Fw: Investor's Eye: Update - Reliance Industries; Cement

 

Investor's Eye [July 04, 2011]  Sharekhan www.sharekhan.com

Summary of Content STOCK UPDATE Reliance Industries   Cluster: Evergreen Recommendation: Buy Price target: Under review Current market price: Rs868 More negative news flow on upstream business Key points Cut in KG D6 2P reserves: Niko Resources (Niko), a Canada-based oil and natural gas exploration & production company having a 10% stake in the Krishna-Godavari (KG) D-6 assets of Reliance Industries Ltd (RIL), has recently in its annual information form of 2011 significantly reduced (by 20%) its proven and probable (2P) oil and gas reserve estimate in India. The same reserves have also been evaluated by an independent expert, Ryder Scott Company, LP. Niko has made this on account of technical revision. The technical revision of gas reserves (2P) 241,334MMcf, ~20% of reserves (Please refer table on next page). In the report, Niko has not bifurcated the reserves of all its assets in India. Nevertheless, we believe a major part of the revision would have been on account of the KG D-6 block as the other assets (in Surat and Hazira) of Niko are relatively smaller. It is mentioned that the FY2011 estimate of Niko's 2P reserves in India has been reduced due to technical reasons, eg the production constraint faced by RIL in KG D-6 during FY2011.  Would lead to lower upstream valuations: The cut in KG D-6 reserves estimate would result in a reduction in the value assigned to the upstream business of RIL in the price target for its stock. We have assigned a value of Rs221.7 per share to the KG D-6 gas which could decline by Rs50-60 per share in line with the reduction in the 2P reserves estimate. Moreover, we see a potential downside risk to the gas output of 60mmscmd assumed for FY2012. However, we would wait for more clarity and further details before making the necessary revisions in our earnings estimates and price target for RIL.  Valuation: Currently the RIL stock is trading at 12x FY2012E earnings and 11x FY2013E earnings. RIL is available at 6.5x enterprise value (EV)/EBITDA on FY2012 estimates and 5.5x EV/EBITDA on FY2013 estimates. Though we have maintained our Buy recommendation on the stock, we have put the price target under review considering the recent news flow related to the cut in the KG D-6 2P reserves estimate.  SECTOR UPDATE  Cement Monsoon effect-sluggish offtake  The volume-wise performance of the top three domestic cement players, namely ACC, Ambuja Cements and UltraTech Cement (UltraTech), for June 2011 was mixed on a year-on-year (Y-o-Y) basis. ACC registered a better performance with a 7.3% growth in its dispatches. However, Ambuja Cements continued to disappoint with a 1% decline in its volume year on year (YoY). Overall, the cement offtake was sluggish on account of a slowdown in the execution of infrastructure and housing projects due to the onset of the monsoon and shortage of labour. Further, on a sequential basis all the major players reported a drop in their dispatches. In terms of demand, dealers have confirmed that the cement offtake in most parts of the country was affected primarily due to the monsoon and shortage of labour. In terms of regions, the southern region, Rajashtan and Kolkata witnessed sluggish cement offtake during the month. However, the demand environment was relatively better in the western market of the country as Gujarat saw some signs of a pick-up in the volume, particularly from the government infrastructure projects.  Cement prices during the month decreased in most parts of the country by Rs12-15 per 50kg bag in June 2011. The price corrected during the month largely on account of a slowdown in the cement offtake and increased inter-regional movement by the cement companies. The largest price correction was witnessed in Kolkata. Further, dealers are of the view that cement prices may decline further in the coming 15-20 days due to a weak demand in the monsoon season.  We feel the cement sector could underperform the market in the next six months since the cement manufacturers may fail to adhere supply discipline. However, we believe any correction in the sector will provide investment opportunities in the mid-sized space. We prefer Grasim Industries in the large space, and Orient Paper and Industries (Orient Paper) in the mid-sized space.   Click here to read report: Investor's Eye

Regards, The Sharekhan Research Team myaccount@sharekhan.com   www.sharekhan.com to manage your newsletter subscriptions