India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Buy Reliance Industries (RELI.BO)
Return Potential: 25% Equity Research
From 0/3 last year to at least 2/3 in 2011; add to Conviction Buy list
Source of opportunity
We add Reliance Industries (RIL) to our Asia Pacific Conviction Buy list as
we believe that its cyclical businesses are turning around and will likely
drive an earnings surprise over the medium term. With RIL’s leverage to
recovering complex refining margins and the global ethylene cycle likely to
bottom out in 2HCY11, we believe two of RIL’s three core businesses are
falling into place going forward. With the delay in D-6 volume ramp-up
widely known and likely priced in, any positive news flow on the E&P front
could further re-rate RIL’s share price, in our view. We also believe that there
could be updates on RIL’s broadband and retail businesses in 2HFY12E.
Catalyst
(1) Continued strength in refining margins leading to consensus earnings
upgrades; (2) recovery in ethylene cycle adding to strong polyester
margins; (3) positive update on D-6 production ramp-up or exploration
progress; (4) newsflow on progress in the new telecom venture and retail
business; and (5) depreciation of the INR-USD exchange rate.
Our new 12-m SOTP-based target price of Rs1,250 (Rs1,200 earlier) for RIL
implies potential upside of 25%. We increase RIL’s FY11E-13E earnings by 5%-
11%, driven by our weaker INR-USD rate forecasts, partly offset by lower
FY12E D-6 volumes of 55mmscmd vs. 60 earlier. At our TP, RIL would
trade at 14X FY12E EPS vs. its historical range of 4X-33X. We believe RIL is
trading at a discount to the Indian market owing to a lack of conviction on
the street on the turnaround of its cyclical segments and on future growth;
we think these attitudes will change as the catalysts cited above start to
play out. We value RIL’s refining at near trough-cycle multiples, petchem
at trough-cycle and E&P business as a mix of DCF and EV/boe multiples.
Key risks
(1) Petchem weakness; (2) delay in D-6 ramp up; (3) expensive acquisitions.
Investment view: Added to Conviction list; Rs1,250 target price
We reiterate our Buy rating on RIL and add it to our Asia Pacific Conviction Buy list as we
believe that its cyclical businesses are turning around and will likely drive an earnings
surprise over the medium term, with a new 12-month SOTP-based target price of Rs1,250
(Rs 1,200 earlier), implying 25% potential upside from the current share price level. We
also add the GDR (RELIq.L) to the Conviction Buy list and nudge up its 12-month SOTPbased target price from US$53.20 to US$53.40. We lower our FY11-FY13E earnings
estimates for the GDR by 1%-4% due to a weaker USD-INR rate.
With RIL’s leverage to recovering complex refining margins and the global ethylene
cycle likely to bottom out in 2HCY11, we believe that two of RIL’s three core
businesses – refining and petrochemicals – are falling into place going forward.
From 0/3 last year to 2/3 in 2011: Refining and petchem recovery
We believe that complex refining margins are likely to recover over the medium term and
estimate that RIL’s earnings are strongly leveraged to the same. Moreover, any widening
of light-heavy oil price differential from robust global oil demand would further help RIL’s
refining profits, in our view, leading to RIL’s margins likely showing greater improvement
against Singapore complex margins over the medium term.
Also, we believe that the global ethylene cycle will likely bottom out in 2HCY11E, giving
RIL’s earnings a further cyclical push. Therefore, it is likely, in our view, that two of RIL’s
core businesses – refining and petrochemicals (together contributing 66% of RIL’s FY12E
EBITDA) – seem to be falling in place going forward.
Earnings changes driven by weaker USD-INR forecast; partly offset
by lower D-6 gas volumes
The increase in our target price is primarily driven by upward revision in earnings. We
have revised RIL’s earnings by 5% for FY12E and by 11% for FY13E, mainly on account of
our Global ECS Research team’s weaker USD-INR exchange rate forecasts (for details,
please see their note published on 6 Jan. 2011 entitled Asia Views: Asian growth—only
limited further upside from latest US revisions but still above consensus in 2011). The
upward earnings for FY12E have been partly offset by lowered forecasts for D-6 gas
production, though.
News flow on the E&P/other businesses could further re-rate RIL
While the cyclical businesses are likely to drive earnings growth going forward, we have
assumed almost flat yoy D-6 gas and oil volumes in FY12E, given the uncertainty on the
ramp-up schedule of the project. Since this is already widely known and likely priced in
the RIL stock, any positive news flow on the E&P front could further re-rate RIL’s share price,
in our view.
We also believe that there could be updates on RIL’s broadband and retail businesses in
2HFY12E. Furthermore, we note that while RIL’s FY11E cash flows are largely utilized
in reinvestment into the businesses, the company will likely generate excess cash of
around US$9bn over FY12E-13E after its committed capex.
Valuation: Sum-of-the-parts valuation shows 25% potential upside
We use SOTP methodology to value RIL as we believe that it is the best method to value a
company that has such diverse businesses with different earnings drivers. Our valuation
produces a 12-month target price of Rs1,250/share implying potential upside of 25%.
Valuation: Sum-of-the-parts valuation shows 25% potential upside
We use SOTP methodology to value RIL as we believe that it is the best method to value a
company that has such diverse businesses with different earnings drivers. Our valuation
produces a 12-month target price of Rs1,250/share implying potential upside of 25%.
No comments:
Post a Comment