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India Equity Research Reports, IPO and Stock News
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The fifth year and counting…
After its recent 15% correction, 2012 is now Reliance’s fifth straight year of
relative under-performance. We foresee some triggers emerging by year-end but
singular variables, such as a gas price hike or the telecom foray, may not be
enough for a sustained re-rating. Reliance needs to create a deep portfolio of
projects to rekindle investor interest. Further, these may need to be in the energy
chain; its ~US$8.5bn non-core portfolio has been a drag on performance. Reliance
has been more reticent here than we had expected clouding its long term outlook.
Reliance has now been under-performing for five years
After its 15% correction since mid-Feb, Reliance’s stock is now under-performing the
Sensex in 2012 – the fifth year in succession. Over this time, FY09-14 earnings have
been cut 18-44%. This is continuing; we recently cut FY12-14 EPS by 2-7% to factor in
lower KG-D6 volumes and SOTP by Rs25/sh to factor in a 30% cut in D1-D3 reserves
to 7tcf. Our current FY13 estimate (~Rs69/sh, similar to consensus) implies a ~30%
rise in EPS over the 4Q run-rate. This is predicated on a weaker currency (Rs53/US$),
a US$1/bbl rebound in GRMs and higher other income but we concede downside risks.
Triggers may emerge by end 2012 but may be short-lived
We expect the EPS momentum to start rebounding when the polyester expansions
begin to come on-stream from early 2013. By this time, we expect the 4G telecom
launch, indications of higher gas prices and more detail on the retail foray to help.
These triggers are likely to short-lived, however, as singular variables may not be
enough for a re-rating. For example, while higher gas prices will renew the E&P thrust,
NAV impact is limited (US$1 = 1.5%) while EPS impact (US$1 = ~3%) will accrue only
from FY15. Similarly, our telecom analyst cautions that infra challenges and lack of a
4G device eco-system may force Reliance to bundle 2G voice implying higher capex.
Reliance needs to build a deep portfolio of projects in the core energy chain
In our view, therefore, Reliance needs to create a portfolio of +15-20 projects like its
global energy peers have, to rekindle investor interest. Historically, sustained project
growth has driven stock performance by driving EPS growth across cycles. This is now
sorely missing; ten year profit Cagr has dipped below 20% for the first time in history.
Reliance can take on another ~US$30bn of projects but has been reticent
Reliance has been more reticent on new projects than we had expected it to be,
though; perhaps because of poor returns from the US$17bn KG-D6, RPET projects and
the +50% fall in US gas prices since the time it acquired its shale gas assets. For
example, gross block will be flat over FY10-15 despite US$12bn outlay on downstream
projects as the olefins, IGCC projects are yet to commence in earnest. Indeed, given
its cash (US$15bn), operating cashflow (US$6-7bn annually) and capital serving
needs, it can easily invest an additional ~US$30bn without stressing its balance sheet.
Non-core investments have been a drag on returns and stock performance
Further, these projects may need to be in the core energy chain. Its ~US$8.5bn noncore
investments (~20% of balance sheet) across multiple verticals have been a drag
shaving off ~3ppt from ROACE; the retail venture, for example, is still incurring losses
even after five years of operation. Nonetheless, with the stock trading at 11x PE and a
25% discount to our NAV and triggers emerging by end-2012, we maintain O-PF.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The fifth year and counting…
After its recent 15% correction, 2012 is now Reliance’s fifth straight year of
relative under-performance. We foresee some triggers emerging by year-end but
singular variables, such as a gas price hike or the telecom foray, may not be
enough for a sustained re-rating. Reliance needs to create a deep portfolio of
projects to rekindle investor interest. Further, these may need to be in the energy
chain; its ~US$8.5bn non-core portfolio has been a drag on performance. Reliance
has been more reticent here than we had expected clouding its long term outlook.
Reliance has now been under-performing for five years
After its 15% correction since mid-Feb, Reliance’s stock is now under-performing the
Sensex in 2012 – the fifth year in succession. Over this time, FY09-14 earnings have
been cut 18-44%. This is continuing; we recently cut FY12-14 EPS by 2-7% to factor in
lower KG-D6 volumes and SOTP by Rs25/sh to factor in a 30% cut in D1-D3 reserves
to 7tcf. Our current FY13 estimate (~Rs69/sh, similar to consensus) implies a ~30%
rise in EPS over the 4Q run-rate. This is predicated on a weaker currency (Rs53/US$),
a US$1/bbl rebound in GRMs and higher other income but we concede downside risks.
Triggers may emerge by end 2012 but may be short-lived
We expect the EPS momentum to start rebounding when the polyester expansions
begin to come on-stream from early 2013. By this time, we expect the 4G telecom
launch, indications of higher gas prices and more detail on the retail foray to help.
These triggers are likely to short-lived, however, as singular variables may not be
enough for a re-rating. For example, while higher gas prices will renew the E&P thrust,
NAV impact is limited (US$1 = 1.5%) while EPS impact (US$1 = ~3%) will accrue only
from FY15. Similarly, our telecom analyst cautions that infra challenges and lack of a
4G device eco-system may force Reliance to bundle 2G voice implying higher capex.
Reliance needs to build a deep portfolio of projects in the core energy chain
In our view, therefore, Reliance needs to create a portfolio of +15-20 projects like its
global energy peers have, to rekindle investor interest. Historically, sustained project
growth has driven stock performance by driving EPS growth across cycles. This is now
sorely missing; ten year profit Cagr has dipped below 20% for the first time in history.
Reliance can take on another ~US$30bn of projects but has been reticent
Reliance has been more reticent on new projects than we had expected it to be,
though; perhaps because of poor returns from the US$17bn KG-D6, RPET projects and
the +50% fall in US gas prices since the time it acquired its shale gas assets. For
example, gross block will be flat over FY10-15 despite US$12bn outlay on downstream
projects as the olefins, IGCC projects are yet to commence in earnest. Indeed, given
its cash (US$15bn), operating cashflow (US$6-7bn annually) and capital serving
needs, it can easily invest an additional ~US$30bn without stressing its balance sheet.
Non-core investments have been a drag on returns and stock performance
Further, these projects may need to be in the core energy chain. Its ~US$8.5bn noncore
investments (~20% of balance sheet) across multiple verticals have been a drag
shaving off ~3ppt from ROACE; the retail venture, for example, is still incurring losses
even after five years of operation. Nonetheless, with the stock trading at 11x PE and a
25% discount to our NAV and triggers emerging by end-2012, we maintain O-PF.
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