RIL is in the midst of executing its largest-ever capital expenditure plan, which experts think could fuel further price action in the stock within 12 mnths.
ETMarkets.com
NEW DELHI: Shares of Reliance Industries (RIL), often called the sleeping giant, hit a seven-year high on the National Stock Exchange on Monday at Rs 1,129. Experts said the rally is not over yet.
The stock hit an intraday high of Rs 1,129, a level last seen in May 2009, ETNow reported. The stock is up nearly 11 per cent so far in 2016 and about 34 per cent in last one year.
RIL is in the midst of executing its largest-ever capital expenditure plan in core and non-core businesses, which most experts think could fuel further price action in the counter over the next 12 months, lifting the stock to Rs 1,365 level. This translates into an upside of 23 per cent from Friday’s closing price.
Most analysts were cautious on the stock over of the past few years, owing to its huge investment in the telecom venture, Reliance Jio, which constitutes a quarter of its balance sheet now.
However, with the non-telecom business showing signs of a turnaround and good response for its telecom venture, the stock could lift off from its current levels, experts said.
"RIL’s $21 billion investment in Jio over the last six years has hobbled the stock performance. But considering a 30 per cent CAGR in core earnings (ex-Jio) and $20 billion in estimated cash flow over FY 2017-FY19, there is more upside in the stock,” ET quoted Rohit Ahuja, analyst, Religare Institutional Research, as saying in mid-September.
"The telecom arm would be less of a concern three years down the line even if it still remains a loss-making venture," he said.
In September, Citigroup maintained a buy rating on RIL with a 12-month target price of Rs 1,235. Regional gross refining margins (GRMs) are at a five-month high and complex refiners like RIL could benefit from it. The third quarter should see the first benefits of core expansions, the global investment bank said.
The realisation is dawning that Jio tariffs are not Arpu-dilutive but RIL still offers a favourable risk-reward ratio. The global investment bank forecast consolidated Ebitda growth at 15 per cent CAGR for the company.
Despite the recent rally, valuation remains attractive, with the stock trading at 7.0 times EV/Ebitda and 5 per cent free cash flow (FCF) yield on FY19E.
In the June quarter, RIL reported a GRM of $11.5 per barrel compared with $10.8 per barrel in Q4 of FY16 and $10.4 per barrel in Q1 of FY16. The GRM was boosted quarter-on-quarter (QoQ) due to better risk management and inventory gain of $2 per barrel.
During Q1 of FY17, the average benchmark Singapore complex margin stood at $5 a barrel compared with $7.7 a barrel in Q4 of FY16 and $8 a barrel in Q1 of FY16. RIL had a premium of $6.5a barrel over Singapore GRM.
RIL's return on equity (ROE) improved to 11.8 per cent in FY16 from 10 per cent in FY15. "We expect ROE to improve further during FY17-18 when its large projects will commence," IndiaNivesh said in a report.
RIL's best-in-class refineries would continue to drive near-term earnings and the earnings jump from $40 billion of investment across telecom, Gasifier, ROGC and Petcoke should be visible by the end of the fiscal year 2017 which will lead to substantial free cash flow in FY18.
"RIL is in the midst of executing its largest ever capex plans in the core and non-core businesses. We expect the earnings growth trigger to play out in RIL in H2FY17 when its large core projects get commissioned," IndiaNivesh said in a report.
The core projects are pet coke gasification plant at its refinery, refinery off-gas cracker in petrochemicals, polyester or aromatics capacity expansion.
ETMarkets.com
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