8 12.1

Rupee (Rs/US$) 40.0 40.0 40.0 40.0 40.0

Throughput (kbpd) 348 580 580 580 580

Ebitda (Rsm) 69,529 117,003 113,879 104,040 80,214

Profit (Rsm) 57,019 96,085 93,673 84,741 61,901

EPS (Rs) 12.7 21.4 20.8 18.8 13.8

% change for $1/bbl lower GRM

Ebitda (7.4) (7.2) (7.4) (8.1) (10.6)

EPS (9.3) (9.0) (9.3) (10.3) (14.2)

% change for 1% stronger rupee

Ebitda (1.0) (1.0) (1.0) (1.0) (1.0)

EPS (1.2) (1.2) (1.2) (1.3) (1.3)

% change for 5% lower throughput

Ebitda (5.0) (5.0) (5.0) (5.0) (5.0)

EPS (5.0) (6.2) (5.5) (5.6) (5.8)


Every $/bbl GRM changein changes EPS by 9-10%

We are assuming a start-

up in 2QFY09

Upgrading GRM estimatesby building in natural gas

savings and a lower crude

intake API (24)

52-71% EPS upgradesover FY09-12CL





Risk to GRMs is on the downsideOur forecasts build in only a softening GRM environment over the next three

years for RPL with margins reducing at $0.5/bbl annually on average. The

margin trajectory may well over-react downwards as market fundamentals

weaken on the back of (a) a more relaxed demand-supply outlook and (b)

lower margin premiums for complex refiners given the slew of upgrading(cracking) projects being implemented by refiners.

Figure 4

Reliance Petroleum gross-refining-margin build up

4.02.9 3.1

5.6

8.3 7.9 7.4 8.27.1 6.3 5.9 5.6 5.3

1.3

1.1 1.0

1.7

3.1 3.9 4.13.6

3.1

2.7 2.22.0 2.11.2

2.51.1

0.5

1.5

5.26.5 5.7

4.96.1

6.45.6

2.8

1.0 1.21.4

1.7

1.9

6.6 6.4

5.2

7.8

12.9

17.0

18.117.5

16.0 16.2 15.9

14.8

12.1

0

4

8

12

16

20

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Norm

Singapore Product premium Crude advantage Natural Gas savings

Building RPL's GRMs ($/bbl)


Capacity additions will exceed demand growth in 2008-09 Refining companies are responding to margin signals and distillation

capacity additions in 2008-9 (4mbpd) will exceed oil demand growth by

25-30%. Projects in Asia (2.6mbpd) and the Middle East (0.3m) will make

up 72% of this additional capacity. Over the next five years, we expect

10.8mbpd of additional capacity to come onstream.

Further, with oil prices at US$90/bbl, the risk to global oil demand

growth remains on the downside. The IEA, for example, has consistently

overstated growth in 2006-7; it has halved its 2007 demand growth

estimate to 1.2mbpd since its first estimate, for example. We see a

similar pattern evolving for its 2008 estimate (+2.4%) which we find

optimistic given the slowdown in OECD and the reasonable, but not

explosive, growth in developing economies.

Figure 5 Figure 6

Supply addition will exceed demand growth in 2008-9 IEA has consistently overstated demand growth

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2002 2004 2006 2008 2010 2012

Incremental demand

Capacity expansion

(m bpd)

0.8

1.0

1.2

1.4

1.6

1.8

J u l - 0

6

A u g - 0

6

S e p - 0

6

O c t - 0

6

N o v - 0

6

D e c - 0

6

J a n - 0

7

F e b - 0

7

M a r - 0

7

A p r - 0

7

M a y - 0

7

J u n - 0

7

J u l - 0

7

A u g - 0

7

S e p - 0

7

O c t - 0

7

Oil demand growth in 2007 (m bpd)


We model softeningGRMs, but not a crash

RPL can process cheapercrude, make more

premium products andwill save from gas use

Capacity additions willexceed demand growth in

2008-2009 by 25-30%

Risk to demand growth ison the downside





Complexity premiums will reduce impacting complex refiners more At the same time, refining system complexity is also increasing as

refineries add upgrading capacity which may impact both product spreads

as well as light-heavy crude differentials. Over the next five years, we

expect 1.1mbpd of cracking capacity to come onstream annually on

average. This is 55% of the incremental new distillation capacity.

Given the cracking upgrades and capacity additions, we also see a more

relaxed outlook for light products. This may reduce the margin

premiums that complex and coking refineries have enjoyed over simpler

ones due to lower crack spreads along with narrowing fuel-oil discounts.

In addition, while not built into our estimates, global crude pool quality

may also improve marginally over the next couple of years (before

deteriorating again). The bulk of non-OPEC production growth (in places

like West Africa and Sakhalin) is of superior quality crude while growth in

OPEC and FSU NGLs is also lightening the mix. This may also reduce the

complexity premiums by impacting light-heavy crude differentials.

