Buy: Raising Target Price to Rs 131; Executing to Perfection

New target of Rs 131, resultant asset valuations justified

New target reflects EV/EBITDA of 6.5x FY10E (first full year of operation), discounted back to Mar- 08 plus NPV of tax benefits (US$2.0bn=Rs18/share). Our new target indicates EV/bpd of US$30,000 and EV per complexity barrel of US$2,200, in-line with present replacement costs and justified by tax breaks and value addition. The recent 17% stock correction from highs also makes risk reward favorable.

What’s changed?

Our FY10-12E GRM assumptions move up by about ~US$2/bbl (~US$14/bbl now) mainly on the back of higher global forecasts for WTI-Maya and sustained strength in product spreads. The assumed product spreads (US$9-10/bbl) compare well vis-à-vis the correlation with crude and CIR long-term WTI forecast of US$55/bbl. We are also introducing FY09E, as we now forecast commissioning in Jun-Sep-08 period vs. Apr-09 earlier.

No sign of new refining supply

Our Global Oils team notes growing risks to refinery expansion plans in the Middle East due to cost inflation. Besides, the supply side is not responding to the growing diesel deficit in Europe. Delayed capacity expansion bodes well for RPL’s margins in FY10-12E; with new-build cost economics providing adequate support to our product spread assumptions.

Risks

A structural slowdown in global distillate demand, emergence of alternative fuels/technologies, and possible merger with RIL are the key longterm risks for the company.