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Buy rating on RIL after 20% rally

We reduce our rating on Reliance Industries (RIL) to ?add? (earlier buy), noting a sharp 20% rally in the stock price over the past two months

We reduce our rating on Reliance Industries (RIL) to ?add? (earlier buy), noting a sharp 20% rally in the stock price over the past two months compared with a moderate 12% rally in the BSE-30 Index. We expect the stock to provide moderate returns from current levels as the tailwinds from expected steady performance of extant core businesses and progress on related expansions will be offset by potential value erosion from significant investments in telecom.

We raise our target price to R1,060 (earlier R990), as we roll forward SOTP valuation to Q2 FY16e. Steady refining margins, firm global demand for plastics and value-accretive new core business projects are positives. However, a relatively weak polyester cycle and investments in telecom may act as headwinds in the medium term.

We have revised our standalone EPS estimates for RIL to R75.5 (-4.9%) for FY15e, R77.4 (-5.7%) for FY16e and R98.9 (-10%) for FY17e to factor in revised exchange rate forecasts of our economics team, modest increase in refining margins, changes in global petchem margins assumptions, and other minor changes.

We expect complex refining margins to remain steady at mid-cycle levels in CY14-15e given delays in capacity additions in China, shutdown of inefficient refineries in Europe, and gradual improvement in global oil demand.

Kotak Institutional Equities

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First published on: 12-04-2014 at 03:24 IST
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