Figure 7 Figure 8

Refineries are investing in cracking capacity Complexity premiums may reduce

0

1020

30

40

50

60

70

80

90

100

2007 2008 2009 2010 2011 2012

Incremental capacity

Avg cracking ratio 07-12

Current cracking ratio

0

2

4

6

8

95 96 97 98 99 00 01 02 03 04 05 06 07

Cracking over Simple Coking over Cracking

Singapore GRM complexity premiums ($/bbl)


We find global valuations rich in this contextIn this context, we find current global refining valuations of 10.8x P/E, 8.0x

P/CE and 6.5x EV/Ebitda (both on 2008 estimates) rich. With margins

expected to come under pressure in 2008, while consensus estimates itself

may be too high, we foresee a contraction in valuation multiples as well.

Figure 9 Figure 10

Global refining valuations appear rich Valero’s P/CF are near previous peaks

P/E (x) P/CE (x) EV/ebitda (x)

2007E 2008E 2007E 2008E 2007E 2008E

US 9.3 11.1 7.3 8.7 5.4 6.2

Europe 13.9 10.3 8.1 7.0 8.3 6.4

Asia ex-Japan, India 12.4 12.1 10.2 9.3 7.9 7.6

India 8.3 9.2 5.9 4.8 5.7 5.4

Japan 14.0 14.4 7.4 7.5 8.8 8.3

Average 11.9 11.7 7.8 7.6 7.4 6.9

Avg ex Japan India 11.4 10.8 7.7 8.0 6.9 6.5

-1sd2.0x

avg3.9x

+1sd5.8x

0

1

2

3

4

5

6

7

8

1997 1999 2001 2003 2005 2007

Valero 12m rolling P/CF multiple (x)

Source: Bloomberg, IBES, CLSA Asia-Pacific Markets

Upgrading capacity isrising which will narrow

complexity premiums

A more relaxed outlookfor light products

The crude pool qualitymay also improve near

term

Global valuations do notreflect an impending

downturn





Reliance Petroleum even more expensiveOn our upgraded top-of-consensus FY10 estimates, we find RPL priced 17-

53% ahead of these global multiples at 12x PE, 10.6x P/CE and 9.7x

EV/Ebitda (adjusted for tax-benefits). These multiples appear rich given that:

Earnings will decelerate each year from FY10CL as GRMs soften; and

Long term earnings potential of RPL is ~42% lower than FY10 estimates

due to (a) lower long term GRMs and (b) scaling back of the tax-benefits.

Figure 11 Figure 12

RPL’s cashflow multiples are 37-53% higher RPL’s mid-cycle potential is 42% lower FY10 estimates

11.1

8.7

6.2

10.3

7.06.4

12.1

9.3

7.6

10.8

8.0

6.5

12.6

10.9

9.9

3

5

7

9

11

13

15

PE P/CE EV/Ebitda

US Europe AxJ Average RPL FY10

2008E (x) 17% higher 37% higher 53% higher

8.210.3 10.0 9.8 9.8 10.1

3.65.3 4.9 3.60.9

5.7 5.95.4

4.0 2.3

0

5

10

15

20

25

09CL 10CL 11CL 12CL 13CL 14CL

Long term Higher interim margins Tax benefits

EPS build-u (Rs

42% lower

Source: CLSA Asia-Pacific Markets =

Estimating fair value for RPLWe have used a range of methods to estimate the fair value of RPL.

Depending on the framework chosen (DCF, earnings-multiples, replacementcosts), RPL’s fair value estimates ranges from Rs103-232/share. Even so, the

“highest” fair value estimate suggests an 11% downside.

Discounted cashflow on expected margin profile: Our discounted

cash-flow fair value estimate is Rs158/share based on our explicit GRM

profile, a 3% terminal growth and a 10.8% WACC. A DCF remains the

best measure because it factors in the expected near term margin profile

as well as the change in fiscal terms for RPL (zero tax ends in five years).

Discounted cash flow on static margins: Recalculating the DCF on a

static margin profile (in effect assuming that current margins remain to

perpetuity, clearly over-optimistic) shows a fair value of Rs212/share.

Peer earnings multiples: Despite the rigor of a DCF, the market is more

likely to focus on RPL’s earnings and cashflow potential. We see current

global refining stocks as overvalued in the context of likely softening

GRMs but using the global average multiples (10.8x PE, 8.0x P/CE and

6.5x EV/Ebitda) on RPL’s FY10 earnings estimates indicates a fair value

range of Rs173-218/share. We re-iterate that an earnings-multiple based

approach overstates value given that RPL’s normalized earnings potential

is 42% lower than FY10 estimates due to lower long term margins and

the scaling back of tax-benefits.

Peer asset valuations: Current refinery stocks across the world trade in

a range of $6800-40,000/bpd (ex Japan and India) with a simple mean of US$18,200/bpd (weighted mean of US$15,900/bpd). This would imply a

fair value range as wide as Rs45-207/share with the mean implying a fair

value estimate of Rs103/share.

