Reliance Industries (RIL) - Buy Stock for safe investment

Reliance Industries (RIL), India’s largest private sector company, is an integrated player in the oil and gas sector, with interests in Exploration & Production (E&P), refining, marketing and petrochemicals.

In the recent past, RIL’s gross refining margin (GRM), although superior to Singapore benchmark GRM, have been under pressure due to the global slowdown.

While the benchmark GRM is expected to see some recovery, the start of refining operations of its 70.4 per cent subsidiary, Reliance Petroleum (RPET) will help offset the decline in margins. RPET has a capacity to refine 0.58 million barrels of oil per day (BOPD), and would take RIL’s consolidated capacity to 1.24 million BOPD in the refining business, which accounted for 56 per cent of profits.

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The start of gas production from RIL’s KG-D6 block, which is estimated to reach peak production levels of 80 mmscmd in the next 6-8 quarters, will also significantly contribute to the consolidated financials of RIL. Although, EBIT contribution from E&P is at around 12 per cent as of Q2 FY09, analysts expect this figure would reach up to 50-60 per cent by FY11E. In the near-term though, there are issues like those pertaining to the pricing of gas, which would weigh on stock valuations, until they get resolved.

The fortunes of the petrochemical business (33 per cent of profits) have been subdued in the last few quarters. Here, analysts expect the polymer cycle to bottom out by June 2009. Overall, with expanded capacities and production from new oil and gas blocks, expect RIL’s profits to rise in the next two years. The stock can deliver 20-22 per cent in one year.

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