Lower light/heavy and sweet/sour differentials result in lower premiums for complex refiners such as Reliance India Ltd (RIL). However, given RIL’s cost advantage (approximately$2/bbl over US refiners) it would be able to maintain utilization levels of more than 90%, albeit at lower margins.

Reliance Industries Limited (RIL)

We are reducing our gross refining margin (GRM) assumptions for FY10 from $6.8/bblto $6/bbl and for FY11 from $8/bbl to $7/bbl. On an annualized basis, a $1/bbl change in RIL’s GRMs, changes RIL’s EPS by approx Rs5.

Refining margins are critical to RIL’s earnings, as benchmark margins declined to new lows in the past few months. Other key things to look out for in the near term are resolution of its court cases with RNRL and NTPC, and update on its bid to acquire global petrochemical major LyondellBasell.

Downgrading EPS by 8-10% for FY10 and FY11,maintain price target: Adjusted for treasury shares, RIL trades at 13.5x FY11Eadj. EPS of Rs82. We maintain our SOTP based price for RIL is Rs828/share(increased EV/EBITDA multiple for petchem and refining to 6.8x from 6x).Besides, we believe there’s a potential E&P upside of Rs240/share. Weremain positive on RIL mainly due to its large E&P potential. We maintain BUY.

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