RPL’s earnings multiplesare 17-53% higher

DCF fair value isRs158/share

DCF on constant marginsis Rs212/share

Earnings based fair valueof Rs173-218/share

Peer asset valuations

indicates Rs103/share





Complexity adjusted asset valuations: Based on the disclosures made

by respective companies, global refining companies trade in a complexity

adjusted asset value range of $1200-3800/complex-bpd with a simple

mean of $2,200/complex-bpd (weighted average of $1,710/complex-bpd).

This would imply a fair value range of Rs94-271/share with the mean

implying a fair value estimate of Rs164/share.

Replacement costs: Project costs have risen sharply in the last year

with several refining projects delayed or put on hold. Our survey of recent

costs indicates that a highest quoted asset cost of $30,000/bpd for

Essar’s proposed 300kbpd refinery in Iran (reportedly scrapped now)

which is expected to cost US$8-10bn. On a complexity adjusted basis, the

615kbpd Al-Zour refinery in Kuwait which recently received quotes of

$15bn and above appears to be the most expensive at $2400/complex-

bpd. This would indicate a fair value range of Rs160-178/share.

Replacement costs adjusted for interim free cash flow: A more

benign valuation indicator would suggest that replacement costs shouldbe adjusted for the free cashflow profile to enable a like-to-like

comparison with refineries already in production. For example, given that

new refineries would likely come up only in Mar-12, we should add the

net-present-value of the cashflow for RPL over FY09-12CL to current

replacement cost valuations for a proper comparison. This increases RPL’s

replacement cost benchmark by Rs58/share to Rs215-233/share.

Recent M&A benchmarks: Recent refinery acquisitions have been priced

at $4000-19000/bpd and $500-1800/complex-bpd (and at 3-5x

EV/ebitda). The upper end of these multiples ($19,000 for Lyondell’s

acquisition of Citgo’s 41% stake in the 12.2x Nelson 268kbpd Houston

refinery and $1800/complex-bpd for the Harvest-NA and Western-Giant

deals, all in 2006) would imply a fair value of Rs108-137/share for RPL.

Figure 13

RPL – a wide range of fair values but all show downsides from current levels

0 50 100 150 200 250 300 350

DCF CLSA

DCF Static GRM

PE

P/CE

EV/Ebitda

Comp asset value

Asset value

Replacement costs

Repl. cost NPV adj

M&A (Rs/share)

Currentmarket

price


RPL’s market price ishigher than all fair value

estimates

Complexity adjusted assetvaluations of Rs164/share

High end of replacementcosts indicates Rs160-

178/share

Adjusted replacementcost benchmark of Rs215-

233/share

M&A benchmarks atRs108-137/share





Downgrading to U-PF on unfavourable risk-rewardOur DCF-based fair value estimate of RPL is Rs158/share but the market is

likely to look at alternate benchmarks like replacement costs and earnings

multiples – both of which overstate value for RPL, in our view. Nonetheless,

our target price of Rs195/share (based on an average of these methods) still

implies a 28% downside from current levels

Figure 14

Target price of Rs195/share

158

212 218

186173 164

103122

169

224

195

0

50

100

150

200

250

300

D C F

C L S A

D C F

S t a t i c

G R M P

E

P / C E

E V / E b i t d a

C o m p

a d j .

a s s e t

A s s e t

v a l u e

M & A

R e p l .

c o s t

R e p l .

c o s t N P V

a d j

T a r g e t

P r i c e

RPL Fair Values (Rs/share)Current market price


We reiterate that these measures may overstate value in the last stages of a

typical cyclical peak given elevated expectations. For example, earnings will

deteriorate over time given lower margins and increasing taxes. Further, it

may be premature to assume that the recent increases in replacement costs

will be structural. A large part of those are based on high commodity prices,

shortages of contractors and manpower and rising “uncertainty premiums”

charged by contractors based on recent experiences with fixed price

contracts. There have been cases (LNG in the 90s, for example) when

markets tighten and then recede as cost pressures soften.

RPL would trade at 9.6x FY10 EPS (16.6x Normalized EPS) on our target

price. The implied asset multiples ($37,000/bpd and $2,647/complex-bpd

adjusted for the 900kta PP plant and tax benefits) are also higher than most

peer valuations today and well above historical benchmarks and recent M&A.

