RIL Macquarie 10 July 06

Please refer to the important disclosures on inside back cover of this document, or on
our website www.macquarie.com.au/research/disclosures.

Reliance Industries
INDIA

10 July 2006

RIL IN Outperform

Stock price as of 07 Jul 06 Rs 1,032
12-month target Rs 1,295
Upside/downside % +25.5
BSE Sensex as of 07 Jul 06 10,510

30-day avg turnover US$m 216.2
Market cap US$m 31,330

Investment fundamentals
Year end 31 Mar 2006A 2007E 2008E 2009E

Total revenue bn 830.2 1,134.0 1,292.2 1,437.6
Adjusted profit bn 94.9 106.2 128.4 161.1

EPS adj 68.15 76.26 92.18 115.66
EPS adj growth % 25.1 11.9 20.9 25.5
PE adj x 15.1 13.5 11.2 8.9

DPS 11.42 13.78 16.20 17.80
Yield % 1.1 1.3 1.6 1.7

ROE % 22.3 19.9 20.3 22.2
Net debt/equity % 44.6 35.3 30.4 14.6
Price/book x 3.1 2.4 2.2 1.8

Analyst
Jal Irani
91 22 6653 3040 jal.irani@macquarie.com
Unmesh Sharma
91 22 6653 3042 unmesh.sharma@macquarie.com
The world is not enough
We initiate coverage with an Outperform recommendation
Our target price of Rs1,295 provides 26% upside. We estimate that 89% of the
sum-of-parts value comprises well-defined businesses; while relatively uncertain,
but potentially large options for growth contribute the balance.
Mammoth US$14bn capex plan to fuel aggressive growth
Indias largest private-sector company, RIL, recently embarked on significantly
stepped-up growth plans. We estimate that it will spend a staggering US$13.6bn
on capex, in addition to US$5.6bn for organised retail, over the next five years.
This would more than double its balance sheet size. Importantly, we forecast that
free cashflow will be sufficient to fund capex.
Earnings poised to double
Oil & gas could reach ONGCs reserves: Stated reserves are already ~15%
of ONGCs, which could increase EBITDA by ~47% over five years (Figure 1).
Refining & petrochem: US$7.6bn expansion plans could double EBITDA.
Retail: US$5.6bn capex to cause paradigm shift in US$220bn retail industry.
Importantly, ROE to rise consistently despite large capex
RIL has consistently created value for shareholders, due to its ability to
successfully execute large projects. Despite giant-sized investments, we forecast
ROE to rise consistently, on a rising contribution from high return businesses,
eg, oil & gas, with average ROE of 30% for five years of full production.
Falling debt levels to enable even larger capex
Importantly, consistent deleveraging from cash generated would result in gearing
levels dropping to 15% by FY09E. Realistically, it is more likely that RIL would
use this financial flexibility to raise further debt of >US$5bn. We believe the bulk
of this would go into oil & gas E&P, enabling resource accretion, which has been
a significant stock price driver in the past three years.
Derating risk unlikely to materialise
We believe that stock derating risk similar to 1994 given equity issuances is
unlikely to materialise as RIL now enjoys strong positive free cashflow. A
conglomerate discount following diversification into retailing is likely to be offset
by a positive NPV from the project.
Fig 1 Division-wise contribution to profits, value and investments
Contribution to Capex-
EBIDTA growth
(FY11E over FY06)
Target price
(Rs/share)
next five yrs
(US$bn)

Comment
Oil & Gas 47% 154 4.5 Target price includes growth option
Refining and
petrochem
87% 879 7.6 Includes RPL & IPCL
Auto fuel retail 24% 84 1.5
Organised retail Potentially 11%* 60 5.6* *Conservatively not included in
consolidated earnings
Aggregate 158% 1,295 19.2 Treasury stock of Rs 118 added to
above values
Source: Macquarie Research, July 2006
Macquarie Research Equities - Report Reliance Industries
10 July 2006 2

RIL IN Outperform

Stock price as of 07 Jul 06 Rs 1,032
12-month target Rs 1,295
Upside/downside % +25.5
Valuation Rs 1,439
- DCF (WACC 12.3%)
BSE Sensex as of 07 Jul 06 10,510

GICS sector energy
Market cap Rs bn 1,438
30-day avg turnover US$m 216.2
Market cap US$m 31,330
Number shares on issue m 1,394

Investment fundamentals
Year end 31 Mar 2006A 2007E 2008E 2009E

Total revenue bn 830.2 1,134.0 1,292.2 1,437.6
EBIT bn 108.5 135.9 165.9 205.8
EBIT growth % 19.7 25.2 22.1 24.0
Reported profit bn 93.9 106.2 128.4 161.1
Adjusted profit bn 94.9 106.2 128.4 161.1

EPS rep 67.44 76.26 92.18 115.66
EPS adj 68.15 76.26 92.18 115.66
EPS adj growth % 25.1 11.9 20.9 25.5
PE rep x 15.3 13.5 11.2 8.9
PE adj x 15.1 13.5 11.2 8.9

DPS 11.42 13.78 16.20 17.80
Yield % 1.1 1.3 1.6 1.7

ROA % 12.7 12.7 13.3 15.6
ROE % 22.3 19.9 20.3 22.2
Net debt/equity % 44.6 35.3 30.4 14.6
Price/book x 3.1 2.4 2.2 1.8

RIL IN rel SENSEX performance, & rec
history

Source: Datastream, Macquarie Research, July 2006 (all
figures in INR unless noted)

RIL's shareholding pattern
Others
4%
FIIs
27%
Banks/
MFs/ FIs
8%
Promoter
&
Promoter
Group
48%
Indian
public
14%

Source: Company data, Macquarie Research, July 2006

Reliance Industries
Company profile
Reliance Industries Ltd (RIL) is Indias largest private sector company by
revenue, profit and asset size. It contributes ~3% of Indias GDP and ~8% of
exports. RIL shares have a ~12% weight on the BSE Sensex and ~9% weight on
the NSE Nifty, the two major broad-based indices in India.
Business profile
Refining and petrochemicals
RIL is among the world's largest refiners and petrochemical producers. Its
existing Jamnagar refinery and petrochemicals complex (33mmtpa) is the
largest and most complex refinery in India. The company is also Indias
largest petrochemicals producer with vertically integrated capacities
across western India.
RIL recently completed an IPO for its export-oriented subsidiary, Reliance
Petroleum, to double refining capacity. This will create the worlds largest
refining and petrochemicals complex and will come on-stream in record
time (by December 2008).
Auto-fuel retailing
Two years ago, RIL entered the Indian auto fuel (gasoline and diesel)
retail outlet market with a license to set up 5,000 outlets. It has set up
>1,200 outlets to capture 13% market share.
Oil & gas E&P
RILs foray into oil & gas E&P started in the early 90s, when it acquired a
30% equity stake in a JV (with ONGC and British Gas) and has since
emerged as the largest Indian private E&P (and now integrated) player.
It has bid and won multiple exploratory oil & gas and coal bed methane
(CBM) blocks in India, some of which have hit gas, oil and CBM gas at
various locations. The company also holds interest in overseas oil & gas
assets (Yemen and Oman).
New ventures
The company has announced its intention to invest a whopping US$5.6bn
in its latest foray in organised retail. The company also plans to venture
into special economic zones and urban infrastructure, life-sciences and
healthcare.
Fig 2 Revenue split by business group
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E
(Rs bn)
Petrochem Refining Auto-fuel retail KG gas RPL- export refinery
10 July 2006 3
The world is not enough
We initiate coverage with an Outperform recommendation
We initiate coverage on Reliance Industries (RIL) with an Outperform rating. Our target price
of Rs1,295 provides 26% upside. We estimate that 89% of the sum-of-parts value comprises
well-defined businesses (refining & petrochemicals), while relatively uncertain, but potentially
large options for growth (oil & gas and retailing) contribute the balance.
Mammoth US$14bn capex plan to fuel aggressive growth
Indias largest private-sector company, RIL, recently embarked on significantly stepped-up
growth plans. We estimate RIL will spend a staggering US$13.6bn in addition to US$5.6bn for
organised retail over the next five years, more than doubling its balance sheet size.
Importantly, we forecast that free cashflows would be sufficient to fund capex.
Earnings poised to double
We predict a commensurate near-doubling in earnings unaided by a cyclical upturn. A
combination of new vistas (retail, oil & gas) and expansion of existing business (refinery,
petrochemical) should fuel the growth.
Oil & gas reserves could reach ONGCs level: Stated reserves are already ~15% of
ONGC, which could increase EBITDA by ~47% over five years. Preliminary studies show
potential to nearly reach ONGCs reserves.
Refining & petrochem: Recent plans to double refining capacity to become the worlds
largest refinery complex and petrochem expansions could double turnover and EBITDA.
Retail: RIL recently announced vague, but large US$ 5.6bn investment plans. RIL could
catalyse a paradigm shift in the US$220bn nascent retailing industry which has 3%
penetration by organised sector and 30% CAGR.
Fuel retailing: Steep ramp up in market share is likely to continue overcoming near-term
concerns surrounding negative marketing margins.
Importantly, ROE to rise consistently despite large projects
RIL has consistently created value for shareholders in the past, due to its ability to
successfully execute large projects. Despite giant-sized investments, we forecast ROE to rise
consistently, due to the increasing contribution from high return businesses, eg, oil & gas,
with average ROE of 30% for five years of full production.
Falling debt levels to enable even larger capex
Importantly, cash generated from RILs existing businesses should result in consistent
deleveraging. We believe the strength of its balance sheet would provide RIL with financial
flexibility to fund more significant investments. We forecast gearing to drop to 15% by FY09E.
Realistically, it is more likely that RIL would use this financial flexibility to raise further debt of
>US$5bn. We believe the bulk of this would go into oil & gas E&P, enabling resource
accretion, which has been a significant stock price driver in the past three years.
We believe that RIL faces the risk of derating on two counts, but is unlikely to materialise:
During 1994 and 1995 Reliance stock had underperformed BSE Sensex by 27% following
a disproportionately large capex requiring financing by new equity issuances.
RIL is currently generating positive free cash flows and hence is unlikely to resort to large-
scale equity raisings by parent company. In fact, recent equity issuance by subsidiary,
Reliance Petroleum, saw RIL shareholders gain substantially as 60% of the pre-IPO stake
issued at Rs10/share currently quotes at Rs 62/share following the IPO.
Diversification into unrelated businesses such as organised retail would result in RIL
becoming a conglomerate, which could result in discounts to valuation. We believe any
conglomerate discount is likely to be offset by a positive estimated NPV of Rs67/share
from RILs organised retail initiative.
10 July 2006 4
Investing heavily to fuel aggressive growth
RILs earnings could more than double over the next four years unaided by a cyclical upturn.
A combination of new vistas (retailing, oil & gas) and expansion of existing businesses
(refinery, petrochem) shall fuel growth.
Growth driver 1: Oil & gas a key driver to add NPV of Rs 172/share
World class oil & gas finds
RIL holds interests in 38 other onshore, shallow water and deepwater and three other CBM
blocks across India, in addition to overseas assets in Yemen and Oman.
RIL is the operator and has a 90% interest in the 7,645sq km deep water KG-D6 block (off the
Indian east coast). To date, drilling has resulted in 18 consecutive discoveries on this block
an incredible 100% success rate. RIL's E&P partner in the KG basin (off the Indian east
coast), Niko Resources (NKO CN, Not rated) recently announced that an independent
engineering report prepared by Gaffney, Cline and Associates has revised upwards P2
reserves (proved + probable; 50% probability of materialising) from 7.9tcf to 18.8tcf. This
confirms D6 blocks reputation as being a world-class petroleum province.
RIL also struck resources in NEC-25 eastern offshore shallow waters (2.3tcf in-place gas),
Sohagpur coal bed methane (3.65tcf in-place gas) and the recent oil find in KG-D6 east coast
deep waters (1 bn bl of in-place oil, Source: press reports).
RILs finding cost is among the lowest globally
According to RIL, its finding cost could be among the lowest amongst global E&P majors.
RILs finding cost at US$0.6/bl compares favourably to ONGCs at US$2/bl and the global
average of approximately US$1.8/bl (Figure 3).
Fig 3 Finding cost for RIL v/s global peers
0.59
1.4
1.8
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
RIL Oil majors (sisters)* Global average
(US$/bl)
* ExxonMobil, Chevron, BP and Royal Dutch Shell
Source: Company, Macquarie Research, June 2006
Rs172/share value, further potential for upside
We attribute a DCF value of Rs78/share to the current estimates of KG-D6 gas and
Rs172/share to RILs entire oil and gas assets (Refer to figure 21 in Appendix 1: Oil & Gas
E&P- Next frontier for details). However, we believe that significant upside is possible:
Potential from KG-D6 remains high as <50% of the KG-D6 acreage has been explored.
Initial evidence of this potential upside is now in place. RILs partner in the KG-D6 block,
Niko, recently announced that an independent engineering report has revised D6 Block P2
reserves upwards by ~200% with scope for further increase.
According to a presentation made to the government of India, RILs total recoverable
reserves could be a staggering 8bn boe- 63% higher than reserves currently stated in
Nikos release.
10 July 2006 5
Untapped demand, fiscal benefits should fuel surge in revenue and profit
We believe that RIL will face no problems in finding buyers for the oil and gas produced due
to latent demand and the attractiveness of gas as a substitute for high-cost LNG imports and
naphtha. This should result in a surge in both revenue and profit, especially as RILs finding
cost could be among the lowest globally. In addition, no fixed cess (Rs2,500/ toe) is
applicable to NELP blocks and deep water blocks attract less royalty and a tax holiday for the
first seven years. We believe the KG-D6 gas production could contribute 22% to RILs FY11E
PAT, the third year of production.
Fig 4 Key financials for Krishna Godavari gas
FY09E FY10E FY11E
Net sales (Rs m) 41,622 49,662 93,373
Contribution to RIL's consolidated revenues 3% 3% 5%
EBITDA (Rs m) 28,768 34,325 67,746
EBITDA margin 69% 69% 73%
Recurring Net Income (Rs m) 12,936 16,948 50,870
PAT margin 31% 34% 54%
Contribution to RIL's consolidated PAT 8% 8% 22%
Source: Company, Macquarie Research, July 2006
Growth driver 2: Retail - Nascent but exciting. Rs67/sh option value
Domestic organised retail holds massive potential. It constitutes only 3% of an estimated US$
220bn total retail in India and is forecast to grow >30% CAGR through 200910E. RIL has
announced a US$5.6bn outlay to enter organised retail across segments and product groups
on a pan-India basis and across several verticals. It aims to drive volumes through the mass-
market segment and margins by tying up with luxury brands such as Armani (refer to
Appendix 2: Retail-Nascent but exciting)
RIL has a history of successfully executing large non-core business projects
RIL has proved its mettle in non-core businesses and has consistently succeeded in creating
accretive value for shareholders in virtually every venture including diversifications such as
telecom. Strategic logic remains the same. RIL will apply its financial wealth to pursue a high-
growth, capital-intensive industry, whose regulatory framework is becoming more pro
business. Demographic and lifestyle changes, such as increasing brand consciousness,
widespread use of plastic money and impulse purchases have also contributed to this trend.
Mitigation of execution risk and supply chain management are key to success
However the key risk is execution. Recognising that the initiative has to be driven by
experienced talent, RIL has been in the news consistently for poaching top talent from related
businesses (such as Electrolux, Unilever, Titan, Pantaloon, etc).
RIL also realises that effective supply chain management is the key to success in this
business. The company intends to deliver better value across the chain - farmers, producers
and consumers, through a world-class integrated model, with an agricultural hub, cold chain
and procurement of agricultural produce without use of middle-men. Press reports suggest
that RIL is also considering importing non-perishable items.
For now, we value retailing option at Rs67/share
With the scarcity of details available around the retail venture, we find it difficult to accurately
forecast earnings and value the business and we have added this as option value to the
value we have attributed to RILs core businesses. We reach an NPV-based value of Rs67/
share for the retail foray. However, we believe that as the details of the investment and
strategy are uncovered, this value will change.

