Stay neutral on stocks of Reliance Industries

RIL's 1P reserve higher than Niko's new 2P reserve: RIL does not give 2P reserve numbers and only gives out 1P reserve number in its annual report. Post the downgrade in FY12, RIL's 1P gas reserves were 104bcm (3.7tcf, net share number). It should be noted that RIL's reserve numbers also include its share in PMT (RIL stake at 30%). Even after adjusting PMT reserves (estimated), RIL's 1P reserve number will still be higher than Niko's 2P reserve number of 1.9tcf.

Niko states that additional investments contingent on gas price revision: Niko stated that the new reserve estimates factor pertain only to the current producing fields - D1D3/MA and additional investment decisions on development plans (satellite and NEC) are contingent upon natural gas pricing (revision scheduled in March 2014). Further, it stated that the reserve/production estimates by Ryder Scott (independent reserve consultant) does not assume any additional drilling in D1D3/MA fields, as Ryder Scott believes that no new wells will be required to recover the revised 2P reserves in D1D3/MA fields in the KG-D6 block.

Key things to watch on RIL: (1) Resolution of cost recovery issues with the government, (2) DGH approvals for E&P program and update on KG-D6 ramp-up, (3) Clarity on 7-year income tax holiday for KG-D6 gas (we model tax holiday), (4) Margin trend in refining and petchem, (5) Developments on USD12b capex plan, and (6) Update on BWA and retail foray.

Cutting SOTP; Maintain Neutral: We have cut our plateau production assumption from 60mmscmd in FY18 to 40mmscmd and cut our overall recovery from 10 tcf to ~7tcf. However, our FY13 and FY14 estimates remain unchanged. Our revised SOTPbased target price is INR760 (earlier INR785) as we cut our KG-D6 value to INR51/ share from earlier INR74/share and NEC-25 to INR13/share (earlier INR15/share). We maintain Neutral due to concerns of (1) RoE slipping to sub-12% levels, (2) falling KG-D6 volumes, and (3) increased share (75%) of cyclical refining and petchem businesses. The stock trades at 11.3x FY13E adjusted EPS of INR63.4 and 7.4x FY13E EV/EBITDA.