Figure 15

Asset valuations of peers in the US, Europe, AxJ, Japan and India

1.21.4 1.4

2.1

2.9

1.7

2.8

3.8

1.8

1.2

2.2

1.8

1.3

2.6

2.22.3

3.43.7

2.1

2.5

1.6

2.2

1.21.1

2.6

3.2

1.1

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5

V a l e

r o

S u n o

c o

T e s o

r o

F r o n t

i e r

H o

l l y

W e s t e

r n

P K N

N e s t e

T u p r a s

P e t r o p l u s

S a r a s

H e l l e n i c

E R G

S K -

E n

S -

O i l

G S H o l d

T h a i

O i l

C a l t

e x

R a y o

n g

I O C

B P

C L

M R

P L

H P

C L

C h e n n a i

N -

O i l

N - M i n i n g T G

I d e m i t u s

S h o w a

C o s m

o

A O C

R

P L

EV/complex-bpd ($000)


RPL is the most expensiveasset in the universe we

evaluated

Intrinsic fair value of Rs158/share

Replacement costs arecyclical as well

$2,647/complex-bpd onour target price

DCF: Rs158/shareTarget: Rs195/share

Target is based onaverage of earnings

multiples andreplacement costs





Figure 16

M&A benchmarks for refinery assets

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1999 2000 2001 2002 2003 2004 2005 2006 2007 RPL

Range of M&A multiples (EV/complex-bpd in $000)


In this context, we see further risk on the downside as the market prices in

(a) softening market fundamentals and (b) RPL’s own earnings profile as the

tax-benefits scale back even if market fundamentals do not soften. We see

risk reward as unfavourable and are cutting our recommendation to U-PF.

Figure 17

Global summary valuation matrix

Mcap EV EV/bpd P/E (x) P/CE (x) P/BV (x) EV/Ebitda (x)

($bn) ($bn) (000 $) 2007E 2008E 2009E 2007E 2008E 2009E 2007E 2008E 2009E 2007E 2008E 2009E

US 65.6 74.1 18.1 9.3 11.1 13.0 7.3 8.7 9.7 3.5 2.8 2.4 5.4 6.2 6.3

Europe 45.1 54.7 19.2 13.9 10.3 10.2 8.1 7.0 6.4 2.0 1.8 1.6 8.3 6.4 6.1

Asia ex-Japan, India 54.8 56.8 19.2 12.3 12.0 14.9 10.1 9.2 10.7 2.2 2.0 1.9 7.9 7.5 8.1

India 25.1 27.3 10.3 8.6 9.5 10.8 6.1 5.0 6.3 1.8 1.6 1.4 5.8 5.6 5.7

Japan 41.9 71.3 15.9 14.0 14.4 15.2 7.4 7.5 7.3 1.3 1.2 1.2 8.8 8.3 8.6

Avg ex Japan, India 165.5 185.5 16.8 11.4 10.8 12.1 7.7 8.0 8.0 2.4 2.1 1.9 6.8 6.5 6.7

Simple Mean 18.3 12.0 11.4 12.8 8.4 8.2 8.8 2.5 2.1 1.9 7.3 6.8 6.9

Weighted Mean 15.8 10.7 10.6 11.5 7.2 7.3 7.9 2.3 2.0 1.8 6.4 6.2 6.5

Median 16.2 11.5 10.4 12.1 7.6 8.4 7.2 2.4 2.1 1.9 6.9 6.4 6.6

Average 232.5 284.1 16.7 11.9 11.7 13.0 7.8 7.6 8.1 2.1 1.9 1.7 7.4 7.0 7.1

RPL 30.8 33.5 57.8 nm 21.3 12.6 Nm 18.5 10.9 9.0 6.3 6.0 nm 16.9 9.9


Risks to our viewWhile company specific newsflow anticipation remains a positive trigger for

the stock, we see most of the upsides already priced into the stock.

Nevertheless, we see the following risks to our view:

Earlier than anticipated start-up: The project is running ahead of its

Dec-08 commissioning target. While management has confirmed this, it

has not crystallized a date. We are building in a 2QFY09 (July-08) phased

start-up implying 60%-utilization in FY09. We see this as realistic but

given the stock’s valuations, there is minimal impact on fair value even if we assumed full operations in FY09 (Rs5-8/share increase). A formal

announcement of an earlier start-up may be a sentiment driver, though.

We are building in a2QFY09 start-up

Recent M&A has been at3-5x EV/Ebitda and sub

$2000/complex-bpd

We see little scope forupside surprises

We are cutting ourrecommendation to U-PF





Stronger than expected GRMs: We are building in $0.5/bbl moderation

in margins for RPL each year in the next three years. A delay in capacity

additions or stronger demand growth may put these assumptions at risk.

Each $/bbl change impacts EPS by 9-10% and we would need to upgrade

estimates. Further, stronger GRMs may also see an increase in the sector

valuation multiples which would add to market value.

Figure 18 Figure 19

CLSA benchmark refining margin assumptions Asian GRMs have stop up in 4Q-2007

0

2

4

6

8

10

12

14

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Simple Cracking Coking

Singapore refining margins ($/bbl)

0

3

6

9

12

15

Jan Feb Mar Apr May Jun Jul Aug Sep Oct NovDec

2005 2006 2007

Singapore complex GRM (US$/bbl)


Chevron buy-in: Chevron has an option to buy up to an additional 24%

in RPL from Reliance at a 5% discount to the market price. A buy-in by

Chevron at current valuations will be seen as a strong vote of confidence

by one of the largest global oil companies and may re-rate the stock.

