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Inexpensive valuations versus telecom overhang. We cut our FY2015-17 EPS
estimates for RIL by 4-7% to factor in lower oil prices and modestly lower downstream
margins. We retain our ADD rating on the stock with a revised SOTP-based TP of
`1,000 (`1,100 earlier) noting (1) robust earnings growth from core business projects
and (2) inexpensive valuations. Higher-than-expected value erosion from the telecom
foray is a key risk to our positive view on the stock.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Reverse valuation suggests stock is trading at 4.7X FY2017E EBITDA post completion of projects
We find the stock inexpensive at current levels, as it is not factoring in growth in earnings from
core business projects while discounting complete erosion of equity, which is likely to be
infused in the telecom venture by FY2017. Our reverse valuation exercise suggests that the RIL
stock is trading at 4.7X FY2017E EBITDA (see Exhibit 1), which will be the first year of
operations for ongoing core business projects. We expect core business projects (and modestly
weaker rupee-dollar exchange rate) to drive 51% growth in standalone EBITDA over the next
two years despite our assumptions of lower petchem margins, flattish core refining margins and
no increase in domestic gas production.
4-7% cut in EPS estimates driven by lower oil and gas prices
We revise our FY2015-17 EPS estimates (standalone) for RIL to `71.5 (-4.1%), `74 (-5.5%) and
`90 (-7.3%) to reflect (1) lower oil and gas prices, (2) modestly lower refining and petchem
margins and (3) other minor changes. We retain our ADD rating on the RIL stock with an
revised SOTP-based target price of `1,000 (`1,100 earlier) noting (1) inexpensive valuations at
10.4X FY2016E standalone EPS versus BSE-30 Index at ~16X and (2) strong earnings growth led
by core business projects. The moderate reduction in our SOTP-based valuation of RIL reflects
(1) cut in earnings estimates and (2) our assumption of `120 bn of incremental equity infusion
over the next two years in the telecom business, to which we ascribe nil equity value.
Potential losses from the telecom business may curtail earnings growth trajectory
Even though there is limited clarity with respect to the rollout plans of Reliance Jio’s telecom
services, one cannot rule out the possibility of significant losses in the initial years, given
(1) large operating overheads—empirical evidence suggests that it is difficult to turn EBITDApositive
in the initial years of operations and (2) high fixed costs of depreciation/amortization
and interest on the indicated capital employed of `700 bn. We compute (1) about `35-`45 bn
of charges pertaining to depreciation and amortization and (2) around `20-`25 bn of interest
costs, in FY2016-17 assuming country-wide rollout of services. We note that Reliance Jio is
required to meet rollout obligations (different for different category of circles) by 2QFY16 in
order to comply with the rules of BWA spectrum.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily09012015ay.pdf
Inexpensive valuations versus telecom overhang. We cut our FY2015-17 EPS
estimates for RIL by 4-7% to factor in lower oil prices and modestly lower downstream
margins. We retain our ADD rating on the stock with a revised SOTP-based TP of
`1,000 (`1,100 earlier) noting (1) robust earnings growth from core business projects
and (2) inexpensive valuations. Higher-than-expected value erosion from the telecom
foray is a key risk to our positive view on the stock.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Reverse valuation suggests stock is trading at 4.7X FY2017E EBITDA post completion of projects
We find the stock inexpensive at current levels, as it is not factoring in growth in earnings from
core business projects while discounting complete erosion of equity, which is likely to be
infused in the telecom venture by FY2017. Our reverse valuation exercise suggests that the RIL
stock is trading at 4.7X FY2017E EBITDA (see Exhibit 1), which will be the first year of
operations for ongoing core business projects. We expect core business projects (and modestly
weaker rupee-dollar exchange rate) to drive 51% growth in standalone EBITDA over the next
two years despite our assumptions of lower petchem margins, flattish core refining margins and
no increase in domestic gas production.
4-7% cut in EPS estimates driven by lower oil and gas prices
We revise our FY2015-17 EPS estimates (standalone) for RIL to `71.5 (-4.1%), `74 (-5.5%) and
`90 (-7.3%) to reflect (1) lower oil and gas prices, (2) modestly lower refining and petchem
margins and (3) other minor changes. We retain our ADD rating on the RIL stock with an
revised SOTP-based target price of `1,000 (`1,100 earlier) noting (1) inexpensive valuations at
10.4X FY2016E standalone EPS versus BSE-30 Index at ~16X and (2) strong earnings growth led
by core business projects. The moderate reduction in our SOTP-based valuation of RIL reflects
(1) cut in earnings estimates and (2) our assumption of `120 bn of incremental equity infusion
over the next two years in the telecom business, to which we ascribe nil equity value.
Potential losses from the telecom business may curtail earnings growth trajectory
Even though there is limited clarity with respect to the rollout plans of Reliance Jio’s telecom
services, one cannot rule out the possibility of significant losses in the initial years, given
(1) large operating overheads—empirical evidence suggests that it is difficult to turn EBITDApositive
in the initial years of operations and (2) high fixed costs of depreciation/amortization
and interest on the indicated capital employed of `700 bn. We compute (1) about `35-`45 bn
of charges pertaining to depreciation and amortization and (2) around `20-`25 bn of interest
costs, in FY2016-17 assuming country-wide rollout of services. We note that Reliance Jio is
required to meet rollout obligations (different for different category of circles) by 2QFY16 in
order to comply with the rules of BWA spectrum.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily09012015ay.pdf
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