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?

The Economic Times - - Markets + Finance - RAMKRISHNA KASHELKAR

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)

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