Chevron has up to July-2009 to make it decision which will depend on

“commercial issues” and “economics of investment”. Chevron alsoindicated in its post 3Q-2007 analyst call that it is yet to sign some key

agreements (related to crude sale and product purchase) on which its

option to buy is contingent. In this context, we see a decision by Chevron

to buy into RPL as unlikely in the near term.

Further, with RPL at 4.5x the levels at which Chevron bought its initial 5%

stake and with RPL trading at an implied value of $56,000/bpd and

$4000/complex-bpd, the economic rationale may also have deteriorated

significantly from Chevron’s point of view.

A buy-in may still be possible should there be a quid-pro-quo between

Reliance and Chevron in other segments of the energy chain – forexample, a farm-out of Reliance’s upstream blocks to Chevron. Chevron

indicated in its analyst call that it remains interested in the KG-Basin but

that there has been no headway in negotiations.

Fund raising: Announcements of equity and quasi-equity fund raising

appear to lift stock-price sentiment in today’s Indian equity markets. A

fund-raising that sets an elevated price target (for example an FCCB with

a 40-50% conversion premium) may be seen as positive.

Building in $0.5/bblannual reduction in

margins over the nextthree years

The economic rationalefor a Chevron buy-in has

deteriorated

A high market benchmarkmay support the stock





Appendix 1: Fair value estimates of RPL

Figure 20

Target price of Rs195/share

End FY09

(Mar-09)

fair value

(Rs/sh) Comments

PE on

FY10

EPS (x)

PE on

Norm

EPS

(x)

EV/co

mplex-

bpd

($)

12m fwd

fair

value

(Rs/sh)

From

current

price

(%)

DCF

On CLSA GRM profile167

Based on 10.8% WACC, our

explicit margin estimates

with a $12.1/bbl normalizedGRM + 3% terminal growth

7.8 13.4 2,105 158 (41)

On static GRM224

Above but with static GRMs

of $16.1/bbl ion horizonperiod, 3% terminal growth

10.5 18.1 2,901 212 (21)

Peer earnings multiples

10.9x PE230

2008E global average exIndia, Japan on FY10 est.

10.8 18.6 2,987 218 (19)

8.0x P/CE197

2008E global average exIndia, Japan on FY10 est.

9.2 15.9 2,523 186 (31)

6.5x EV/Ebitda183

2008E global average ex

India, Japan on FY10 est.

8.6 14.8 2,333 173 (36)

Peer asset valuations

$2,200/complex-bpd173

Based on the weightedaverage of global refinery

peer asset multiples

8.1 14.0 2,200 164 (39)

$18,200/bpd108

-do- but complexity adjusted5.1 8.7 1,300 103 (62)

Replacement Cost

$2400/complex-bpd

188

Based on highest recentquote (Al-Zour in Kuwait)

8.8 15.1 2,400 178 (34)

$30,000/bpd169

Based on the highest recent

quote (Essar in Iran)

7.9 13.6 2,143 160 (40)

$2400/complex-bpd adj.246

Above adjusted for FY09-

12CL cashflow NPV of RPL

11.5 19.8 3,201 233 (14)

$30,000/bpd adj.227

Above adjusted for FY09-12CL cashflow NPV of RPL

10.6 18.3 2,944 215 (20)

M&A

$1,800/complex-bpd145

Based on the Harvest-North

Atlantic and Western-Giant

deals in 2006

6.8 11.7 1,807 137 (49)

$18,200/bpd114

Based on Lyondell’s buyout

of Citgo’s residual stake in

the Houston refinery in 2006

5.3 9.2 1,371 108 (60)

Summary

Max246

NPV adj. replacement cost11.5 19.8 3,201 233 (14)

Min108

Based on $18,200/bpd EV5.1 8.7 1,300 103 (62)

Average182

Simple avg of all methods8.5 14.7 2,324 173 (36)

Target price206

Avg of replacement cost

and earnings-multiple

based valuation methods

9.6 16.6 2,647 195 (28)

Source: CLSA Asia-Pacific Markets. Note: All numbers for Reliance Petroleum are adjusted for the NPV of

tax benefits and the value of its non refining assets (900kta PP plant).