10 July 2006 6
Fig 5 Key financials for organised retailing business
FY06 FY07E FY08E FY09E FY2010E FY2011E
Net sales* (Rs m) 0 34,493 72,270 96,360 120,450 151,110
EBITDA* (Rs m) 0 1,380 2,891 5,782 9,636 15,111
EBITDA margin nm 4% 4% 6% 8% 10%
Recurring Net Income* (Rs m) 0 -806 -1,124 -15 1,787 4,833
PAT margin nm -2% -2% 0% 1% 3%
* As a consevative measure, we have not included contriution from organised retail in RILs consolidated earnings
Growth driver 3: Refining & petrochem - NPV of Rs802/share
Greenfield refinery through 75% subsidiary to exploit strength in GRMs
Global shortages and enhanced crack spreads took refining margins to record highs in FY04
and FY05, followed by a sharp dip in 2HFY06. Margins will likely rebound in the near term
given limited global refinery capacity additions and vintage US capacities (one-fifth of global
capacity) constrained to process scarce light sweet crude.
RILs existing refinery will benefit from this over the next four years. We expect RILs existing
refinery to continue its outperformance of regional benchmarks like the Singapore complex. It
is worth noting that the RIL refinery has consistently outperformed the Singapore complex by
US$3-6/bl. This is due to economies of scale and, more importantly, refinery complexity. The
highly complex refinery allows RIL to process multiple varieties of crude and increases
flexibility of the product slate to maximise spread between product prices and cost of crude.
Beyond FY09, however, GRMs are likely to revert to their longer-term range between US$2-
4/bl. RIL has started implementing plans for a mammoth (27mmtpa) export oriented refinery,
next to the existing refinery, through its 75% subsidiary Reliance Petroleum (RPL). In May
2006, RIL raised ~US$2.4bn through an equity IPO and private placement and US$3.5bn for
financing the worlds largest refining complex, which will come on-stream by 3QFY09E
(Figure 6).
Fig 6 Refinery expansion to create world's largest refining complex
The refinery will create value by:
Unique in-house engineering capabilities will enable it to commission the refinery by
December 2008. This is much faster than the 5-7 years typically required for a project of
this scale.
Completion of the project will result in enormous economies of scale.
It will also be among the world's most complex refineries, allowing high crack spreads and
margins, which are US$4-5/bl higher than global benchmarks. Integrated petrochemicals
(propylene) complex will help capture an additional GRM of US$0.5/bl.
458,000
493,500
495,000
520,000
557,000
605,000
650,000
817,000
940,000
1,240,000
Shell Eastern, Singapore
Exxon Mobil, Baton Rouge, USA
Hovensa LLC, Virgin Islands
S - Oil Corp, South Korea
Exxon Mobil, Baytown, USA
Exxon Mobil, Singapore
LG - Caltex, South Korea
SK Corp, South Korea
Paraguana Refining, Venezuela
World's largest refining complex
(bpd)
Proposed refinery Existing refinery
10 July 2006 7
The export oriented refinery will emerge in a special economic zone (SEZ), allowing it to
import plant and machinery without duty and delivering significant tax benefits (five-year
tax holiday, 50% tax holiday for the next five years and 50% tax holiday for the subsequent
five years, on reinvested reserves).
Significant expansion in petrochemical capacities to drive volume growth
Petrochemicals typically follow a 10-year boom-bust cycle with the last peak in the
cracker/polymer chain occurring in 2004, while the polyester chain peaked in 1994. We
forecast capacity expansions, especially in China and the Middle East, to result in lower
capacity utilisations in the cracker-polymer petrochemical stream. On the other hand, higher
utilisation rates may enhance polyester chain margins (Appendix 5: Mixed petrochemical
outlook).
RIL is already among the largest petrochemical producers for a number of products. The
company continues to focus on significant capacity expansions to drive volume growth and
enhance economies of scale (Figure 7). Petrochemicals along with refining will continue to
dominate Reliances earnings and value.
Fig 7 RILs key petrochemical and refinery expansion plans

Petrochemicals capacity (tpa) FY06

FY09E
% expansion by
FY09E
Polyester filament yarn (PFY) 430,000 595,000 38%
Polyester staple fibre (PSF) 550,000 800,000 45%
Purified terephthalic acid (PTA) 1,350,000 1,980,000 47%
Paraxylene (PX) 1,856,000 1,956,000 5%
Polypropylene (PP) 1,150,000 1,430,000 24%
Styrene - 550,000
Propylene (within RIL) 486,667 486,667
Propylene
(within RPL-RILs stake= 75%)
- 900,000

Refining capacity (m tpa)
Within Reliance Industries 33.0 33.0
Reliance Petroleum (RILs stake= 75% ) - 27.0

Fig 8 Key financials for refining and petrochemical businesses
Net sales (Rs m) 812,113 1,004,631 1,022,849 980,742 901,001 842,970
Contribution to RIL's consolidated revenues 98% 89% 79% 68% 53% 47%
EBITDA (Rs m) 142,991 179,269 203,445 219,576 247,438 231,711
EBITDA margin 18% 18% 20% 22% 27% 27%
Recurring net income (Rs m) 90,693 109,478 128,721 141,473 170,478 161,738
PAT margin 11% 11% 13% 14% 19% 19%
Contribution to RIL's consolidated PAT 96% 100% 95% 88% 84% 69%
Driver 4: Auto-fuel to overcome near-term concerns - Rs93/share
In the short span of two years, new entrant RIL has taken a 13% market share in the auto-fuel
retail space from incumbent PSU oil marketing companies, IOC, BPCL and HPCL (Figure 9).
It is notable that RIL has achieved retail throughputs per outlet at 350-370MT per outlet,
which is nearly three times the average PSU throughput.
10 July 2006 8
Fig 9 Auto fuel retail market share: RIL gains rapidly
20%
25%
30%
35%
40%
45%
50%
Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06
0%
2%
4%
6%
8%
10%
12%
Retail market share: IOC/ IBP (LHS) HPCL (LHS) BPCL (LHS) RIL (RHS)
Source: Industry, Macquarie Research, June 2006
Long-term competitive parameters indicate further gains for RIL
Incumbent PSU OMCs are forced to set up petrol pumps at unviable locations. We expect the
steep ramp up in RILs market share with higher throughputs to continue as the company
expands outlets along highways and into major and second-tier cities. We believe that retail/
restaurant/ lodging services currently available at the RILs outlets should result in higher
IRRs as compared to PSU OMC incumbents. This should rise as RIL unleashes its retail
strategy in the hyper-market cum auto-fuel retail outlet format stores in the next two-to-five
years.
Negative marketing margins raise near-term concerns
Government controlled retail prices for petrol and diesel have resulted in negative
margins of Rs6-8/litre, despite the recent price hike. While PSU OMCs would benefit
from discounts by government-owned upstream companies and refiners and oil bonds,
private players (eg, RIL) have not been offered any such packages.
RIL has decided to go ahead and raise diesel and petrol prices by Rs2-3/ litre above prices
offered by PSU OMCs. This helps cut the losses, but RILs throughputs have reduced by 75-
80%. We believe this is only a near-term concern especially as <10% of refinery throughput
was dedicated to the retail outlets in FY06 and RIL retains the ability and option to export the
refinery output.
Growth in number of outlets added not expected to slow
We believe that the pace of addition to retail outlets will continue with throughputs returning to
normal as the government and RIL work out a solution and oil prices come down to an
average US$65/bl for the next 2 years. Support from the retail outlets as distribution outlets
and hubs for the foray in organised retail should boost IRRs from the investment in auto-fuel
retail.
Fig 10 Key financials for auto fuel retail business
Net sales (Rs m) 52,753 129,337 269,370 332,896 372,279 417,717
Contribution to RIL's consolidated revenues 6% 11% 21% 23% 22% 23%
EBITDA (Rs m) -2,468 4,258 14,472 20,817 27,001 33,752
EBITDA margin -5% 3% 5% 6% 7% 8%
Recurring Net Income (Rs m) -4,345 294 6,036 9,477 13,112 17,278
PAT margin -8% 0% 2% 3% 4% 4%
Contribution to RIL's consolidated PAT -5% 0% 5% 6% 6% 7%
10 July 2006 9
Profitable growth
Earnings poised to more than double over four years
We forecast Reliances EBITDA to grow by 23% CAGR and EPS by 21% CAGR over the
next four years. Investments in unrelated businesses, such as organised retail, will probably
continue, but these are unlikely to change the face of the company oil & gas related
businesses will remain at its core. We expect petrochemicals and refining to remain the key
earnings generators, the cash cows of the company. We believe oil & gas E&P will likely
emerge as the significant profit driver (Figure 11).
Fig 11 EBITDA breakdown: Steep ramp up in contribution from new businesses
0
50
100
150
200
250
300
350
FY2005 FY2006 FY2007E FY2008E FY2009E FY2010E
(Rs bn)
Ref ining Petrochemicals KG gas Auto f uel retail Reliance Petroleum
Can Reliance enhance shareholder value?
Nevertheless, the question arises whether RIL can grow profitability? We use a combination
of ROCE and EVA analysis, and a qualitative competitive matrix to conclude that RIL can
indeed create shareholder value.
EVA and ROCE show a rising trend
RIL has earned a positive EVA spread over the past two years. We expect EVA from
businesses, with firmed up operating and capex schedules, to face a temporary dip this year,
as capital-work-in-progress peaks in FY07E. We expect this to be followed by a sharp rise
(Figure 12).
Similarly, we forecast RILs ROCE to increase, primarily driven by KG D6 gas production
(Figure 13).
10 July 2006 10
Fig 12 Economic value-added and spread over cost of capital
-5
5
15
25
35
45
55
65
75
2004 2005 2006 2007E 2008E 2009E 2010E 2011E
(Rs bn)
-50
50
150
250
350
450
Economic Value Added (LHS) Spread in basis points (RHS)

Fig 13 ROCE contribution of individual divisions: KG basin gas emerges as profit
driver
-10%
0%
10%
20%
30%
40%
FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007E FY2008E FY2009E FY2010E FY2011E
RIL (consolidated) Ref ining & Petrochem KG gas Fuel retail
Qualitative peer group comparison confirms competitive edge
We have qualitatively compared RIL with its domestic peer group on a number of parameters
such as economies of scale, expansion plans, fuel marketing ability, impact of potential policy
changes, etc. From Figure 14 it is evident that RIL is competitive on most parameters and
hence can potentially deliver a positive economic spread.

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e
s
1
0

J
u
l
y

2
0
0
6

1
1
Fig 14 Competitive matrix for Indian refining & fuel retailing companies
Refining and Marketing players
Indian Oil Corporation (IOC)
Bharat Petroleum (BPCL)
Hindustan Petroleum (HPCL)
Reliance Industries (RIL)
Quality/
scale of
operations
Expansion
plans
Resilience of
retail market
share
Retail
throughput
per outlet
Automobile
fuel
branding
Upside from
differential
pricing
Subsidy
rebalance
potential
Refining business Retailing/ Marketing business Policy changes Other businesses
Upside from
sale of cross-
holdings
Pipeline
business
Other
business(eg.p
etrochem)
Source: Macquarie Securities, July 2006
10 July 2006 12
Free cashflow to finance mammoth capex
Reliance Industries to invest US$8.3bn over three years
As in the past, RIL continues to think big, when it comes to strategic investments to fuel
growth. We expect Reliance Industries to incur capital expenditure of ~Rs375bn (US$8.3bn)
between FY07 and FY09E (Figure 15). Key investments include existing core businesses,
refining and petrochemical expansion and auto-fuel retail outlets and newer businesses such
as oil & gas E&P and a foray into organised retail.
Fig 15 Break-up of Reliance Industries 3-year capex plan
FY07- FY09E
Petrochemical expansions 40,653 ~20% expansion in petrochemical facilities
Auto fuel retailing 36,900 2,200 new retail outlets by FY09E
Krishna-Godavari gas field development 71,863
Oil & Gas E&P 83,234 E&P expenses for other oil & gas and CBM
blocks
Reliance Petroleum 50,625 RIL's contribution to the export oriented refinery
Maintenance capex (including contingency) 90,000 Estimated at Rs30bn pa
RIL's total capex 373,275
In fact, we estimate that the Reliance group (including 75%-owned subsidiary, Reliance
Petroleum) may spend up to US$19bn in the next five years (Figure 16). Our capex estimates
do not include investments forays into urban infrastructure and special economic zones,
organised retail as details surrounding the magnitude and timing of cashflow remain
uncertain. However, we believe this could add another Rs125-150bn to capex within three
years.
Fig 16 Break up of Reliances US$19bn capex plans in next five years (US$bn)
Greenf ield ref inery*,
6.0
Oil & Gas E&P, 4.5
Petrochemical
expansion, 1.6
Auto-f uel retail, 1.5
Organised retail, 5.6
* Through Reliance Petroleum (75% subsidiary). RIL's equity contribution is ~US$600m
Source: Company presentations, Macquarie Research, July 2006

Strong free cashflow and modest debt position
However we believe that RIL will have no problems financing its aggressive capex plans. This
is because: We forecast RILs free cashflow (pre-capex) in the next three years to be
~Rs475bn, exceeding capex requirements.
10 July 2006 13
Fig 17 Free cashflow to fund bulk of capex requirements
0
50
100
150
200
250
FY2005 FY2006 FY2007E FY2008E FY2009E
(Rsbn)
Free cash flow (pre-capex) Planned capex
RILs net-debt equity ratio is currently ~45% and interest-coverage multiple >9x providing
flexibility to leverage if necessary.
RIL has a reputation of successfully implementing mammoth projects involving significant
capex and creating value for shareholders through equity offerings. This has been evident
from the record response generated by both Reliance Petroleum offerings (1993 and
2006). RIL holds the option to tap the primary markets to raise funds. We foresee this
possibility in the case of RILs (100%) organised retail subsidiary.
The potential for raising significant debt and equity along with a robust free cashflow position,
leaves RIL well placed to continue its strategy of investing heavily to fund growth.
10 July 2006 14
Valuation: Price target provides 26% upside
The inherent varied nature of RILs businesses, assets, investments and projects in gestation
periods requires and justifies use of a non-uniform approach for valuing individual assets and
businesses within the company. We have used a sum-of-parts methodology for valuing RIL.
We estimate that 89% of RILs sum-of-parts value comprises well-defined existing and growth
initiatives (refining and petrochemicals) while uncertain, but potentially large options (such as
oil & gas, retailing) contribute towards the balance (Figure 18).
(1) Well-defined businesses: We use a DCF-based valuation methodology for
businesses whose cashflows can be reasonably predicted. This includes:
The refining and petrochemicals business
Auto-fuel retailing business
E&P business: KG D6 basin gas (refer to Figure 21 for scenario analysis)
(2) Observed market prices: We value assets and investments, where values can be
easily ascertained, based on observed market prices. This includes:
Value of 75% stake in Reliance Petroleum
Value of 46% stake in IPCL
Value of treasury stock, which forms 12.2% of equity capital
(3) Option value: These are businesses where plans are either uncertain or not fully
disclosed. Cashflows from reserves arising from oil & gas E&P may be difficult to quantify
until a fairly advanced stage in the exploratory stage. We value E&P (in-place and
recoverable) resources on the basis of a benchmark EV/ reserves and discounting them
back from expected date of commencement of operations (Figures 21, 22). This includes:
The recent oil find in the KG-D6 block
The gas find in the NEC-25 block
Coal bed methane blocks in Sohagpur
DCF value of newly announced organised retail venture
Refer to Appendix 8: Global peer group valuations for domestic and global valuation
comparisons.
Fig 18 RILs segment wise sum-of-parts DCF value
Contribution to
value of RIL (Rs m)
Contribution to
value of RIL
(Rs/share)
Fair value (at a
10% discount)
(Rs/share)

