Reliance Ind: Ready to Lead the Next Bull Rally?
The market after contributing in a big way to the 2004-2007 bull rally. It has, however, in the past With many of the issues plaguing it nearing resolution, will it to the which many say is now imminent?
On Wednesday, the gap in the market cap of Reliance Industries and software giant TCS narrowed to .` 58,936 crore. Just three months ago, it was .` 1,86,882 crore. After languishing for many years, the shares of RIL have climbed 35% in the past three months, while those of TCS have fallen 8.5%. If this trend continues, there is a good chance that RIL will regain its position as India’s most valuable company in the coming weeks and months. In the last bull market between 2005 and 2008, the Nifty had gained 3128 points; RIL’s contribution to this was 692 points, or around 22%. But the stock slumped since then due to stagnating earnings and uncertainty over a hike in the prices of natural gas. The Nifty, for instance, has gained 138% till date from its bottom in 2009 compared with RIL’s gain of 45.4%. From to its earlier peak of 6337 on January 10, 2008, Nifty is 14.8% up now, while RIL’s market cap has fallen 20.8%. The company commanded a peak valuation of nearly 30 times its trailing 12 month profits at the height of the bull cycle in end-2007; the valuations dropped to 10-12 times in subsequent years. The big question for RIL investors is if the good times will come back. The BJP government led by Narendra Modi, which will assume office next week, is expected to revive investment and announce new policies to lift growth. Most investors believe this heralds good times for RIL.
Shankar Sharma, global strategist at First Global, known for his bearish and contra bets, is one of those who believe the tide has turned. “Yes, we believe RIL will participate strongly in the next bull run. We have changed our stance on the company to ‘buy’ after the general elections. We believe RIL will benefit from this new government, the long awaited gas price hike is likely to happen soon.” While most of the gains in price is based on an anticipated doubling of natural gas prices, some fundamental factors are also changing for RIL. The firm’s multi-year Rs1lakh-crore capex will expand its pe-
Foreign research house CLSA expects the scrip to double by FY17
trochemical capacities by twothirds by end of FY16. Similarly, a coal gasification unit that will expand its refining margins and add nearly $1.5 billion to its operating profits will come up by FY16.
Dwindling natural gas production from KG-D6 has started inching up, and a likely revision in domestic gas prices will make more production viable. Subsidiaries such as the retail business started contributing to earnings in FY14. Its retail business turned profitable, while the shale gas business in the US is growing steadily. From $659 million of EBIDTA, the shale gas business is expected to post $1.2 billion of EBIDTA in FY16. Its telecom venture is expected to launch in the second half of FY15, where the pace of subscriber addition will determine its break-even.
The petroleum refining industry has faced margin pressures in the last few years due to slowed down demand and capacity additions. RIL has done reasonably well in this period, always earning a pre-
Consensus Target Price mium over benchmark gross refining margins (GRMs), thanks to its higher refinery complexity.
“After a three-year decline, we forecast Reliance’s US-dollar EBIDTA to double in three years on downstream expansions, a doubling of domestic gas prices, rising gas production and contributions from non-core businesses,” brokerage CLSA said in a recent report. It expects the scrip to double by end FY17.
RIL reported earning per share (EPS) of .` 76.5 for FY14 on a consoli- dated basis. According to Bloomberg data, the average analyst forecasts for RIL’s EPS stands at .` 79 for FY15, .` 84 for FY16 and .` 103 for FY17. This translates into a three-year CAGR of 10.4%. “Foreign institutional investors (FIIs) will look at RIL as a proxy play to India’s growth story,” said Amar Ambani, head of research at IIFL. “RIL is among the few companies in Nifty, where a significant headroom for FIIs is available. Hence, being the top three companies in the index, RIL is most certain to participate in the next bull run.”
For the fiscal year 2013-14, RIL posted a consolidated EBIDTA, or earnings before interest, depreciation, tax and amortization, of .` 43,710 crore. To double in three years, it will need to grow at an average annualised growth rate of 25%. A difficult, but not an impossible, task.
Not everybody believes in the Reliance’s bull story though. Kotak Securities downgraded the stock’s rating to ‘reduce’ from ‘add’ on May 20 due to the recent run up in its prices. RIL’s standalone EPS, the brokerage points out, will likely be flat through FY2016 and will jump only in FY2017 based on a timely start of new projects. “FY2017 is far away and the stock is already discounting our FY2016 target price of .` 1,085,” it said. Low value creation from the large investments in non-core businesses and sustained rupee appreciation are key risks, it said. “The odds are overwhelmingly stacked against large index companies, as the recent market rally has been mostly based on hopes rather than on any concrete policy announcements. Hence, there could be disappointment for investors going forward,” said Saurabh Mukherjea, CEO, Institutional Equities, Ambit Capital. Most brokerage analysts also do not appear in a hurry to raise the target price of the company. Bloomberg data shows the average one-year target price of RIL is at .` 1,040, while the share price is already at .` 1,078. John Templeton had famously said that bull markets are born on pessimism and grow on scepticism. One will have to watch out if the same applies to an individual stock such as RIL. (With inputs from Ashutosh Shyam, Rajesh Naidu, Jwalit Vyas and Biswajeet Baruah)