DCF = Rs158

A 28% downside to our12m forward target price

Peer multiples = Rs173-

218

Asset value = Rs103-164

Repl. cost = Rs160-233

M&A = Rs108-137

Target price = Rs195





Appendix 2: Refining valuation matrix

Figure 21

Global refining valuation matrix

Price Mcap EV EV/bpd P/E (x) P/CE (x) P/BV (x) EV/Ebitda (x)

(lcy) ($bn) ($bn) (000 $) 2007E 2008E 2009E 2007E 2008E 2009E 2007E 2008E 2009E 2007E 2008E 2009E

US

Valero 69.7 38.6 43.2 13.9 8.1 8.6 8.8 5.9 6.3 7.2 2.3 2.0 1.8 4.6 5.2 5.6

Sunoco 71.4 8.4 10.6 11.8 8.6 9.1 10.3 5.6 5.4 6.2 3.0 2.5 2.0 4.8 4.8 5.3

Tesoro 57.4 7.9 9.3 14.0 10.9 10.1 11.9 6.6 6.5 7.1 2.4 2.0 1.7 5.7 5.3 6.0

Frontier 45.3 4.9 4.5 24.5 10.1 13.9 14.2 9.4 11.6 11.7 4.8 3.6 3.2 5.5 7.5 5.8

Holly Corp 64.1 3.5 3.2 29.0 10.7 15.0 18.8 9.5 13.0 14.1 5.9 4.4 3.7 5.9 8.1 7.8

Western 35.0 2.4 3.3 15.0 7.5 10.2 14.2 6.6 9.3 12.0 2.9 2.3 2.2 6.0 6.1 7.5

Mean 65.6 74.1 18.1 9.3 11.1 13.0 7.3 8.7 9.7 3.5 2.8 2.4 5.4 6.2 6.3

Median 14.5 9.3 10.1 13.0 6.6 7.9 9.4 3.0 2.4 2.1 5.6 5.7 5.9

Europe

PKN (Poland) 56.6 9.6 13.4 25.0 11.8 10.3 10.4 5.3 4.7 4.5 1.1 1.0 1.0 6.5 5.8 5.6

Neste Oil (Finland) 25.6 9.5 10.6 42.4 11.9 10.5 10.7 9.2 7.8 8.1 2.7 2.3 2.1 7.8 6.9 6.9

Tupras (Turkey) 31.5 6.7 6.6 11.6 8.5 8.1 9.0 6.7 9.3 6.4 2.3 2.1 1.9 6.6 6.1 5.6

Petroplus (Europe) 96.0 5.7 7.2 8.4 23.2 8.8 9.3 13.9 6.4 5.4 2.6 2.1 1.8 14.8 6.7 6.3

Saras (Italy) 4.1 5.7 5.7 19.0 12.9 11.3 10.7 7.3 7.4 7.0 2.6 2.4 2.1 6.1 5.6 5.4

Hellenic (Greece) 10.9 4.8 6.4 17.3 13.6 13.7 13.2 8.4 8.3 8.7 1.4 1.3 1.3 9.2 9.0 8.6

ERG (Italy) 13.9 3.0 4.9 11.0 15.2 9.6 7.9 5.5 4.8 4.3 1.6 1.4 1.3 6.9 4.9 4.2

Mean 45.1 54.7 19.2 13.9 10.3 10.2 8.1 7.0 6.4 2.0 1.8 1.6 8.3 6.4 6.1

Median 17.3 12.9 10.3 10.4 7.3 7.4 6.4 2.3 2.1 1.8 6.9 6.1 5.6

Asia ex-Japan

SK-Energy (Korea) 200k 20.2 20.8 19.0 15.5 18.7 23.0 nm 10.5 21.9 2.9 2.6 2.3 11.4 12.5 16.2

S-Oil (Korea) 81k 10.0 8.5 15.1 12.0 12.9 17.7 18.8 9.4 11.9 2.2 2.2 2.2 6.4 6.8 8.9

GS Holdings (Korea) 67k 6.8 7.3 11.3 18.4 10.5 13.0 nm nm nm 2.2 1.9 1.7 8.7 4.5 5.1

Thai Oil (Thailand) 96 5.7 6.5 28.8 11.3 10.0 12.2 7.4 8.5 7.2 2.5 2.2 2.1 7.6 6.2 6.9

Caltex (Australia) 21.2 5.3 5.7 25.9 11.6 11.8 12.6 8.6 8.4 8.3 2.1 1.9 1.8 7.0 7.4 7.0

SPC (Singapore) 8.7 3.1 3.2 23.1 10.0 9.6 20.7 7.9 8.6 5.4 2.4 2.1 2.0 7.9 7.5 7.0

Rayong (Thailand) 25.8 2.2 2.6 18.3 8.7 13.3 12.7 8.9 9.9 12.8 1.5 1.4 1.4 7.1 9.6 8.8

Petron (Phillippines) 7.0 1.5 2.1 11.8 10.8 9.1 7.5 9.4 9.0 7.3 1.8 1.5 1.3 6.9 5.9 5.1