Basis for valuation
(1) Core current businesses
Refining and Petrochemicals business* 1,117,797 802 722 DCF based valuation (Figure 56)
Auto-fuel retailing 129,561 93 84 DCF based valuation (Figures 33,34)
E&P business (KG basin gas) 109,230 78 71 DCF based valuation (Figures 21, 26)
Contribution from main business segments 1,356,589 974 876

(2) Other assets and investments
Value of 75% stake in Reliance Petroleum 212,625 153 137 Market price based valuation
Value of 46% stake in IPCL 29,916 21 19 Market price based valuation
Treasury stock (12.2% of equity capital) 182,714 131 118 Market price based valuation
Contribution from assets and investments 425,255 305 275

(3) Option value: Projects with unclear
plans

E&P business (Recent oil find- KG basin) 51,322 37 33 Using EV/ boe of reserves for ONGC as
benchmark (Figures 21, 22)
Other E&P (CBM-Sohagpur and NEC 25 Gas) 78,567 56 51 Using EV/ boe of reserves for ONGC as
benchmark (Figures 21, 22)
Organised retail venture 92,831 67 60 DCF based valuation (Figures 33, 34)
Total value per share 2,004,563 1,439 1,295

Current stock price (Rs) 1,032

Upside/ (Downside) % 26%
* Value of investments in IPCL and RPL stripped out
10 July 2006 15
We believe that RIL faces the risk of derating on two accounts:
Potential negative sentiment during gestation period of capex
A quick look at the historical PER chart plotted against capex plans shows that sentiment can,
and does tend to turn negative when RIL embarks on large-scale capex projects. For
example during 1994 and 1995, Reliance stock had underperformed the BSE Sensex by 27%
following a disproportionately large capex requiring financing by new equity issuances (Figure
19).

Fig 19 RIL: PER reflects capex cycle
-
5
10
15
20
Apr-92 Mar-93 Mar-94 Feb-95 Feb-96 Jan-97 Jan-98 Dec-98 Dec-99 Nov-00 Nov-01Oct-02 Oct-03 Sep-04 Sep-05
0%
10%
20%
30%
40%
50%
60%
70%
Capital work in progress/ Gross f ixed assets (RHS) PER (LHS)
(x)
Source: Bloomberg, Macquarie Research, July 2006

Potential conglomerate discount
Multi-directional forays into organised retail, agriculture and food processing, urban
infrastructure and SEZs, healthcare, would result in RIL becoming a sprawling conglomerate.
This could result in conglomerate discounts to valuation.
We believe derating risk is unlikely to materialise
RIL is currently generating positive free cashflows (post-capex) and hence it is unlikely to
resort to large-scale equity raisings by the parent company. In fact, recent equity issuance
by 75%-owned subsidiary, Reliance Petroleum, saw shareholders of RIL gain substantially
as 60% of the pre-IPO stake issued at Rs10/share currently quotes at Rs62/share
following the recent IPO.
We believe any conglomerate discount is likely to be offset by a positive estimated NPV of
Rs67/share from RILs organised retail initiative.

10 July 2006 16

Profit & Loss 2002A 2003A 2004A 2005A Profit & Loss 2006A* 2007E 2008E 2009E

Revenue m 420,958 459,101 520,253 665,977 Revenue m 830,248 1,133,967 1,292,219 1,437,615
Gross Profit m 107,255 118,974 144,218 168,638 Gross Profit m 221,503 225,125 263,457 322,669
Cost of Goods Sold m 313,703 340,127 376,035 497,339 Cost of Goods Sold m 608,745 908,842 1,028,762 1,114,947
EBITDA m 78,656 83,831 98,438 127,966 EBITDA m 143,487 183,526 217,917 275,288
Depreciation m 28,162 28,375 32,508 37,274 Depreciation m 34,949 47,651 51,995 69,481
Amortisation of Goodwill m - - - - Amortisation of Goodwill m - - - -
Other Amortisation m - - - - Other Amortisation m - - - -
EBIT m 50,494 55,456 65,929 90,692 EBIT m 108,537 135,875 165,922 205,807
Net Interest Income m -13,098 -10,386 -9,197 -11,048 Net Interest Income m -4,426 -15,409 -17,047 -23,715
Associates m - 798 581 - Associates m 4,747 3,157 3,114 3,425
Exceptionals m 4,117 - - 306 Exceptionals m -995 - - -
Other Pre-Tax Income m 3,136 2,865 5,788 11,305 Other Pre-Tax Income m 2,380 2,511 2,762 2,900
Pre-Tax Profit m 44,649 48,734 63,101 91,255 Pre-Tax Profit m 110,243 126,134 154,751 188,418
Tax Expense m -11,860 -8,701 -11,411 -14,972 Tax Expense m -16,295 -19,891 -26,452 -30,603
Net Profit m 32,789 40,033 51,690 76,282 Net Profit m 93,948 106,243 128,300 157,815
Minority Interests m - - - - Minority Interests m - - 120 3,324

Reported Earnings m 32,789 40,033 51,690 76,282 Reported Earnings m 93,948 106,243 128,420 161,138
Adjusted Earnings m 28,672 40,033 51,690 75,976 Adjusted Earnings m 94,943 106,243 128,420 161,138

EPS (rep) 25.87 28.68 37.03 54.72 EPS (rep) 67.44 76.26 92.18 115.66
EPS (adj) 22.75 28.68 37.03 54.5 EPS (adj) 68.15 76.26 92.18 115.66
EPS Growth (adj) % 17.64 26.06 29.12 47.17 EPS Growth (adj) % 25.1 11.9 20.9 25.5
PE (rep) x 15.3 13.5 11.2 8.9
PE (adj) x 15.1 13.5 11.2 8.9

DPS 5.26 5.00 5.00 8.59 DPS 11.42 13.78 16.20 17.80
Yield % 1.1 1.3 1.6 1.7
Weighted Average Shares m 1,267 1,396 1,396 1,394 Weighted Average Shares m 1,393 1,393 1,393 1,393
Period End Shares m 1,396 1,396 1,396 1,393 Period End Shares m 1,393 1,393 1,393 1,393

Profit and Loss Ratios 2006A* 2007E 2008E 2009E Cashflow Analysis 2006A* 2007E 2008E 2009E
Revenue Growth % 24.7 36.6 14.0 11.3
EBITDA Growth % 12.1 27.9 18.7 26.3 EBITDA m 143,487 183,526 217,917 275,288
EBIT Growth % 19.7 25.2 22.1 24.0 Tax Paid m -16,295 -19,891 -26,452 -30,603
Gross Profit Margin % 26.7 19.9 20.4 22.4 Changes in Working Capital m -29,650 -54,981 -13,044 -2,947
EBITDA Margin % 17.3 16.2 16.9 19.1 Net Interest Paid m -4,426 -15,409 -17,047 -23,715
EBIT Margin % 13.1 12.0 12.8 14.3 Other m 43,605 -9,264 11,896 1,055
Net Profit Margin % 11.3 9.4 9.9 11.0 Operating Cashflow m 136,720 83,981 173,271 219,078
Payout Ratio % 16.8 18.1 17.6 15.4 Acquisitions and Investments m 164,172 8,206 -35,000 -35,000
EV/EBITDA x 10.0 7.8 6.6 5.2 Capex m -367,389 -168,516 -46,431 -70,154
EV/EBIT x 12.7 10.3 8.5 6.9 Asset Sales m - - - -
Other m 2,380 2,511 2,762 2,900
Balance Sheet Ratios Investing Cashflow m -200,837 -157,799 -78,669 -102,254
ROE % 22.3 19.9 20.3 22.2 Dividend (Ordinary) m -15,907 -19,198 -22,569 -24,804
ROA % 12.7 12.7 13.3 15.6 Equity Raised m 1 - - -
ROIC % 17.3 17.0 16.1 19.4 Debt Movements m 45,257 115,186 -8,059 -38,743
Net Debt/Equity % 44.6 35.3 30.4 14.6 Other m - - - -
Interest Cover x 24.5 8.8 9.7 8.7 Financing Cashflow m 29,351 95,988 -30,628 -63,547
Price/Book x 3.1 2.4 2.2 1.8
Book Value per Share 330.5 435.7 471.4 569.2 Net Change in Cash/Debt m -34,766 22,170 63,974 53,277

Balance Sheet 2006A* 2007E 2008E 2009E

Cash m 26,164 125,381 132,984 182,938
Receivables m 43,517 59,151 63,255 64,778
Inventories m 103,453 137,280 136,775 126,716
Investments m 66,668 58,462 93,462 128,462
Fixed Assets m 602,093 747,294 745,382 765,647
Intangibles m - - - -
Other Assets m 76,988 93,623 101,437 102,009
Total Assets m 918,883 1,221,191 1,273,294 1,370,549
Payables m 124,541 136,252 134,680 124,252
Short Term Debt m 66,659 43,499 43,499 20,000
Long Term Debt m 166,769 305,115 297,056 281,812
Provisions m 42,017 38,910 38,910 38,910
Other Liabilities m 53,876 65,029 77,283 90,698
Total Liabilities m 453,862 588,805 591,428 555,672
Shareholders' Funds m 510,280 653,575 703,176 839,510
Minority Interests m 4,573 25,313 25,192 21,869
* FY06A is significantly skewed due to de-merger of telecom and power businesses Other m -49,832 -46,502 -46,502 -46,502
All figures in INR unless noted. Total Shareholders' Equity m 465,021 632,386 681,866 814,877
Source: Macquarie Research, July 2006 Total Liabilities & Shareholders' Funds m 918,883 1,221,191 1,273,294 1,370,549

10 July 2006 17
Appendix 1: Oil & Gas E&P Next frontier
Significant discoveries since RIL entered E&P in the early 90s
Panna-Mukta Tapti (PMT) JV: The first step
Producing asset
RILs foray into oil & gas E&P started in the early 90s, when it acquired a 30% equity stake in
a JV (with ONGC and British Gas). The JV started direct marketing of gas in FY06 and
supplies gas to consumers such as Gujarat State Petroleum Corporation, Indian
Petrochemicals Corporation Limited, Gujarat Gas Company Limited, Gas Authority of India
Limited etc.
The Panna-Mukta fields produced 1.6m tonnes of crude oil and 46.7 bcf of gas and the Tapti
field produced ~79.0 bcf of gas during FY06.
The JV is implementing an expanded plan of development (EPOD) of the Panna Mukta field,
which is likely to result in additional recovery of oil and gas of 4.1m tonnes and 237 bcf from
December 2006. Additionally, a newly revised plan of development (NRPOD) for Tapti is
being implemented, which would result in additional gas of 210 mmscfd from 2007.
KG-D6 gas: The most significant discovery
Reliance is the operator and has a 90% interest in the 7,645 sq km deep water KG-DWN-98/3
(a.k.a. KG-D6) block. To date, drilling has result in 18 consecutive discoveries on this block.
Recent new discoveries and increased reserves estimates confirm the D6 blocks reputation
as being a world-class petroleum province.
Asset under development
In 2002, RIL announced the largest gas find in the world that year in the block. Initial
estimates for the in-place resources were ~14tcf. RIL's E&P partner in the KG basin (off the
Indian east coast), Niko Resources (NKO CN, Not rated), announced its FY06 results on 27
June 2006. Along with its results, the company announced that an independent engineering
report prepared by Gaffney, Cline and Associates has revised the in-place resources in the
D6 Block upwards by ~200%, from 12tcf to 35.4tcf. This is notable since Niko has been
conservative in its estimates in the past. However, we find it more notable that the P2
reserves (proved + probable; 50% probability of materialising), have gone up from 7.9tcf to
18.8tcf.
KG-D6 oil: Significant oil discovery in deep waters
Recently discovered
In April 2006, newspapers reported that RIL had struck a significant 1bn barrels of oil in KG6
(Indian east coast) deep water. This find was later confirmed at RILs annual general meeting
(AGM), but the size of the strike is not confirmed yet.
At the AGM, RIL also announced that it struck oil at two shallow water blocks. Details are yet
to be announced.
NEC 25: Eastern offshore block
Declared as commercial reserves
In June 2004, RIL struck gas in its NEC-OSN-97/2 block off the Orissa (east India) coast. RIL
(90% interest) and Niko (10% interest), have confirmed the six discoveries made to date as
commercial. Current estimate for the in-place gas resources is 2.3tcf. The first commercial
natural gas deliveries into the Kolkata natural gas market are expected in early 2009.
Coal Bed Methane (CBM) Blocks
Established reserves
RIL won 5 CBM blocks and has struck gas in the Sohagpur East and West Blocks. The
Director General of Hydrocarbons (DGH) has confirmed that the in-place resources at these
gas blocks is 3.65tcf.
10 July 2006 18
Overseas assets
The company has been expanding its oil exploration and production business consistently.
RIL acquired interests in exploration of overseas blocks, one each in Yemen and Oman.
Reliance is also pursuing an aggressive plan for acquisition of oil and gas assets overseas,
including Sudan, Iraq, Madagascar and Libya.
Yemen: Producing asset
In Yemen, it struck oil in the onshore Malik-9 block. We estimate recoverable crude oil
reserves from this block to be between 40-60m barrels. The asset is currently producing
10,000bpd of which 25% is RILs share.
Oman: Preliminary surveys
In FY05, RIL successfully bid for a 100% stake in offshore exploration block in Oman.
Existing seismic data has been collected and 2D reprocessing of data is underway.
Our conservative valuation of RILs E&P reserves is Rs172/share
We have valued RILs oil & gas assets at Rs172/share based on a sum-of-parts basis. The
sum-of-parts value comprises a value of Rs78/share for RILs KG-D6 gas reserves and a
potentially large value of Rs93/share from RILs oil & gas KG-D6 oil finds, NEC-25 gas find
and CBM block in Sohagpur (Figure 21).
Scenario analysis for KG-D6 gas reserves: Assets to add Rs78/share NPV
The KG-D6 basin gas price to NTPC (NATP IN, Not rated) and Reliance natural resources
(RNR IN, Not rated) of US$3.27/mmbtu (delivered) is currently below market price and is
applicable currently to the first 40m scmd of gas produced for the next 17 years.
Our pessimistic-case scenario (Rs55/share, 30% probability) assumes no increase in
size of the 14tcf in-place resources (contrary to RIL and Nikos expectations) and a price of
US$3.27/mmbtu for the production (40m scmd), entirely attributable to NTPC and RNRL.
Our base-case scenario (Rs73/share, 55% probability) assumes an increase in size of
reserves (as mentioned in Nikos annual results) to only the P2 reserves (ie, 18.8tcf, which
has 50% probability of materialising) and a delivered price of US$4.5/mmbtu for the
incremental production above 40m scmd. We note that this price is ~6% below the price
negotiated by the PMT JV for PMT gas and about half the prevalent spot market gas
prices.
Our optimistic-case scenario (Rs145/share, 15% probability) assumes an increase in
size of reserves (as mentioned in RILs presentation to the government) to 70% (recovery
rate) of the estimate of in-place resources (i.e. 60tcf, 10% probability of materialising) and
delivered price of US$4.75/mmbtu for the incremental production above 40m scmd. We
note that this price is equal to the price negotiated by the PMT JV for PMT gas and a little
over half the prevalent spot market gas prices.
All the scenarios incorporate all terms of the production sharing contracts (PSCs). The
Government of India is entitled to a 10% interest in the profit oil and gas produced if operators
(in this case RIL and Niko Resources) have recovered less than 150% of their investment in
the field from cash flows. The government share escalates as a greater multiple of the
investment is recovered (For NEC-25 and D6, see Figure 20)
10 July 2006 19

