Reliance Industries: Core will Score

India Infoline News Service | Mumbai |

Oil demand globally is derivative of the economic growth which over the past couple of years has been patchy.

CMP Rs931, Target Rs1,050, Upside 12.8%
 

Over the past five years reliance industries (RIL) has grossly underperformed the broader markets (80% underperformance), empirically it's longest such period. One of the prime reasons for the same has been a weak performance of its E&P segment plagued by falling gas production and bureaucratic issues. This caused a shift in focus of investors from RIL’s core business of refining and petrochemicals to the E&P segment. Over the next three years, we believe, these core businesses will drive a strong 25% CAGR in standalone EBIDTA on the back of commencement of large scale projects - off gas cracker and petcoke gasification.

 

The petcoke gasification project whereby RIL is investing US$4bn is expected to commence operations in FY17. Commencement of this project will allow RIL to replace expensive RLNG with gas produced from petcoke leading to incremental US$2/bbl GRM (management guidance of US$2.5/bbl). Off gas cracker will provide a consistent low cost supply of feedstock to the petrochemical plants where RIL is increasing its capacity. While the global environment has been moderately improving form GRMs and petrochemical spreads, RIL will outperform the benchmarks by a significant margin.

 

The E&P segment, which has gone through its share of trials and tribulations, is likely to see a revival in fortunes with gas price hike, moderate increase in production at KG-D6, commencement of production at new fields and possible exploration upsides from current exploration activities. Shale gas on the other hand will continue to show robust growth in revenues and profitability as both volumes and gas prices head north. While Telecom business might achieve EBIDTA breakeven in three years considering its asset light model, Retail business will show improved trend in profitability.

 

P/E valuations of 9.8x on FY16E earnings is much below RIL’s historical average and we believe a re-rating is due given strong earnings growth profile in the coming years. We maintain BUY with a revised 9-month price target of Rs1,050.


Financial summary (Standalone)
Y/e 31 Mar (Rs mn)
FY13
FY14E
FY15E
FY16E
Revenues
3,602,970
4,002,411
4,186,668
4,311,000
yoy growth (%)
9.2
11.1
4.6
3.0
Operating profit
307,870
305,547
355,880
437,571
OPM (%)
8.5
7.6
8.5
10.2
Reported PAT
210,030
221,466
255,651
307,913
yoy growth (%)
4.8
5.4
15.4
20.4
EPS (Rs)
64.2
68.6
79.2
95.4
P/E (x)
14.5
13.6
11.7
9.8
Price/Book (x)
1.7
1.5
1.4
1.2
EV/EBITDA (x)
10.1
9.8
8.7
7.4
Debt/Equity (x)
0.3
0.3
0.3
0.3
RoE (%)
12.1
11.7
12.2
13.2
RoCE (%)
12.1
12.0
12.5
13.5
 Source: Company, India Infoline Research
BSE 915.00 [5.95] ([0.65]%)
NSE 915.45 [5.55] ([0.60]%)

***Note: This is a NSE Chart

 

Advertisements

  • Save upto Rs.2.67 lakh with Pradhan Mantri Awas Yojana ...Know more
  • Now Save Rs.3150 on your Demat Account ...Click here
  • Now get IIFL Personal Loan in just 8* hours...APPLY NOW!
  • Get the most detailed result analysis on the web - Real Fast!
  • Actionable & Award-Winning Research on 500 Listed Indian Companies.