Mean 54.8 56.8 19.2 12.3 12.0 14.9 10.1 9.2 10.7 2.2 2.0 1.9 7.9 7.5 8.1

Median 18.7 11.5 11.1 12.8 8.7 9.0 8.3 2.2 2.0 1.9 7.3 7.1 7.0

India

IOC 496 15.0 16.2 14.9 8.9 8.1 9.7 6.9 4.2 5.6 1.4 1.3 1.2 6.4 4.7 5.1

BPCL 343 3.2 3.7 8.6 6.4 6.4 7.5 6.3 4.0 4.4 1.0 0.9 0.8 4.4 3.8 4.0

MRPL 82 3.7 4.0 15.6 14.5 17.8 18.3 8.6 9.2 10.0 4.1 3.5 3.1 8.2 8.8 8.3

HPCL 239 2.1 1.9 5.5 6.6 5.4 7.4 3.1 2.4 3.9 0.8 0.7 0.7 5.9 5.2 5.5

Chennai 325 1.2 1.5 6.9 6.5 9.9 11.1 5.6 5.2 7.4 1.5 1.4 1.3 4.2 5.3 5.5

Mean 25.1 27.3 10.3 8.6 9.5 10.8 6.1 5.0 6.3 1.8 1.6 1.4 5.8 5.6 5.7

Median 8.6 6.6 8.1 9.7 6.3 4.2 5.6 1.4 1.3 1.2 5.9 5.2 5.5

JapanNippon Oil 1,036 13.2 22.7 21.4 11.6 15.1 16.1 5.5 6.0 6.2 1.1 1.1 1.0 7.4 7.8 8.0

Nippon Mining 1,102 8.9 15.1 28.1 9.5 10.1 10.1 6.1 7.0 6.3 1.4 1.3 1.2 9.0 9.2 9.1

TonenGeneral 1,163 5.9 6.6 8.7 20.5 20.6 20.0 12.5 13.2 13.3 2.5 2.4 2.3 9.5 9.3 10.4

Idemitusu 13,370 4.7 10.9 17.9 15.4 13.8 13.5 4.8 4.4 4.3 0.9 0.9 0.9 7.9 7.4 7.3

Showa Shell 1,323 4.3 5.8 11.3 12.9 14.9 14.8 8.1 7.9 7.8 1.3 1.3 1.2 7.9 7.8 7.7

Cosmo 491 3.6 8.1 12.8 11.0 12.8 16.1 5.3 6.2 6.2 0.9 0.9 0.8 8.3 8.6 9.0

AOC Holdings 1,794 1.2 2.2 11.3 16.8 13.3 15.8 9.7 7.5 7.3 0.9 0.9 0.9 11.8 8.4 9.0

Mean 41.9 71.3 15.9 14.0 14.4 15.2 7.4 7.5 7.3 1.3 1.2 1.2 8.8 8.3 8.6

Median 12.8 12.9 13.8 15.8 6.1 7.0 6.3 1.1 1.1 1.0 8.3 8.4 9.0

Ex-Japan ex-India 165.5 185.5 16.8 11.4 10.8 12.1 7.7 8.0 8.0 2.4 2.1 1.9 6.8 6.5 6.7

Simple Mean 18.3 12.0 11.4 12.8 8.4 8.2 8.8 2.5 2.1 1.9 7.3 6.8 6.9

Weighted Mean 15.8 10.7 10.6 11.5 7.2 7.3 7.9 2.3 2.0 1.8 6.4 6.2 6.5

Median 16.2 11.5 10.4 12.1 7.6 8.4 7.2 2.4 2.1 1.9 6.9 6.4 6.6

Global 232.5 284.1 16.7 11.9 11.7 13.0 7.8 7.6 8.1 2.1 1.9 1.7 7.4 7.0 7.1

RPL 269.4 30.8 33.5 57.8 nm 21.3 12.6 nm 18.5 10.9 9.0 6.3 6.0 nm 18.6 10.9






Appendix 3: Key financialsFigure 22

Key assumptions

FY06 07CL 08CL 09CL 10CL 11CL 12CL 13CL

Capacity Data (kbpd)Nameplate capacity 580 580 580 580 580 580 580 580

Crude intake 0 0 0 348 580 580 580 580Secondary intake 0 0 0 0 0 0 0 1

Total intake 0 0 0 348 580 580 580 581

% utilization 0 0 0 60 100 100 100 100

Refining Margin ($/bbl)

Singapore Complex 7.9 7.4 8.2 7.1 6.3 5.9 5.6 5.3

RPL slate premium 3.9 4.1 3.6 3.1 2.7 2.2 2.0 2.1

RPL crude advantage 5.2 6.5 5.7 4.9 6.1 6.4 5.6 2.8Net clean fuel adv 0.0 0.0 0.0 1.0 1.2 1.4 1.7 1.9

RPL GRM 17.0 18.1 17.5 16.0 16.2 15.9 14.8 12.1

PP Plant

PP-Propylene spread ($/t) 171 184 150 155 159 164 169 174

PP production (mt) 0.0 0.0 0.0 0.5 0.9 0.9 0.9 0.9

Exchange Rate (Rs/$) 44.4 45.0 40.0 40.0 40.0 40.0 40.0 40.0


Figure 23

Key financials

(Rsm) FY06 FY07 08CL 09CL 10CL 11CL 12CL 13CL

Income Statement

Revenues - - - 389,647 666,538 679,901 687,042 680,706

RM - - - (304,848) (523,322) (539,022) (555,193) (571,849)