Fig 20 Share of profit attributable to Government of India
GoI entitlement
Investment multiple Block: KG-D6 Block: NEC-25
0.0-1.5x 10% 10%
1.5-2.0x 16% 16%
2.0-2.5x 28% 22%
2.5-3.0x 85% 28%
>3.0x 85% 70%
Source: Niko Resources
Additional reserves valued at Rs93/share
We value KG-D6 oil reserves, NEC-25, and CBM-Sohagpur gas reserves using benchmark
EV/ reserves for ONGCs assets and discounting them back from expected date of
commencement of operations.
Fig 21 Valuation of RIL's oil & gas assets

KG-D6 gas reserves
Pessimistic
scenario Base case
Optimistic
scenario
Recoverable reserves (tcf) 10 19 42
Peak production (mscmd) 40.0 60.0 125.0
Capex / additional tcf of reserve as % of original capex n/a 80% 60%
DCF value per share (Rs) 55 73 145
Value per boe (US$) 0.96 0.67 0.61

Probability of occurrence 30% 55% 15%
Value of KG-D6 gas per RIL share (Rs) 78

KG-D6 oil reserves
Recoverable reserves (m bl) 315 405 495
Value of KG-D6 oil per RIL share (Rs)* 29 37 45

NEC-25
Recoverable reserves (tcf) 1.2 1.4 1.7
Value of NEC-25 gas per RIL share (Rs)* 23 27 30

CBM block- Sohagpur
Recoverable reserves (tcf) 1.1 1.5 1.8
Value of CBM gas per RIL share (Rs)* 22 30 37

Total value of oil & gas assets per share (Rs) 129 172 258
* based on ONGC's current EV/ reserves discounted back from expected date of production
Source: Niko Resources, Macquarie Research, July 2006

Fig 22 Details of valuation for KG-D6 oil, CBM-Sohagpur and NEC-25 resources
Recent oil find in KG-D6 CBM-Sohagpur NEC 25 (eastern offshore)
Pessimistic
scenario
Base
case
Optimistic
scenario
Pessimistic
scenario
Base
case
Optimistic
scenario
Pessimistic
scenario
Base
case
Optimistic
scenario
In-place gas resources (tcf) - 3.7 2.3
In-place resources (m boe) 1,000 657 414
RIL's share of in-place resources (%) 90 100 90
RIL's share of in-place resources (m
boe)
900 657 373
Recovery rate (%) 35 45 55 30 40 50 60 70 80
Recoverable reserves (tcf) 1.1 1.5 1.8 1.2 1.4 1.7
Recoverable reserves (m barrels) 315 405 495 197 263 329 224 261 298
EV/reserves (US$/bl)* 5 5 5
Impact on Enterprise value (Rsbn) 70 90 110 44 58 73 49 58 66
Impact on EV/share (Rs) 50 64 79 31 42 52 36 41 47

WACC (%) 11.8 11.8 11.8
Number of years to production 5 3 4
Present value of impact on EV (Rsbn) 39.9 51.3 62.7 31.2 41.6 52.0 31.7 36.9 42.2
Impact on EV/share (Rs) 29 37 45 22 30 37 23 27 30
* ONGCs EV/ reserves used as benchmark

10 July 2006 20
Blue sky scenario: Potential reserves could nearly replicate ONGC
According to a presentation made to the government of India, RILs total in-place gas
resources could be as high as 11bn boe. Of this, ~3bn boe could be attributed to current and
prospective finds from the KG D6 block alone. As mentioned earlier, this is in-line with the
independent engineering report prepared by Gaffney, Cline and Associates for Niko
resources. The recent oil find in the KG-D6 block could add another 1bn bl of oil to RILs in-
place resources.
We have not built these values into our valuation for RIL shares as exploratory drilling is yet
to commence at most areas and these estimates are yet to receive approval from the Director
General of Hydrocarbons (DGH) for classification as reserves.
Fig 23 Potential reserves could nearly replicate ONGC
In-place resources Proved reserves (bn bl oil equivalent)*
tcf bn bl oil equivalent Conversion rate* =
30%
Conversion rate* =
40%
Conversion rate* =
50%
D6 gas (original announcement) 14.0 2.5 0.8 1.0 1.3
D6 gas (increase in reserve estimate)** 18.0 3.2 1.0 1.3 1.6
Gas in other RIL blocks 28.0 5.0 1.5 2.0 2.5
Total- Gas 60.0 10.8 3.2 4.3 5.4
Recent D6 oil find 1.0 0.3 0.4 0.5
Total- Oil + Gas 11.8 3.5 4.7 5.9
% of ONGC's current proved reserves 54% 72% 90%
* % of in-place resources which are finally classified as proved reserves
** In line with independent engineering report prepared by Gaffney, Cline and Associates for Niko resources
Source: Company, Niko resources filings, Macquarie Research, July 2006

ONGC (ONGC IN, Underperform) is Indias largest E&P company with proved reserves of
~6.5bn boe. RILs current proved reserves (according to the disclosure by partner Niko
Resources) are already ~15% of ONGCs proved reserves. This includes only the proved gas
reserves (5.7tcf) in the KG-D6 basin. If we assume a 40% conversion rate (from in-place to
proved reserves), the estimate of proved reserves for RIL could be as high as 72% of
ONGCs total current proved reserves. An optimistic conversion rate of over 50% could
potentially replicate ONGCs oil & gas assets (Figure 23).
10 July 2006 21

Fig 24 RIL: Oil & Gas block details

Round

Basin

Block
Date of signing
contract
Area
(sq km)

Consortium

Type of block
Petroleum exploration licences
5 (Pre-NELP) Gujarat-Kutch GK-OS/5 Jul 16, 1998 3,750 RIL, TIOL and OKLAND Offshore
7 (Pre-NELP) Saurashtra SR-OS-94/1 Apr 12, 2000 6,860 RIL Offshore
JV (Pre-NELP) Gujarat-Kutch GK-OSJ-3 Sep 06, 2001 5,725 RIL, ONGC, OIL Offshore
NELP-I Krishna Godavari KG-DWN-98/1 Apr 12, 2000 10,810 RIL Deep water
NELP-I Krishna Godavari KG-DWN-98/3 Apr 12, 2000 7,645 RIL, Niko Deep water
NELP-I Mahanadi MN-DWN-98/2 Apr 12, 2000 7,195 RIL Deep water
NELP-I Gujarat-Kutch GK-OSN-97/1 Apr 12, 2000 1,465 RIL Shallow offshore
NELP-I Saurashtra SR-OSN-97/1 Apr 12, 2000 5,040 RIL Shallow offshore
NELP-I Mumbai MB-OSN-97/3 Apr 12, 2000 5,740 RIL Shallow offshore
NELP-I Kerala-Konkan KK-OSN-97/2 Apr 12, 2000 19,450 RIL Shallow offshore
NELP-I Krishna-Godavari KG-OSN-97/4 Apr 12, 2000 4,020 RIL Shallow offshore
NELP-I Bengal NEC-OSN-97/2 Apr 12, 2000 10,755 RIL, Niko Shallow offshore
NELP-II Kerala-Konkan KK-DWN-2000/1 Jul 17, 2001 18,113 RIL Deep water
NELP-II Kerala-Konkan KK-DWN-2000/3 Jul 17, 2001 14,889 RIL Deep water
NELP-II Gujarat-Saurashtra GS-OSN-2000/1 Jul 17, 2001 8,841 RIL, HEPI Shallow offshore
NELP-II Upper Assam AS-ONN-2000/1 Jul 17, 2001 6,215 RIL, HEPI Onland
NELP-III Kerala-Konkan KK-DWN-2001/1 Feb 04, 2003 27,315 RIL, HEPI Deep water
NELP-III Kerala-Konkan KK-DWN-2001/2 Feb 04, 2003 31,515 RIL, HEPI Deep water
NELP-III Cauvery CY-DWN-2001/2 Feb 04, 2003 14,325 RIL, HEPI Deep water
NELP-III Cauvery-Palar CY-PR-DWN-2001/3 Feb 04, 2003 8,600 RIL, HEPI Deep water
NELP-III Cauvery-Palar CY-PR-DWN-2001/4 Feb 04, 2003 10,590 RIL, HEPI Deep water
NELP-III Palar PR-DWN-2001/1 Feb 04, 2003 8,255 RIL, HEPI Deep water
NELP-III Krishna-Godavari Kg-DWN-2001/1 Feb 04, 2003 11,605 RIL, HEPI Deep water
NELP-III Krishna-Godavari KG-OSN-2001/1 Feb 04, 2003 1,100 RIL, HEPI Shallow offshore
NELP-III Krishna-Godavari KG-OSN-2001/2 Feb 04, 2003 210 RIL, HEPI Shallow offshore
NELP-IV Mahanadi-NEC NEC-DWN-2002/1 Feb 06, 2004 25,565 RIL, HEPI Deep water - Blocks
NELP-V Kerala-Konkan KK-DWN-2003/1 Sep 23, 2005 18,245 RIL Deep water - Blocks
NELP-V Kerala-Konkan KK-DWN-2003/2 Sep 23, 2005 12,285 RIL Deep water - Blocks
NELP-V Krishna-Godavari KG-DWN-2003/1 Sep 23, 2005 3,288 RIL, HEPI Deep water - Blocks
NELP-V MahanadiI-NEC MN-DWN-2003/1 Sep 23, 2005 17,050 RIL, NR(V)L Deep water - Blocks
NELP-V Cambay CB-ONN-2003/1 Sep 23, 2005 635 RIL Onland
Development of small and medium-sized discovered fields
1 (Pre-NELP) Mumbai offshore Mid and south Tapti Dec 22, 1994 1,471 BGEPIL, RIL, and ONGC Medium-sized fields
1 (Pre-NELP) Mumbai offshore Panna Dec 22, 1994 430 BGEPIL, RIL, and ONGC Medium-sized fields
1 (Pre-NELP) Mumbai offshore Mukta Dec 22, 1994 777 BGEPIL, RIL, and ONGC Medium-sized fields
NELP: New Exploration Licensing Policy
Source: Director General of Hydrocarbons, July 2006

Fig 25 RIL: Coal bed methane (CBM) block details

Coal field

Block
Consortium
(Participating interest)

Date of signing
Area
(sq km)
CBM - round I
Sohagpur East/ Madhya Pradesh SP(E)-CBM-2001/1 RIL(100) Jul 26, 2002 495
Sohagpur West/ Madhya Pradesh SP(W)-CBM-2001/1 RIL(100) Jul 26, 2002 500
CBM - round II
Sonhat/ Chatisgarh & MP SH(North)-CBM-2003/II RIL(100) Feb 06, 2004 825
Barmer/ Rajasthan BS(1)-CBM-2003/II RIL(100) Feb 06, 2004 1,045
Barmer/ Rajasthan BS(2)-CBM-2003/II RIL(100) Feb 06, 2004 1,020
Source: Director General of Hydrocarbons, July 2006

Fig 26 Snapshot of key operating parameters (base case scenario) for KG gas
FY09E FY10E FY11E
Initial (Proved + Probable) reserves (tcf) 18.8
Total Sales (m scmd) 32 40 60
Sales (mscmd) to NTPC and RNRL 32 40 40
Producer price (US$/mmbtu) to NTPC & RNRL 2.4 2.4 2.4
Sales (mscmd)- open market - - 20
Producer price (US$/mmbtu)- open market 3.6 3.9 4.3
Govt Share 10% 10% 10%
Net Sales (Rs m) 41,622 49,662 93,373
Recurring Net Income (Rs m) 12,936 16,948 50,870
PAT margin 31% 34% 54%

10 July 2006 22
Fig 27 Snapshot of key valuation assumptions (base case scenario) for KG gas
WACC Calculations Rationale behind
assumptions
DCF calculation
Risk-free rate (%) 8.0 10-year government bond
yield
WACC (%) 11.8
Market risk premium (%) 7.0 PV of FCF to total depletion of 101,437
Total market return (%) 15.0 reserves (Rs m)
Beta (x) 1.04 RIL's prospective beta
Cost of equity (%) 15.3 NPV-Base case scenario (Rs m) 101,437
Gross cost of debt (%) 8.0 NPV per RIL share (Rs) 73
Tax rate (%) 33.6 Marginal tax rate
Net cost of debt (%) 5.3
Debt/capital ratio (%) 35.0 Contribution of KG gas to price 71
WACC (%) 11.8% target (Rs)

10 July 2006 23
Appendix 2: Retail - Nascent but exciting
Domestic organised retail holds massive potential. It constitutes only 3% of an estimated
Rs10tr (US$220bn) total retail in India and is forecast to grow >30% CAGR through 200910.
RIL has announced a US$5.6bn outlay to enter retail across segments and product groups on
a pan-India basis and across several verticals. On a preliminary basis, we believe RILs retail
plans could add Rs67/share of option-value or 5% of the total NPV we have attributed to RIL.
RIL retail: Aiming to tap the great Indian retail boom
Reliance Industries has identified organised retail as the next growth driver for the group.
Apart from a brief mention of the retail initiative in the annual general meeting (AGM), the
details of the companys strategy are currently unknown. At the AGM, held in June 2006, the
chairman, Mr Mukesh Ambani, announced that the company plans to enter retail across
segments (mass market and premium segments, domestic and international brands) and
product groups (food products to luxury goods).
RIL announced that the foray in retail would be through a 100% subsidiary and described a
significantly stepped-up outlay of US$5.6bn (v/s US$750m announced in January 2006) as
the "overwhelming theme". Retailing would entail a pan-India footprint covering 1,500 cities
and across several verticals (food, clothes, travel, health, leisure, education, etc).
Penetration of organised retail is miniscule, and growth prospects large
Domestic organised retail constitutes only 3% of total retail in India and is forecasted to grow
>30% CAGR through 200910. We expect this growth to be driven by shifting domestic
demographics, higher disposable incomes, consumer lifestyles and favourable changes in
government policies.
The potential due to low penetration of organised retail in India looks even bigger if we
compare this with other Asian countries such as Taiwan, where penetration levels (80%) have
gone to levels seen only in developed countries such as the US and UK. According to CRIS
INFAC, even countries such as China, which first permitted FDI in retail in six cities, has seen
the top 11 retailers in these six cities account for around half of the overall sales of FMCG in
the country.
Fig 28 Organised retail penetration: Long road ahead for India
Country Share of organised sector (%)
Taiwan 81
Malaysia 45
Thailand 40
Indonesia 30
China 15
India 3
Source: CRIS INFAC, July 2006

The government has started recognising the need for organised retail
We believe the domestic retail sector is not only poised for strong growth, but also that
consolidation within the sector should enable larger formats. The government recognised that
it had to reverse policies that were designed to encourage small formats. Driven by various
government initiatives such as allowing 51% FDI in single brand retail and the introduction of
value added tax (VAT) in addition to a tax holiday for multiplexes and malls, we expect the
penetration level of organised retail in India to increase multiple times over the next decade.
RILs strategy targets the mass market segment to drive volumes
RIL especially aims to drive a surge in volumes and top-line growth by tapping the mammoth
food beverage and tobacco sub-sector, which currently constitutes 76% of total retail but
organised retail has managed only a 1% penetration.

