We reiterate our ?buy? call on Reliance Industries (RIL) with a new target price of R1,036 as the company has embarked upon a capex phase (capex at 40-45% of current market cap) in refining/petchem/shale gas that would see earnings CAGR reverting to more than 15% over the next few years.
In addition, increased visibility on upstream discoveries, approvals and higher gas price will further aid growth. Reliance’s FY11-13 earnings CAGR were muted at 4% due to negative surprise on India upstream.
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Reliance, British Petroleum, and Niko announced a ?significant? discovery in KG-D6 MJ-1 well at ~2000 m below the existing producing D1/D3 fields. Gas flowed at 0.87 mmscmd and 2,121 bopd, constrained by equipment capacity. Reported gross column of 155m is very high.
Niko estimated MJ-1?s best/high prospective resources at 1.2/3.6tcfe having 29% liquids. We peg our estimate of recoverable resources at 1.8tcfe. Production of MJ-1 discovery should not take as much time as a normal discovery as it is located below existing producing D1/D3 fields. We estimate value of the discovery at R29 per share, which reflects in our new target price.
Our interaction with the RIL management has renewed our confidence on the company?s growth prospects. The management expects construction of most refining/petchem projects to commence in FY14 and complete by FY16 (specific timings not known). This should drive Reliance’s earnings growth over the next few years.