Gross Margins - - - 84,799 143,216 140,878 131,849 108,857

Opex - - - (15,269) (26,213) (26,999) (27,809) (28,643)

Ebitda - - - 69,529 117,003 113,879 104,040 80,214

Depreciation - - - (8,686) (14,694) (14,911) (15,128) (15,345)

Ebit - - - 60,843 102,309 98,968 88,912 64,869

Interest - - - (5,585) (9,058) (9,058) (9,058) (8,927)

Other Income 0 0 0 3,412 5,021 6,399 8,036 9,503PBT 0 0 0 58,670 98,273 96,310 87,890 65,445

Taxes - - - (1,651) (2,188) (2,637) (3,149) (3,544)

PAT 0 0 0 57,019 96,085 93,673 84,741 61,901

Dividends - - - - 86,342 84,236 76,339 55,807

Appropriated 0 0 0 57,019 9,743 9,436 8,402 6,094

Balance Sheet

Networth 31,500 134,488 134,488 191,507 201,250 210,686 219,089 225,183

Debt - 54,670 122,500 122,500 122,500 122,500 122,500 118,900

Total 31,500 189,158 256,988 314,007 323,750 333,186 341,589 344,083

NFA, CWIP 19,036 187,517 240,000 261,314 250,670 239,809 228,731 217,436

Investments 7,985 2,280 - - - - - -

Cash 4,505 96 16,988 43,300 57,235 77,739 98,158 114,418

Net current assets (52) (735) - 9,393 15,845 15,639 14,699 12,230

Total 31,474 189,158 256,988 314,007 323,750 333,186 341,589 344,083

Cash Flow

From operations 52 683 (735) 61,897 113,385 117,847 109,866 88,643

PAT 0 0 0 57,019 96,085 93,673 84,741 61,901

Add interest - - - 5,585 9,058 9,058 9,058 8,927

Add depreciation - - - 8,686 14,694 14,911 15,128 15,345

W-capital change 52 683 (735) (9,393) (6,452) 206 940 2,470

From investments (27,047) (159,055) (43,400) (26,527) (4,050) (4,050) (4,050) (4,050)

Capex (19,036) (164,786) (45,680) (26,527) (4,050) (4,050) (4,050) (4,050)

Investments (7,985) 5,705 2,280 - - - - -

Others (26) 26 - - - - - -

From financing 31,500 153,824 61,027 (9,058) (95,400) (93,294) (85,397) (68,334)

Equity 31,500 102,988 (0) - 0 - (0) 0

Debt - 54,670 67,830 - - - - (3,600)

Interest costs - (3,834) (6,803) (9,058) (9,058) (9,058) (9,058) (8,927)

Dividends - - - - (86,342) (84,236) (76,339) (55,807)

Free Cash Flow (18,984) (164,103) (46,415) 35,370 109,335 113,797 105,816 84,593


We are assuming a start-up in 2QFY09 with a GRM

of $16/bbl

Each $ change in GRMsimpacts earnings by 9-

11% in the initial years

We are building in anexchange rate of Rs40/$

We are building in$12.1/bbl terminal GRM

for RPL

50:50 debt/equityfunding of the $6bn

project

RPL is aiming to completeall major capex by end

FY08 itself with a view toan early FY09 start-up

$4bn in free cash flow inthe first 18 months after

commissioning




14 h k i h @ l 3 N b 2007

Recommendation history - Reliance Petroleum NRPET IN

Date Rec level Closing price Target

05 November 2007 U-PF 269.60 195.0028 August 2007 BUY 112.45 128.0009 April 2007 BUY 71.40 90.0027 June 2006 SELL 64.10 48.00


Key to CLSA investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = Expected to outperform the local marketby 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%.Performance is defined as 12-month total return (including dividends).

©2007 CLSA Asia-Pacific Markets (“CLSA”). Note: In the interests of timeliness, this document has not been edited.

The CLSA Group, CLSA's analysts and/or their associates do and from time to time seek to establish business or financial relationships with companiescovered in their research reports. As a result, investors should be aware that CLSA and/or such individuals may have one or more conflicts of interests

that could affect the objectivity of this report. The Hong Kong Securities and Futures Commission requires disclosure of certain relationships andinterests with respect to companies covered in CLSA's research reports and the securities of which are listed on The Stock Exchange of Hong Kong

Limited and such details are available at www.clsa.com/member/research_disclosures/. Disclosures therein include the position of the CLSA Group onlyand do not reflect those of Calyon and/or its affiliates. If investors have any difficulty accessing this website, please contact [email protected] on

(852) 2600 8111. If you require disclosure information on previous dates, please contact [email protected]

IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copyof which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway,Hong Kong, telephone (852) 2600 8888. 08/03/2007

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