10 July 2006 24
Fig 29 Organised retail: Low penetration, strong potential
Total retail Organised retail
Category Estimated market
size 2005 (Rs bn)
Market
share (%)
Market size
(Rs bn)
Market
share (%)
Penetration
(%)
Food beverage and tobacco 7,738 75.8 65 19 1
Clothing and textile 716 7 141 40 20
Consumer durables 416 4.1 43 13 10
Jewelleries and watches 416 4.1 25 7 6
Home dcor and furnishing 300 2.9 25 7 8
Beauty care (products) 214 2.1 7 2 3
Footwear 104 1 32 9 31
Books, music and gifts 87 0.8 11 3 13
Total 9,990 100 349 100 3
Source: CRIS INFAC, July 2006
and premium retail to drive margins
The consumption pattern of Indian households suggests that 40% of income is spent on food
and edibles. Engels law of micROEconomics states that as per-capita incomes rise, food
and edibles lose share of total spend, resulting in increased levels of average disposable
income. The number of households in the middle and rich class are expected to increase
50% by 2009/10.
Fig 30 Shifting Indian demographics: The burgeoning upper and middle class
40%
50%
60%
70%
80%
90%
100%
1995-96 2001-02 2005-06P 2009-10P
Deprived (<US$2,000 pa) Middle class (US$2,000 to 4,500 pa) Upper Class (>US$4,500 pa)
Source: NCAER, CRIS INFAC, Macquarie Research, March 2006
An increasing proportion of young population, thus reducing the dependency ratio should
also help spur consumption growth (Figure 31).
Awareness and availability and consequently penetration of credit and plastic money and
growing fashion consciousness amongst Indians, stimulate impulsive buying which should
lead to growth in premium segment retail.
CAGR
(till 2010)

+15%

+9%

-4%
10 July 2006 25
Fig 31 India's population: Growing 'young' with time
0%
20%
40%
60%
80%
100%
1990 1995 2000 2005 2010 2015
< 15 years 15-60 years > 60 years
Source: Census 2001, CRIS INFAC, Macquarie Research, March 2006
It is our view that the scope for margin expansion is higher in premium and branded retail. By
its tie up with Armani, RIL has made its intention clear to ensure that this opportunity is
addressed in its mammoth organised retail strategy.
The key risk to be mitigated is execution
Robust supply chain management remains the key
The global experience shows that branding and retailing typically allow 4x mark-up over
producer prices. Nevertheless, high lead times and inventory obsolesce can sharply erode
margins (Figure 32).
Fig 32 Net profit margin of global retailers
0
2
4
6
8
10
12
Linens 'n
Things
JC Penney Walmart Tesco Tommy
Hilfiger
Target Marks and
Spencer
Bed Bath &
Beyond
(%)
Source: Bloomberg, March 2006
RIL realises this and intends to deliver better value across the chain - farmers, producers and
consumers, through a world-class integrated model. The company has already acquired land
in Punjab (Northwest India) to act as the agricultural hub. RIL plans to set up a cold chain,
buy dedicated cargo airplanes and procure agricultural produce straight from the mandis to
capture the margins typically captured by numerous wholesalers and middle-men. Press
reports suggest that RIL is also considering importing non-perishable items from Thailand and
China. We believe that the scale at which RIL plans to operate will also help it negotiate
prices from FMCG majors, leading to lower prices and higher margins.
10 July 2006 26
RIL is hiring the right people for the right jobs
RIL has built its franchise in its current businesses by hiring the most appropriate talent.
Recognising that the initiative has to be driven by experienced talent, RIL has been in the
news consistently for poaching top talent from related businesses (for example, Rajeev
Karwal of Electrolux, Gunender Kapur of Unilever- Nigeria, Bijou Kurien of Titan, Raghu Pillai
of Pantaloon. Source: Press reports).
RIL eventually intends to directly employ 0.5m staff at retail outlets. We believe that RIL
should have no trouble attracting and retaining the best talent given its strong brand, high-
profile, reputable team and commitment as displayed by the size of its investment foray.
We value the organised retail venture at Rs67/share
With the scarcity of details available around the retail venture, we find it difficult to accurately
forecast earnings and value the business. Nevertheless, RIL has demonstrated during the
past that it is capable of creating value in virtually every venture including diversifications
such as telecom. Hence, retailing is a value that cannot be ignored. Such businesses, with
potential but uncertain value, have added as option value to the value that we have
attributed to RILs core businesses.
We estimate that the current limited details justify an NPV-based value of Rs67/share for
RILs retail foray. However, we believe that as the details of the investment and the strategy
are uncovered, this value would change. Key announcements, which would force us to
reconsider the value we have assigned to this business, are:
The size, scale and geographical spread of the operations
Procurement strategy: especially for agri-products
Supply chain: progress on cold chain, agreements with FMCG companies, imported
goods, etc
Any announcement regarding debt and eventual IPO of the retail subsidiary
We estimate that the current limited details justify an NPV-based value of Rs67/ share for
RILs retail foray. However, we believe that as the details of the investment and the strategy
are uncovered, this value would change. Key announcements, which would force us to
reconsider the value we have assigned to this business, are:
The size, scale and geographical spread of the operations
Procurement strategy: especially for agri-products
Supply chain: progress on cold chain, agreements with FMCG companies, imported
goods, etc
Any announcement regarding debt and eventual IPO of the retail subsidiary
Fig 33 Snapshot of key operating parameters for RILs retail subsidiary
FY07E FY08E FY09E FY10E FY11E FY12E FY13E FY14E FY15E
Revenue worksheet
Revenue/ sq ft / day (Rs) 21.0 22.0 22.0 22.0 23.0 23.0 23.0 23.0 24.0
No of stores 1,500 3,000 4,000 5,000 6,000 7,000 7,500 8,000 8,300
Total Revenues (Rs m) 34,493 72,270 96,360 120,450 151,110 176,295 188,888 201,480 218,124
Net Income (Rs m) -805.9 -1,123.6 -15.3 1,786.6 4,832.8 8,522.3 8,698.5 10,706.4 11,566.3
PAT margin -2% -2% 0% 1% 3% 5% 5% 5% 5%

10 July 2006 27

Fig 34 Snapshot of key valuation assumptions for RILs retail subsidiary
WACC Calculations Rationale behind assumptions DCF calculation
Risk free rate (%) 8.0 10 year government bond yield WACC 12.3%
Market risk Premium (%) 7.0 Terminal multiple 10.8
Beta of the Stock 1.04 RIL's prospective beta Terminal year growth 3.0%
Cost of equity (%) 15.3 PV of FCF to FY2022E (Rs m) 48,446
Gross cost of debt (%) 8.0 Terminal value (Rs m) 283,575
Tax rate (%) 33.6 Marginal tax rate PV of terminal value (Rs m) 44,385
Net cost of Debt (%) 5.3 NPV (Rs m) 92,831
NPV per RIL share (Rs) 67
Debt/capital ratio (%) 30.0
Contribution to price target (Rs) 60
WACC 12.3% (including 10% discount)
Eventual IPO of the retail subsidiary would create value for RIL shareholders
RIL has stated that its retail operations are currently through a 100% subsidiary. We
believe that an eventual IPO of RIL's retail venture could create value for RIL shareholders as
in the case with Reliance Petroleum (RPET IN, Not rated). RIL had created ~Rs100 per share
for RIL shareholders, as the RPET IPO was priced at Rs60, while the RIL's equity
contribution was issued at Rs10 per share for 60% of its holding.
10 July 2006 28
Appendix 3: Fuel retail Pain before gain
Fuel retail incumbents losing share to RIL
Demand for auto-fuel in India has grown at 45% CAGR over the last three years, but is
witnessing recent signs of stagnation. In the short span of two years, new entrant Reliance
Industries (RIL) has taken a 13% market share in the auto-fuel retail space from incumbent
PSU oil marketing companies (viz. IOC, BPCL and HPCL) (Figure 9).
However, the market share gains by RIL are not merely due to its presence in the market.
While throughputs of IOC, BPCL and HPCL have fallen, RIL has maintained retail
throughputs per outlet at 350-370MT per outlet, despite the high fixed-cost nature of the
business (Figure 35) This is nearly three times the average PSU throughput.
The gain in market share is likely to continue longer term as profitability will receive a boost in
phase two of RILs retailing plan, which we believe will target motor spirit retailing in towns
and cities through larger formats and hyper malls.
Fig 35 RILs throughputs are 3-fold those for incumbent PSU OMCs
75
125
175
225
275
325
375
Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06
Thruput for IOC/ IBP HPCL BPCL RIL
Long-term competitive parameters indicate further gains for RIL
Effective positioning of outlets by RIL to result in higher market share and
throughput
Incumbent PSU OMCs suffer from the disadvantage of being forced to set up petrol pumps at
unviable locations and the negative perception of service and product quality. The Paretos
(80-20) principle holds true for the positioning of retail outlets. As seen in retail outlets in
North America (Figure 36), 22% of the most attractive/prominent sites for auto-fuel retail
contribute nearly 71% of net profits.

10 July 2006 29
Fig 36 Paretos principle: 22% of retail outlets contribute 71% of profits
78%
29%
22%
71%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Share of sites Share of PAT
Other sites Attractive sites sites
Source: McKinsey and Co

RIL has succeeded due to effective implementation of its strategy revolving around the
following rule: focus on positioning retail outlets along highways, rather than a rampant
expansion of outlets. This strategy has ensured higher throughput (Figure 37).

Fig 37 Retail competitive landscape
40
90
140
190
240
290
340
390
440
850 950 1050 1150 1250 1350 1450 1550 1650 1750 1850 1950 2050 2150 2250 2350
Retail Outlet additions (Since Jan'05)
Retail Throughput
(MT/outlet)
BPCL
HPCL
IOC & IBP
RIL

Non-fuel retail content boosts IRRs
Outlets with a higher mix of non-fuel retail content result in a higher IRR (Figure 38). The
steep ramp up in RILs market share in the past two years could continue as the company
expands outlets into major and second-tier cities apart from highways. We believe that retail/
restaurant/lodging services currently available at the outlets should result in higher IRRs from
RIL retail outlets as compared to PSU OMC incumbents. This should rise as RIL unleashes
its retail strategy in the hyper-market cum auto-fuel retail outlet format stores over the next
two-to-five years.
10 July 2006 30
Fig 38 Contribution from non-fuel retail could boost returns earned
Fuel/ non fuel sales mix 100% 80% 100% <40% 100%
Typical IRR 4-7% 7% 13-25%
Market examples - India - Brazil - US
- China - Italy - France
- Fuel - Fuel
Value proposition - Vehicle related - Basic convenience - Strong non-fuel
product/ service impulse non-fuel value proposition
products
Source: McKinsey and Co
Negative marketing margins raise near-term concerns
Government finally allowed petrol and diesel prices to be hiked on 5 June 2006
The government did not allow petrol and diesel retail prices to be increased between October
2005 and 5 June 2006. This was despite oil prices having increased by ~15% during the
same period. This had resulted in significant under-recoveries for PSU oil marketing
companies (OMCs): HPCL, BPCL and IOC.
On 5 June, the government allowed petrol retail prices to be increased by Rs4/litre and diesel
retail prices by Rs2/litre and import duties on petrol and diesel were reduced from 10% to
7.5%. This addressed ~27% of the overall expected losses (Rs800bn) for the year. The
government also tilted the subsidy burden in favour of OMCs and announced issue of oil
bonds to help them remain in the black in FY07E.
No subsidy for private players, including RIL
However, despite the price hike, marketing margins remain negative with petrol and diesel
still being sold at a discount of Rs6-8/ litre. While PSU OMCs would benefit from discounts by
government owned upstream companies and refiners and oil bonds, private players (e.g. RIL)
have not been offered any such package.
Under-recoveries have forced RIL to raise prices above its competition
While RIL management has appealed to the government to look into this discrepancy, the
company has decided to go ahead and raise diesel and petrol prices by Rs2-3/ litre above
prices offered by PSU OMCs. This helps cut the losses, but RILs throughputs have reduced
to 20-25% of normal throughputs. We believe this will continue in the near-term as the
government and RIL work out a solution and unless oil prices fall below US$64-65/bl.
However, growth in number of outlets added not expected to slow
RIL management is confident that this phenomenon will only remain a concern in the near-
term. Only 10% of refinery throughput was dedicated to the retail outlets in FY06. RIL retains
the ability and option to export the refinery output and has robust contracts with retail outlets
owners. This will help tide over this phase.
We believe that the pace of addition to retail outlets will continue with throughputs returning to
normal as the government and RIL work out a solution and oil prices come down below
current levels of US$72-73/bl and average US$65/bl for the next two years.
Also, support from the retail outlets as distribution outlets and hubs for the foray in organised
retail should boost IRRs from the investment in auto-fuel retail.

