Dalal Street

Reliance Industries (RIL) announced on Nov 10 its first oil discovery in onshore exploration block CB-ONN-2003/1, where it holds 100% participating interest. The discovery, named Dhirubhai-43, was made at a depth of 1,451 meters in the fifth well drilled in this block. RIL is still ascertaining commerciality of the discovery with the Indian oil regulator.

Although the gross reservoir thickness of 15 meters of Miocene sand, giving test flow of 500 b/d, does not prima facie look outstanding, in our view, we note that this is the first oil discovery reported in the block and further data gathering and future success may open up more potential for reserve accretion. Moreover, other E&P operators like GSPC, ONGC have discovered commercial oil reserves in onshore blocks in the Cambay basin in the past.

Panacea Biotec sales from vaccines stood at Rs1050.4mn which is a growth of 15.5% YoY and a 13.1% QoQ decline. Despite delays due to programmatic changes in Global Polio Eradication Initiative (GPEI), supplies have begun and the inventory at the company’s end is being reduced. Expect contribution from vaccines segment to increase substantially by Q4, as Pbio shall begin servicing its new UNICEF order for its Pentavalent EasyFive vaccine worth $222.4mn for supplies over 2010-12 from January 2010.

The management re-iterates that a vaccine to combat Swine flu is the offing and could be ready by the end of the current fiscal. In India, only 2 other company besides Pbio, viz Serum Institute and Bharat Biotec have received the virus strain for H1N1 flu from the UK-based National Institute for Biological Standards and Control, for development of the vaccine.

The company has a huge debt of debt of about Rs7.4bn weighing on the stock price.

GPIL’s adjusted net profit was lower-than-expectations at Rs24.9mn, declining 92.7% YoY and 80.7% QoQ. This was primarily on account of (1) lower price realizations from power which dropped almost 50% QoQ to Rs3.5 per unit, (2) 10% QoQ decline in power generation to 70.9mn units (3) 13% QoQ decline in production volumes of sponge iron to 60680 tonnes.

Net Sales was reported at Rs1531.1mn, declining 53.8% YoY.

However, analysts expect a significant improvement in earnings only from Q4FY10. GPIL’s 600,000 tpa pellet plant and an additional 20MW power plant are expected to get commissioned in Dec’09. This along with ramp up in iron ore mining is likely to significantly expand GPIL’s margins and earnings from Q4FY10.

In FY11, increased utilisation of its captive raw material assets (iron ore mines and pellet plant) and increased power generation are expected to not only lead to significant growth in GPIL’s earnings but also reduce the past cyclicality in its earnings. GPIL is expected to earn an EPS of Rs 18 and Rs 40 for fy10 and fy11 respectively.