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15 May 2009

Valuation of Reliance Stock by Kotak Securities

Reliance is a stock which has kept the investors glued by virtue of its appreciation in price over a period of time.

Kotak Secutrities has come out with a fair valuation of said stock and has given following 3 scenarios and same is as listed below:

Valuation 1: Rs 2,300 would entail higher chemical and refining margins and gas reserves
We compute that a fair valuation of Rs 2,300 for RIL stock, based on FY2011E estimates, would entail (1) significantly higher chemical margins (+16-24%), (2) very high refininf margins (US $13.8/bbl and US$12.4$/bbl for RIL and RPET refineries) and (3) additional 16 tcf of gas to be discovered over the next six years. Our SOTP-based 12-month fair valuation is Rs 1650 and fair valution based on FY2011E estimates is Rs1,750.

Valuation 2: Rs2,300 would entail large new E&P discoveries, unchanged margins in others
We estimate that RIL would need to add 51 tcf of additional gas reserves next over the six years without additional contribution from other businesses to reach our fair valuation of Rs 2,300 in our hypothetical exercise. It would be interesting to see if RIL can create further value from gas through forward integration into merchant power generation and city gas distribution.

Valuation exercise 3: Rs1,375 in downside scenario
We calculate RIL's fair valuation at Rs1,375 in our downside scearion of (1) weaker than assumed margins (US$50/ton lower for major chemicals, US$2/bbl lower for refining margins) and (2) higher-than-expected taxation (no income tax exemption for gas production). We also do not rule out lower multiples in case if lower0than-expected earnings.

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