10 July 2006 31
Fig 39 Snapshot of key operating parameters for auto-fuel retail business
No. of retail outlets 1,200 1,800 2,600 3,400 4,200 5,000
Throughput per outlet/ month (MT) 150 220 300 300 300 300
Retail margins
Gasoline (Rs/kl) -700 800 1,375 1,513 1,588 1,668
High speed diesel (Rs/kl) -1,000 700 1,210 1,331 1,398 1,467
Net sales (Rs m) 52,753 129,337 269,370 332,896 372,279 417,717
- from Gasoline 11,480 36,058 72,619 89,840 100,590 112,979
- from High speed diesel 41,273 93,278 196,751 243,056 271,689 304,738
Recurring Net Income (Rs m) -4,345 294 6,036 9,477 13,112 17,278
PAT margin -8% 0% 2% 3% 4% 4%

Fig 40 Snapshot of key valuation assumptions for auto-fuel retail business
WACC calculation (%) Rationale behind assumptions DCF calculation
Risk-free rate (%) 8.0 10-year government bond yield WACC (%) 12.3%
Market risk premium (%) 7.0 Terminal Growth rate (%) 3.0
Total market return (%) 15.0 PV of FCF to FY13E (Rs m) 33,315
Beta (x) 1.04 RIL's prospective beta PV of terminal FCF (Rs m) 119,859
Cost of equity (%) 15.3 Total PV (Rs m) 153,174
Gross cost of debt (%) 8.0 Less Net Debt (Rs m) 23,613
Tax rate (%) 33.6 Marginal tax rate NPV per RIL share (Rs) 93
Net cost of debt (%) 5.3
Debt/capital ratio (%) 30.0 Contribution to price target 84
WACC (%) 12.3% (including 10% discount)

10 July 2006 32
Appendix 4: GRMs to remain strong until FY09
Global shortages and enhanced crack spreads took refining margins to record highs in FY04
and FY05, followed by a sharp dip in 2HFY06. Margins will likely rebound in the near term
given limited global refinery capacity additions and vintage US capacities (one-fifth of global
capacity) constrained to process scarce light sweet crude. Beyond FY09, nevertheless,
GRMs are likely to revert to their longer-term range between US$2-4/bl. HPCL will benefit
from this over the next four years, especially in FY08 and FY09 as new capacities come on-
stream. However, note that HPCL is a net buyer/retailer of petroleum products. Hence,
earnings are impacted by retail margins more than refining margins.
Global GRMs collapse in 2HFY06 after hitting record levels
Global margins peaked in CY05 and have been about US$6/bl higher than the long-term
average gross refining margins in the past six quarters.
Fig 41 Global GRMs had collapsed recently after hitting a cyclical peak
Source: CMAI, Macquarie Research, June 2006
This is due to multiple triggers.
Global demand growth outpaces capacity increases: Economic growth in the US,
China and India have resulted in increased demand for refined petroleum products.
However, incremental refining capacity has failed to keep pace with the increase in
demand (Figure 42), notably in the Asia-Pacific region. This has resulted in a decrease in
global spare refining capacity, a trend that is expected to continue until 2009.

Fig 42 Global demand growth has outpaced capacity increases
0
1
2
3
4
5
6
7
8
9
10
1993 1997 2001 2005 2006P 2007P 2008P 2009P
(%)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
(mn bl/day)
Spare capacity (LHS) Incremental demand (RHS) Incremental capacity (RHS)
Source: CRIS INFAC, BP, EIA, OGJ, Macquarie Research, June 2006
-0.25
0.75
1.75
2.75
3.75
4.75
5.75
6.75
7.75
Apr-93 Oct-94 Apr-96 Oct-97 Apr-99 Oct-00 Apr-02 Oct-03 Feb-05 Aug-05 Feb-06
(US$/bl)
Singapore Dubai Hydrocracking
10 July 2006 33
Enhanced crack spreads: Sweet crude oil depletion has led to the increasing availability of
crude reserves of the medium and heavy-sour type. Thus, the incremental crude supply will
also tilt away from sweet crude increasing crack spreads.
Fig 43 Available mix of reserves (2005)

Fig 44 Supply of crude (2005)
Heavy-sour
15%
Light-sweet
19%
High acid-
sweet
2%
Medium-sour
64%

Heavy-sour
14%
Light-sweet
30%
High acid-
sweet
3%
Medium-sour
53%
Source: Valero Energy Corp, June 2006 Source: Valero Energy Corp, June 2006
The inability to process heavy crude at obsolete refineries has led to multiple capacities
becoming redundant. This is most notable in the US, which accounts for nearly 21% of global
refining capacity. This puts further pressure on spare capacity. In fact, we believe that the
current global spare refining capacity, dominated by heavier crudes, has turned negative.
Refining margins poised to rebound in the near term
However, the last five months has seen a dip in global refining margins (Figure 41) with
margins closer to the long-term average (~US$2/bl). However, margins are likely to rebound
in the near term given limited global refinery capacity additions and vintage US capacities
(one-fifth of global capacity) constrained to process scarce light sweet crude.
GRMs are expected to taper off beyond FY09
Aggressive global refining capacity expansions expected over the next 3-5 years
It takes around four-to-five years to set up a green-field refinery. Capacity expansions which
were planned in the high-GRM scenario will come on-stream only by FY0910. Hence, the
trend of incremental demand outstripping incremental supply is expected to continue until
FY09E.
Multiple capacity expansions and new refineries globally and in India are expected to be
commissioned over the next three-to-five years. Indian refining capacity is expected to
increase nearly 60% to reach 210mmtpa by 2012 (from 132mmtpa currently).
Fig 45 Major domestic capacities proposed start-ups
Location Additional capacity (mmtpa) Expected commissioning date
BPCL Mumbai 4.1 Commissioned in July 2005
Essar Oil Vadinar 10.5 1HFY07
IOC Panipat 6.0 1HFY07
HPCL Vishakhapatnam 2.5 FY08
HPCL Mumbai 2.4 FY08
Reliance Industries Jamnagar 29.0 2HFY09
IOC Panipat (phase-2) 3.0 FY09
IOC Haldia 1.5 FY10
BPCL Bina 6.0 FY10
MRPL Mangalore 5.4 FY10
HPCL Bhatinda 9.0 FY10 to FY11
IOC Paradip 15.0 FY11
KRL Cochin 2.5 FY11
MRPL Mangalore SEZ 15.0 Beyond FY11
MRPL Barmer 5.0 Beyond FY11
MRPL Rajasthan 7.5 Beyond FY11
UP refinery Allahabad 7.0 Beyond FY11
Source: Industry, CRIS INFAC, Macquarie Research, June 2006
10 July 2006 34
Consequently, we expect the Singapore (Dubai hydro-cracking) complex margin post FY09E
to fall to its long-term average of ~US$2-4/bl.
Progressive regulation to reduce premium of Indian GRM over Singapore complex
Indian refinery GRMs have historically commanded a US$23/bl premium over
the Singapore complex. However, we believe that reduced import duties have led to lower
protection of the import parity price. Also, progressive movement towards free pricing or a
trade-parity regime (as suggested in the Rangarajan committee report) should lead to the
premium falling to under US$1/bl over the next three-to-five years. We estimate a normalised
US50/bl premium for Indian refiners beyond FY09E.
Fig 46 Gross refining margin trends and our forecasts
0.00
2.00
4.00
6.00
8.00
10.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Long-
term
(US$/bl)
RIL's GRMs Indian GRMs Singapore cracking margins
Source: FACTS, BPCL, CRIS INFAC, Macquarie Research, June 2006

Fig 47 Snapshot of key operating parameters for refining business
FY06 FY07 FY08 FY09 FY2010 FY2011
Installed capacity (m tpa) 33.0 33.0 33.0 33.0 33.0 33.0
Capacity utilisation (%) 92.3 100.0 105.0 110.0 110.0 110.0
Crude throughput (tpa) 30.5 33.0 34.7 36.3 36.3 36.3

External Sales (m tonnes)
Propylene 0.0 0.0 0.1 0.0 0.0 0.0
LPG 2.1 2.3 2.4 2.6 2.6 2.6
MS 1.9 1.4 0.4 0.0 0.0 0.0
Naphtha 0.0 0.0 0.0 0.0 0.0 0.0
Reformate (Aromatic naphtha) 0.0 0.0 0.0 0.0 0.0 0.0
Kerosene 5.7 6.2 6.5 6.8 6.8 6.8
HSD 7.0 5.9 2.9 1.2 0.0 0.0
Coke 2.4 2.6 2.7 2.8 2.8 2.8
Sulphur 0.6 0.6 0.6 0.7 0.7 0.7

Product prices before excise duty (Rs/kg)
Propylene 46.9 47.4 42.3 40.1 38.4 35.8
LPG 23.5 28.5 26.9 23.9 21.4 20.0
MS 27.5 32.5 30.7 27.3 24.5 22.9
Naphtha 23.9 25.1 24.3 21.8 19.9 18.6
Reformate (Aromatic naphtha) 26.3 27.7 26.7 24.0 21.8 20.4
Kerosene 25.8 27.4 24.8 23.2 20.8 19.4
HSD 25.1 28.2 28.0 24.9 22.3 20.8
Coke 12.4 14.4 13.6 12.1 10.8 10.1
Sulphur 4.7 5.7 5.4 4.8 4.3 4.0

Turnover (External) (Rs m)
Propylene 769 1,651 4,325 0 0 0
LPG 50,425 66,161 65,599 61,124 54,746 51,139
MS 57,706 48,516 11,797 0 0 0
Naphtha 631 0 0 0 0 0
Reformate (Aromatic naphtha) 754 0 0 0 0 0
Kerosene 146,766 168,626 160,577 157,663 141,063 131,770
HSD 190,113 179,603 88,202 33,018 0 0
Coke 34,210 42,845 42,481 39,583 35,452 33,117
Sulphur 3,113 4,084 4,050 3,773 3,380 3,157
External turnover (before excise) 484,487 511,486 377,030 295,162 234,640 219,182

Forecast
10 July 2006 35
Appendix 5: Mixed petrochemical outlook
Petrochemicals typically follow a 10 year boom-bust cycle with the last peak in
cracker/polymer chain during 2004, while the polyester chain peaked during 1994 (Figure 48).
Fig 48 RIL's cracker margins/ plastic stream integrated margins
18
23
28
33
38
43
Oct-92 Jan-94 Apr-95 Jul-96 Oct-97 Jan-99 Apr-00 Jul-01 Oct-02 Jan-04 Mar-05 Jun-06
(Rs/ kg)
Cracker margin (Naphtha route)
We forecast capacity expansions, especially in China and the Middle East, to results in lower
capacity utilisations in the cracker-polymer petrochemical stream. On the other hand, higher
utilisation rates may enhance polyester chain margins.
Cautious on cracker-polymer stream outlook
Macquarie remains cautious on the outlook for petrochemical sector, as we feel increased
capacity from China and the Middle East will lead to a steady decline in earnings over the
next few years.
Fig 49 Ethylene capacity additions
0
2
4
6
8
10
12
14
2000E 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E
(m tpa)
0
1
2
3
4
5
6
7
8
9
10
(%)
Chg in capacity ( Chg YoY, LHS) Chg in capacity (Chg YoY, RHS)
Source: CMAI, Macquarie Research, June 2006

10 July 2006 36

Fig 50 Projected ethylene capacity additions
Capacity Est start
Year Project Location ('000s tpa) date
2005 SECCO China 900 2Q05
BASF-YPC China 600 2Q05
PetroChina-Jilin China 380 3Q05
NPC-Amir Kamir (#6) Iran 880 3Q05

2006 CNOOC/Shell China 800 1Q06
NPC-Marun (#7) Iran 1,100 2Q06
Sinopec Maoming China 640 3Q06
Sabic-Jubail Saudi Arabia 150 3Q06
Sasol/Pars (#9) Iran 1,000 4Q06
NPC-Jam (#10) Iran 1,320 4Q06

2007 Formosa PC Taiwan 1,200 1Q07
YNCC Korea 350 1Q07
Reliance-Hazira India 40 1Q07
PTT Thailand 130 1Q07
PetroChina Lanzhou China 460 1Q07
Sabic Yanbu Saudi Arabia 1,300 4Q07

2008 Honam PC Korea 400 1Q08
BASF Belgium 280 1Q08
PetroChina-Fushun PC China 800 3Q08
PetroChina Daqing PC China 370 3Q08
PetroChina Sichuan China 800 3Q08
Ineos Germany 100 3Q08
Q-Chem II Qatar 1,300 4Q08
Sinopec Fujian China 800 4Q08
NPC-Arvand (#8) Iran 1,000 4Q08

2009 PetroChina Dushanzi PC China 780 1Q09
Sinopec Zhenhai Refining China 1,000 3Q09
Sinopec Tianjin II China 1,000 4Q09
Sinopec Beijing Yanhua China 600 4Q09
Qatar Petroleum/Honam Qatar 900 4Q09
Source: Macquarie Research, June 2006
The one risk to our cautious view on the sector is the potential for material delays in new
capacity from the Middle East. This is especially the case for Iran given that it has been
referred to the UN Security Council.
Any material delays (ie, more than nine months) in new petrochemical capacity from Iran
would have a very material impact on global petrochemical demand-supply dynamics. Based
on data from CMAI, new ethylene supply in the Middle East will account for roughly 60% of
total new supply additions globally from 2006 to 2009. More importantly, new supply capacity
from Iran accounts for 30% of new additions in the Middle East (slightly under 20% of new
global additions).
It is important to note a few key points about petrochemical production in the Middle East.
First, Middle Eastern producers use natural gas as a feedstock, meaning that they can only
produce ethylene and ethylene derivatives. Second, there is very little end-demand for
petrochemical products in the Middle East. Hence, it is likely that a lot of this production will
eventually find its way to Asia. As such, any delays in new Iranian petrochemical capacity
would be positive for Asian petrochemical producers. More importantly, it would be most
favourable for petrochemical manufacturers with relatively higher exposure to ethylene and
ethylene derivative products (more so for downstream products). In Korea, this includes LG
Petrochemical and Honam Petrochemical.
That said, we continue to maintain our cautious stance on the petrochemical sector, given our
view that there will be no major delays in new Middle East capacity. Unless one has a very
strong conviction as to what is going to happen in Iran, we feel buying petrochemical shares
now based on the potential scenario of delays in Iranian petrochemical capacity is still a risky
trade.
10 July 2006 37
Fig 51 Ethylene demand-supply forecast

Fig 52 Ethylene demand-supply outlook (without Iran)
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
99 00 01 02 03 04 05E 06E 07E 08E 09E
80.0
82.0
84.0
86.0
88.0
90.0
92.0
94.0
Capacity Demand Operating rate (%)
('000 tpa) (%)

0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
99 00 01 02 03 04 05E 06E 07E 08E 09E
80.0
82.0
84.0
86.0
88.0
90.0
92.0
94.0
Adjusted capacity Demand Operating rate (%)
('000 tpa) (%)
Source: Macquarie Research, CMAI, June 2006 Source: Macquarie Research, CMAI, June 2006
Scott Weaver (8862) 2734 7512, scott.weaver@macquarie.com
Polyester chain margins hit a low, could improve
Polyester margins have hit an all-time low recently due to rapid rise in global capacities and a
decline in global capacity utilisation rates (Figure 53).
Fig 53 RIL's polyester chain margins and Cotlook A index
10
15
20
25
30
35
40
45
Oct-92 Jun-94 Feb-96 Oct-97 Jun-99 Feb-01 Oct-02 Jun-04 Feb-06
(Rs/kg)
30
40
50
60
70
80
90
100
110
120
(USc/pound)
Polyester margins (R) Cotlook A index
Source: Company data, Bloomberg, Macquarie Research, July 2006
We expect utilisation rates to decline further over the next year. However, we believe that
rising prices of cotton (due to high demand and reduction in output due to removal of farm
subsidies in the US) should increase demand for polyester, which is a substitute limiting a
further significant downturn in the near-term. From FY08E onwards polyester margins could
revive as capacity utilisation rates once again improve.
10 July 2006 38
Fig 54 Global polyester operating rates likely to improve
75%
79%
83%
87%
91%
95%
2003 2004 2005 2006E 2007E 2008E 2009E 2010E
Operating rate for Polyester (PSF) PTA

10 July 2006 39

Fig 55 Snapshot of key operating parameters for petrochemicals business
FY06 FY07 FY08 FY09 FY10 FY11
Installed capacities (tpa)
PFY 430,000 595,000 595,000 595,000 595,000 595,000
Fabric * 20 20 20 20 20 20
PSF 550,000 550,000 800,000 800,000 800,000 800,000
PTA 1,350,000 1,980,000 1,980,000 1,980,000 1,980,000 1,980,000
LAB 115,000 115,000 115,000 115,000 115,000 115,000
Paraxylene 1,856,000 1,856,000 1,956,000 1,956,000 1,956,000 1,956,000
MEG/EO 521,000 521,000 521,000 521,000 521,000 521,000
PVC 325,000 325,000 325,000 325,000 325,000 325,000
HDPE/LLDPE 450,000 450,000 450,000 450,000 450,000 450,000
Polypropylene 1,150,000 1,150,000 1,430,000 1,430,000 1,430,000 1,430,000
PET 300,000 300,000 300,000 300,000 300,000 300,000
Ethylene 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Propylene 486,667 486,667 486,667 486,667 486,667 486,667
Benzene 388,000 388,000 388,000 388,000 388,000 388,000
Butadiene 225,000 225,000 225,000 225,000 225,000 225,000
Toluene 262,667 262,667 262,667 262,667 262,667 262,667
Xylene 220,000 220,000 220,000 220,000 220,000 220,000

Sales (tpa)
PFY 382,000 411,500 471,000 590,000 649,500 649,500
Fabric * 18 18 18 18 18 18
PSF 333,800 330,000 400,000 600,000 800,000 800,000
PTA 644,485 745,125 900,000 858,750 664,125 664,125
LAB 116,867 117,300 120,750 120,750 126,500 126,500
Paraxylene 607,300 705,150 797,700 669,000 669,000 669,000
MEG/EO 294,943 281,199 224,349 128,649 50,799 50,799
PVC 353,086 357,500 357,500 357,500 357,500 357,500
HDPE\LLDPE 420,443 405,000 450,000 450,000 450,000 450,000
Polypropylene 1,012,167 1,092,500 1,144,000 1,430,000 1,430,000 1,430,000
PET 219,887 240,000 300,000 300,000 300,000 300,000
Ethylene 0 6,607 34,907 6,307 27,707 27,707
Propylene 0 0 0 0 0 0
Benzene 340,303 382,783 196,719 109,819 44,701 44,701
Toluene 122,678 150,351 195,416 215,058 247,981 272,879
Xylene 242,216 242,216 242,216 242,216 242,216 242,216

Product prices before excise duty (Rs/kg)
PFY (Polyester filament yarn) 76.4 76.4 74.0 66.5 63.7 59.5
PSF (Polyester staple fibre) 62.3 65.0 67.4 63.7 61.0 57.0
PTA (Purified terephthalic acid) 40.8 42.3 44.8 45.0 45.3 42.3
LAB (Linear alkyl benzene) 79.5 81.3 78.9 70.9 67.8 63.4
Paraxylene 35.9 41.2 38.5 43.8 44.2 41.3
Ethylene Glycol (MEG + HEG) 57.6 60.8 55.9 50.2 48.0 44.9
Poly vinyl chloride (PVC) 38.2 36.8 33.8 30.4 29.1 27.2
Polyethylene (HDPE/LLDPE) 46.7 49.6 49.1 44.1 42.2 39.4
Polypropylene 52.3 55.7 54.7 54.6 52.3 48.8
PET 75.7 79.4 73.4 73.2 70.1 65.5
Ethylene 44.4 47.2 42.5 38.2 36.5 34.1
Propylene 47.8 47.4 42.3 40.1 38.4 35.8
Benzene 37.9 40.3 36.2 32.5 31.2 29.1
Butadiene 55.6 59.1 53.2 47.8 45.7 42.7
Toluene 32.7 34.7 31.3 28.1 26.9 25.1
Orthoxylene 26.1 27.7 25.0 22.4 21.5 20.0

Turnover (External) (Rs m)
PFY (Polyester filament yarn) 30,855 33,995 37,736 42,456 44,738 41,791
Fabric 1,777 1,777 1,777 1,866 1,959 2,057
PSF (Polyester staple fibre) 24,167 23,224 29,177 41,377 52,809 49,330
PTA (Purified terephthalic acid) 26,417 36,632 46,895 44,916 35,001 32,695
LAB (Linear alkyl benzene) 10,803 11,098 11,079 9,951 9,979 9,321
Paraxylene 22,110 33,792 35,749 34,108 34,368 32,103
Ethylene Glycol (MEG + HEG) 19,764 19,887 14,578 7,508 2,838 2,651
Poly vinyl chloride (PVC) 15,686 15,318 14,069 12,636 12,095 11,298
Polyethylene (HDPE/LLDPE) 22,842 23,383 25,690 23,074 22,086 20,631
Polypropylene 61,596 70,818 72,817 90,834 86,948 81,220
PET 19,354 22,165 25,605 25,552 24,459 22,848
Styrene 0 0 25,056 30,005 35,902 33,537
Ethylene 0 363 1,726 280 1,178 1,100
Propylene 0 0 0 0 0 0
Benzene 18,664 17,926 8,291 4,157 1,620 1,513
Toluene 4,105 6,075 7,106 7,024 7,753 7,969
Orthoxylene 7,350 7,812 7,030 6,314 6,044 5,646
Butadiene 5,855 9,282 13,922 12,504 11,969 11,181
Others 614 645 677 711 746 784
External turnover 314,597 364,244 417,862 431,696 425,766 399,133

10 July 2006 40
Fig 56 Snapshot of key valuation assumptions for refining and petrochemicals business
WACC calculation (%) Rationale behind assumptions DCF calculation
Risk-free rate (%) 8.0 10-year government bond yield WACC (%) 12.3%
Market risk premium (%) 7.0 Terminal Growth rate (%) 3.0
Total market return (%) 15.0 PV of FCF to FY13E Rs m 587,550
Beta (x) 1.04 RIL's prospective beta Present Value of Terminal FCF 870,912
Cost of equity (%) 15.3 Enterprise Value 1,458,462
Gross cost of debt (%) 8.0 Less Net Debt incl def tax liab 246,903
Tax rate (%) 33.6 Marginal tax rate Value for Equityholders 1,211,560
Net cost of debt (%) 5.3 NPV per RIL share (Rs) 870
Debt/capital ratio (%) 30.0
Contribution to price target* 783
WACC (%) 12.3% (including 10% discount)
* Includes value of investments in IPCL and RPL

10 July 2006 41
Appendix 6: Oil price outlook
Oil price outlook: Significant gas substitution will halve crude prices
Crude oil prices have tripled over the past four years. Diminished global spare production
capacity coupled with rising global inventories will keep crude oil prices volatile in the near-
term. Longer-term however, we believe significant gas substitution will halve crude prices.
Crude oil prices are likely to remain volatile near term
Demand remains robust
Demand continues to grow, driven by the gas guzzling US, Chinese and Indian economies.
With no significant near-term signs of a slowdown (Figure 57), crude oil prices are slated to
remain firm.

Fig 57 World oil demand growth: No signs of slowing down

* FSU = Former Soviet Union
Source: IEA (Monthly oil market report), June 2006

Global crude oil spare production capacity is highly diminished.
Oil producing nations are producing close to full capacity. Estimated spare capacity in 2005
fell to ~1.2m bl per day in 2005, about 1% of global demand. In the 1990s, global spare
capacity averaged ~3m bl per day. However, demand growth has outstripped production.
This is expected to recover but will still remain below historic levels (Figure 58).

Fig 58 World oil spare production capacity: Demand growth outstrips supply
0
1
2
3
4
5
6
1991-
1997
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(mn bl/ day)

-
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2005 2006 2007
OECD Non-OECD Asia FSU* & Eastern Europe Others
Forecast
Forecast
10 July 2006 42
. but crude oil inventory has increased to record levels
On the other hand, OECD crude oil inventories rose above the six year high in most months
of 2005 and early 2006 (Figure 59). US inventories have seen a notable rise, especially under
the high oil price scenario of the past three years. The short-term negative correlation
between inventories and oil prices will invariably lead to volatility in crude oil prices in the near
term. OECD crude oil stocks in 2005 and 2006 remained consistently higher than the upper
end of the historical range.

Fig 59 OECD crude oil stocks: Above historical levels
800
840
880
920
960
1000
January March May July September November
(mn bl)
Range: 1999-2004 2005 2006

Overall, high but volatile prices likely to prevail in the near-term
Geo-political risk has been a feature of crude oil price behaviour over the past few years. The
scenario in Iraq and unrest in Nigeria and Venezuela will likely continue to result in a risk
premium for crude oil prices in the near term. Barring the 2Q CY06 seasonal dip in demand,
near-term prices are expected to remain both high and volatile (Figure 60).

Fig 60 EIA crude* price forecast: Tapering off during the near term
0
10
20
30
40
50
60
70
80
1976 1980 1984 1988 1992 1996 2000 2004 2008E 2012E
(US$/bl)
WTI crude oil price
Source: BP, Platts, EIA, Macquarie Research, June 2006

Forecast
10 July 2006 43
Longer-term outlook: Current price levels unsustainable
Gas substitution will reduce crude oil prices over the long term
Global crude oil prices are a factor of numerous variables, not all of which are predictable or
even foreseeable. We believe that some structural changes in the industry will reduce crude
oil prices over the long term by more than 50%. We view the primary structural change will be
oil substitution, mainly with gas, for the following reasons:
Growth in proven gas reserves has outpaced those of crude oil. Increased exploratory
activity will ensure that these reserves continue to grow (Figure 61).

Fig 61 Gas reserves: Catching up with oil
520
620
720
820
920
1020
1120
1220
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
('000 mn bl)
Crude oil Natural gas (oil equivalent)
Source: BP, Macquarie Research, June 2006

Gas is currently under-utilised as an energy resource compared to crude oil. This is
evident from the fact that the gas reserves-to-production ratio (2005) stands at 65.1 years,
which is about 60% higher than crude oil at 40.6 years (Figure 62).

Fig 62 Global gas reserves to production ratio is ~60% higher than crude
25
30
35
40
45
50
55
60
65
70
1980 1984 1988 1992 1996 2000 2004
(yrs)
R/P ratio-Oil Gas
Source: BP, Macquarie Research, June 2006
The problems and costs associated with transportation of gas made it unviable when oil
remained below its long-term average of US$20/bl. Relatively high oil prices over the past
three years have led to the increased viability of gas as a substitute for oil.
10 July 2006 44
Economics of LNG and GTL become attractive at oil price above US$20/bl
Advances in scale and technology continue to improve the economics of LNG (liquefied
natural gas: liquefaction at the source to facilitate large-scale transport and re-gasification
at the destination). As seen in Figure 63, LNG becomes viable at oil prices above
US$20/bl.
Fig 63 LNG viable at oil price of US$20/bl
US$/mmbtu Oil equivalent (US$/bl)
Gas production 1.00 5.80
Liquefaction 1.10 6.38
Shipping (average) 1.00 5.80
Re-gasification 0.30 1.74
Total 3.40 19.72
Source: EIA, Macquarie Research, June 2006
Similarly, newer technologies are expected to develop, aimed at exploiting the gas
substitution opportunity. A notable example of this is GTL. A previously expensive option,
technology advances have reduced the capital costs of this technology by ~80% over the
past few years. In fact, ConocoPhillips believes that GTL fuel is cost competitive with
diesel fuel at world oil prices above US$20/bl (assuming cost of natural gas is
US$1.0/mmbtu).
Fig 64 Cost components for GTL: Viable at US$20/bl
Cost Component GTL* Refinery
Natural Gas (at US$1 per mmbtu) $10.00
Crude oil (at US$20/bl) $20.00
Operating Costs $ 4.00 $ 2.50
Capital Recovery, Taxes $14.00 $ 6.50
Total $28.00 $29.00
* Gas-to-liquid technology
Source: ConocoPhillips, Macquarie Research, June 2006
Consequently, demand for cheaper fuel is set to encourage continued investment in gas
pipelines and LNG liquefaction facilities by gas rich countries such as Qatar, Iran, Nigeria and
Russia. Basic demandsupply economics will put downward pressure on long-term oil prices.
10 July 2006 45
Appendix 7: Quant perspective
Welcome to the Alpha Model
This section introduces another part of the Macquarie Research product: the Macquarie
Alpha Model. The Alpha Model is our quantitative model that ranks stocks based on seven
criteria that we have found effective in differentiating outperforming stocks from
underperforming stocks (see details below).
Developed over five years ago, the Alpha Model has been successful in distinguishing
outperforming versus underperforming stocks across Asia-Pacific markets including India. We
believe the Alpha Model is among the first of its kind for India.
Details behind the Alpha Model
The Macquarie Alpha Model or the Alpha Model is our quantitative model that ranks
stocks based on seven criteria, that we have found effective in differentiating outperforming
stocks from under performing stocks.
The seven attributes, or factors, that we look at are:
Earnings revisions (from I/B/E/S).
Value (using a combination of forward earnings yield and dividend yield).
Consensus recommendations from I/B/E/S.
The change in consensus recommendations.
Earnings certainty, which is the dispersion of analysts EPS forecasts.
Long-term price momentum (12 months).
Short-term price reversion (1 month).
The quant view on a stock may not necessarily be in line with the view based on fundamental
analysis. However, we believe that this presents a different perspective on the stock, which
we believe investors will find useful.
Quant Perspective on Energy Stocks
The current aggregate market cap weighted Macquarie Alpha score for the energy industry
stocks is 0.36%. This indicates the Macquarie Alpha model currently holds a neutral to mildly
positive view on the energy sector in India. This is mainly due to ONGC, which is the largest
stock in the sector, having a strong positive Alpha score. All the other stocks in the energy
sector had negative Alpha scores.
Fig 65 Macquarie Alphas ranking of energy stocks
Code Name Market Cap
($USbn)
ST Alpha Rank
ONGC OIL & NATURAL GAS CORP. 34.15 4.60% 1
NATP NTPC LTD 21.69 -0.30% 2
IOCL INDIAN OIL CORP LTD 10.67 -1.60% 3
RIL RELIANCE INDUSTRIES LTD 31.75 -1.70% 4
PLNG PETRONET LNG LTD 0.77 -3.70% 5
TPWR TATA POWER 1.98 -4.60% 6
SUEL SUZLON ENERGY LTD 6.09 -5.20% 7
The Quant team, Macquarie Research Equities
Martin Emery 852 2823 3582 martin.emery@macquarie.com
Viking Kwok 852 2823 4735 viking.kwok@macquarie.com
George Platt 612 8232 6539 george.platt@macquarie.com
Riccardo Briganti 612 8232 4089 riccardo.briganti@macquarie.com
Scott Hamilton 612 8232 3544 scott.hamilton@macquarie.com
Raelene de Souza, CFA 612 8232 8388 raelene.desouza@macquarie.com
Richard Lawson 612 8232 4391 richard.lawson@macquarie.com
Burke Lau 612 8232 0481 burke.lau@macquarie.com
10 July 2006 46
Reliance Industries Ltd (RIL)
Reliance Industries has a negative overall alpha score of -1.7% in the alpha model. This is
mainly due to poor valuation ratios, with a below market average dividend yield of 1% and a
above market average prospective PE of 14.9x. This weakness in valuation metrics may be
due to the strong price performance of RIL over the last 12 months, which has seen RILs
stock price jump over 50%. Recent downward changes in analyst sentiment has also
affected RILs ranking in the Alpha Model, giving it a poor recommendations revisions quant
factor score.
Quant Scorecard Historic & Forecast Valuation Data
Factor Raw Std Mkt Sect Ind
Earn Rev 0.6 0.7 20 5 1
Composite Value -0.5 -0.7 112 24 7
Rec'd 1.9 0.1 76 15 4
Rec Revision -0.3 -0.6 82 16 2
Earn. Certainty 12% -0.3 84 14 3
12 Mnth Mom 91% 1.0 21 7 1
1 Mnth Reversion 7% -2.0 143 26 8
Overall 98/145 20/26 5/8
Source: Macquarie Research and Thomson Financial I/B/E/S Source: Thomson Financial I/B/E/S
Forecast Earnings Revisions Consensus Recommendation
Source: Thomson Financial I/B/E/S Source: Thomson Financial I/B/E/S
The Good And Bad
Very Strong 12 Month Momentum Extremely Poor 1 Month Reversion Potential
Ranked 21 out of 145 stocks in market Ranked 26 out of 26 stocks in sector
Strong Earnings Revisions Poor Composite Valuation
Ranked 20 out of 145 stocks in market Ranked 24 out of 26 stocks in sector
Source: Macquarie Research and Thomson Financial I/B/E/S Source: Macquarie Research and Thomson Financial I/B/E/S
RELIANCE INDUSTRIES LTD (RIL)
Price: $1,011.95; Market Cap: $1,410.2b; Sector: Consumer Goods; Industry: Textiles & Apparel
Score Rank
$0.00
$20.24
$40.48
$60.72
$80.96
2004 2005 2006 2007 2008 2009
0%
2%
4%
6%
8%
Y
i
e
l
d
EPS DPS
IRR = 6.7%; Stage 2 EPS Growth = 8.2%
$65.0
$69.5
$68.9
$59.3
$63.0
$64.5
$54.00
$56.00
$58.00
$60.00
$62.00
$64.00
$66.00
$68.00
$70.00
$72.00
-3 months -1 month Latest
FY1 (Mar 07) FY2 (Mar 08)
1.63 1.63 1.63
1.94
1.0
2.0
3.0
4.0
5.0
-3 months -2 months -1 month Latest
Strong
Buy
Buy
Hold
Sell
Strong
Sell

10 July 2006 47
Appendix 8: Global peer group valuations
Fig 66 Global peer group relative valuation

Company

Country

Market
Cap
(US$m)
Price
Perf.
(1 yr %)
2 yr fwd
EPS
CAGR
(%)
EBIDTA
Margin
(%)
Current
EV/
EBIDTA
(x)
Current
PER
(x)

1 yr fwd
PER
(x)

2 yr fwd
PER
(x)
P/BV
(x)
RoCE
(%)
ROE
(%)
Integrated players (1 year historic)
HessCorp USA 15,020 41.9 9.1 13.7 6.2 9.8 7.8 8.2 2.2 14.0 20.1
BG group plc UK 13,825 55.7 0.1 46.9 9.7 14.1 14.5 14.1 4.0 24.0 28.4
BP Plc UK 68,596 1.7 4.3 15.5 6.5 11.2 10.8 10.3 3.0 23.0 28.5
ChevronTexaco USA 139,088 7.2 4.6 15.0 5.1 8.9 8.0 8.1 2.2 21.9 26.1
China Petroleum China 61,107 73.6 3.3 12.7 6.7 12.6 12.1 11.8 2.3 11.7 19.6
Exxon Mobil USA 376,028 3.3 4.4 15.1 5.9 11.2 10.2 10.2 3.3 31.5 33.9
Petrobras Brazil 93,633 59.0 16.4 34.3 4.8 7.5 5.9 5.5 2.2 24.3 33.6
Petrochina China 193,541 42.4 6.9 44.4 6.4 11.5 9.8 10.0 3.0 24.8 28.3
Reliance Industries* India 31,330 121.2 16.3 17.3 10.0 15.1 13.5 11.2 3.1 16.3 22.3
Royal Dutch Shell Holland 98,642 NA (6.4) 16.1 4.9 9 9.5 10.0 2.4 25.7 28.8
Total SA France 100,171 6.1 1.8 20.6 4.8 9.5 9.1 9.2 2.8 24.9 34.0
Average 108,411 41.2 5.5 22.9 6.6 11.0 10.2 9.9 2.8 22.0 27.6
Exploration & Production companies
Anadarko Petroleum USA 22,353 11.0 3.7 77.7 4.6 8.4 8.7 7.8 2.0 18.7 24.5
Apache Corp USA 22,734 (0.7) 4.6 75.3 8.5 8.5 8.3 7.7 2.0 22.9 28.2
CNOOC China 35,131 32.6 1.5 60.8 6.2 10.5 9.2 10.1 3.6 31.2 38.9
Gazprom Russia 9,388 NA 26.1 38.7 19.2 19.8 13.6 12.4 2.6 8.8 10.4
ONGC* India 34,744 14.5 9.5 41.8 4.7 10.2 8.7 8.5 3.0 34.4 30.7
Average 24,870 14.4 9.1 58.9 8.6 11.5 9.7 9.3 2.6 23.2 26.6
Refining & Marketing companies
Bharat Petroleum* India 2,238 (5.9) 115.1 1.9 10.5 33.1 13.3 7.1 1.3 2.6 4.0
Formosa Petrochemical Taiwan 17,387 4.3 1.2 16.0 9.6 9.8 10.4 9.6 2.7 17.7 29.4
Hindustan Petroleum* India 1,726 (24.5) 120.4 1.5 9.4 22.9 8.8 4.7 0.7 2.2 3.7
Indian Oil Corp India 10,528 (1.4) 8.2 7.2 7.2 9.8 8.6 8.4 1.8 14.5 21.3
SK Corp S. Korea 8,263 10.1 (3.2) 15.4 1.8 4.8 5.2 5.1 1.0 13.5 22.6
S-Oil Corp S. Korea 8,086 (18.6) 6.3 8.9 6.7 8.8 7.3 7.8 2.1 18.4 25.5
Sunoco Inc USA 9,136 13.8 0.5 6.6 5.3 9.7 9.6 9.6 4.5 26.3 53.3
Tesoro Petroleum USA 5,097 50.1 (0.2) 5.7 4.7 9.9 8.9 10.0 2.7 23.2 31.6
Valero Energy USA 41,174 57.5 0.8 4.6 7.3 9.5 8.2 9.4 2.7 23.2 31.7
Average 11,515 9.5 27.7 7.5 6.9 13.1 8.9 8.0 2.2 15.7 24.8
Petrochemicals companies
Formosa Chemical & Fibre Taiwan 8,382 (8.6) (1.9) 15.2 11.1 6.8 8.7 7.1 1.7 18.6 27.0
Formosa Plastics Taiwan 8,038 (6.6) (0.4) 16.3 10.7 7.6 7.8 7.7 1.7 15.8 22.7
Honam Petrochemical South Korea 1,595 9.7 n/a 18.6 1.2 3.0 6.6 n/a 0.7 21.6 27.6
IPCL India 1,397 47.7 (17.1) 19.3 4.4 7.3 9.4 10.6 2.2 20.0 30.4
LG Chemicals S. Korea 2,109 (17.7) 9.1 13.8 2.4 5.6 5.7 4.7 0.8 11.9 17.2
LG Petrochemical S. Korea 888 (25.6) NA 15.5 2.6 4.4 4.4 NA 1.0 24.7 25.5
Sinopec Shanghai
Petrochem
China 4,657 71.1 14.0 9.0 10.2 22.3 26.2 17.2 2.2 8.5 9.9
Sinopec Yizheng Chemical
& Fibre
China 1,521 83.0 n/a -0.6 nm n/a 235.6 1256.7 1.9 -10.1 -11.3
Average 3,574 19.1 0.7 13.4 6.1 8.1 38.1 217.3 1.5 13.9 18.6
Gas Distribution companies
Aus Gas Light Co Australia 10,694 21.2 (27.0) 23.1 11.5 9.4 19.9 17.6 2.4 18.9 26.9
GAIL India 4,665 12.5 (1.5) 29.6 5.6 9.3 9.6 9.6 2.4 20.8 25.1
Gujarat Gas India 287 17.7 8.8 19.9 7.8 13.5 13.0 11.4 3.5 27.7 29.2
H. K. & China Gas HK 12,159 8.2 (2.9) 41.5 26.2 18.1 17.0 19.2 5.8 n/a 34.1
Indraprastha Gas India 331 9.4 17.6 41.1 8.1 14.4 12.3 10.4 4.9 28.3 32.9
Korea Gas S. Korea 2,612 7.4 (10.5) 9.3 8.9 9.3 11.5 11.6 0.7 4.7 7.5
Panva Gas HK 429 11.0 63.1 22.8 9.0 21.3 10.3 8.0 NA 7.8 9.8
Petronas Gas Myanmar 4,697 6.8 3.1 59.9 10.0 17.6 16.6 16.6 2.4 12.8 14.1
Tokyo Gas Japan 13,360 30.3 27.1 n/a n/a 26.1 17.0 16.2 2.3 5.8 9.1
Transcanada corp Canada 14,286 (0.8) 1.3 50.1 9.4 17.1 17.7 16.6 2.2 9.5 17.6
Xinao Gas China 881 42.3 22.7 30.1 15.3 22.3 17.5 14.8 3.0 8.9 14.3
Average 5,855 15.1 9.2 32.7 11.2 16.2 14.8 13.8 3.0 14.5 20.0

Cumulative average 34,398 20.8 11.2 24.4 7.9 12.4 16.1 40.1 2.4 17.6 23.4
* Macquarie estimates. All other estimates are based on consensus (Source: Bloomberg)
Source: Bloomberg, Macquarie Research, July 2006

10 July 2006 48
Appendix 9: RILs product flow chart
Fig 67 Oil & Gas and Petrochemicals value chain
Oil & Gas
Production
Oil & Gas
Production
Refining
Refining
ATF
ATF
MS
MS
HSD
HSD
Sulfur
Sulfur
Coke
Coke
LPG
LPG
Fuel Oil
Fuel Oil
Naphtha/NGL
Naphtha/NGL
Kerosene
Kerosene
Ethylene
Ethylene
Propylene
Propylene
PP
PP
Butene-1
Butene-1
EO
EO
EDC
EDC
VCM
VCM
MEG
MEG
DEG
DEG
PVC
PVC
TEG
TEG
HDPE/LLDPE
HDPE/LLDPE
PX
PX
PTA
PTA
PET
PET
PFY
PFY
PSF
PSF
O
i
l
R
e
f
i
n
i
n
g
Retail
P
o
l
y
m
e
r
/
C
r
a
c
k
e
r
I
n
t
e
g
r
a
t
e
d

p
o
l
y
e
s
t
e
r
Texturised/
Twisted dyed yarn
Texturised/
Twisted dyed yarn
Spun yarn
Spun yarn
Fabrics
Fabrics
Wool viscose
Silk Linen
Wool viscose
Silk Linen
Acetic acid
Acetic acid
NP
NP
LAB
LAB
Oil & Gas
Production
Oil & Gas
Production
Refining
Refining
ATF
ATF
MS
MS
HSD
HSD
Sulfur
Sulfur
Coke
Coke
LPG
LPG
Fuel Oil
Fuel Oil
Naphtha/NGL
Naphtha/NGL
Kerosene
Kerosene
Ethylene
Ethylene
Propylene
Propylene
PP
PP
Butene-1
Butene-1
EO
EO
EDC
EDC
VCM
VCM
MEG
MEG
DEG
DEG
PVC
PVC
TEG
TEG
HDPE/LLDPE
HDPE/LLDPE
PX
PX
PTA
PTA
PET
PET
PFY
PFY
PSF
PSF
O
i
l
R
e
f
i
n
i
n
g
Retail
P
o
l
y
m
e
r
/
C
r
a
c
k
e
r
I
n
t
e
g
r
a
t
e
d

p
o
l
y
e
s
t
e
r
Texturised/
Twisted dyed yarn
Texturised/
Twisted dyed yarn
Spun yarn
Spun yarn
Fabrics
Fabrics
Wool viscose
Silk Linen
Wool viscose
Silk Linen
Acetic acid
Acetic acid
NP
NP
LAB
LAB
Source: Company

10 July 2006 49
Important disclosures:
Recommendation definitions
Macquarie Australia/New Zealand
Outperform return >5% in excess of
benchmark return (>2.5% in excess for listed
property trusts)
Neutral return within 5% of benchmark return
(within 2.5% for listed property trusts)
Underperform return >5% below benchmark
return (>2.5% below for listed property trusts)

Macquarie Asia
Outperform expected return >+10%
Neutral expected return from -10% to +10%
Underperform expected return <-10%

Recommendations 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations

Volatility index definition*
This is calculated from the volatility of historic
price movements.

Very highhighest risk Stock should be
expected to move up or down 60100% in a
year investors should be aware this stock is
highly speculative.

High stock should be expected to move up or
down at least 4060% in a year investors
should be aware this stock could be
speculative.

Medium stock should be expected to move
up or down at least 3040% in a year.

Lowmedium stock should be expected to
move up or down at least 2530% in a year.

Low stock should be expected to move up or
down at least 1525% in a year.
* Applicable to Australian/NZ stocks only
Financial definitions
Adjusted profit = net profit - individually
significant items + tax on individually significant
items - preference dividends - minority interests
+ goodwill amortisation.
ROA = EBIT / average total assets
ROE = reported profit / average shareholders
funds

All reported numbers for Australian/NZ listed
stocks are modelled under IFRS (International
Financial Reporting Standards).

Recommendation proportions
Macquarie Australia/New Zealand
Outperform 44.29%
Neutral 43.93%
Underperform 11.79%
Macquarie Asia
Outperform 54.93%
Neutral 28.06%
Underperform 17.01%
For quarter ending 30 June 2006

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Utilities
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Strategy
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Desh Peramunetilleke (Asia) (852) 2823 3564
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Peter So (China) (852) 2823 3586
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Regional Heads of Sales contd
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K.Y. Nam (Korea) (822) 3705 8607
Giles Heyring (Singapore) (65) 6231 2888
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Nick Cant (Tokyo) (813) 3512 7821
Dominic Henderson (Tokyo) (813) 3512 7820
Charles Nelson (UK/Europe) (44) 20 7065 2032
Rob Fabbro (UK/Europe) (44) 20 7065 2031
Sales Trading
Anthony Wilson (Asia) (852) 2823 3511
Mona Lee (Hong Kong) (852) 2823 3519

Sales Trading contd
Howard Yoon (Korea) (822) 3705 8601
Bruce Budd (Singapore) (65) 6231 2888
Stuart Goddard (Europe) (44) 20 7065 2033
Robert Risman (New York) (1 212) 231 2555
Kenichi Ohtaka (Tokyo) (813) 3512 7830
Vijay Gussain (India) (9122) 6653 3205
Isaac Huang (Taiwan) (8862) 2734 7582
Alternative Strategies
Hedge Fund Sales - Jamie Boyton (852) 2823 3532
Convertibles - Roland Sharman (852) 2823 4628
Futures - Tim Smith (852) 2823 4637
Depository Receipts - Robert Ansell (852) 2823 4688
Derivatives - Vipul Shah (852) 2823 3523
Structured Products - Andrew Terlich (852) 2249 3225

AXXXXX/HK.MA

RIL Macquarie 10 July 06

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RIL Macquarie 10 July 06

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