We downgrade Reliance Industries (RIL) to 'neutral' (earlier 'overweight') with a new March 2015 price target of R1,100. While we remain positive on RIL’s strategy of organic growth in core businesses, we believe the current share price already reflects the positive catalysts that were identified in our upgrade in Q4CY13.
Further, we do not foresee a material change in the earnings trajectory. We believe GRMs are likely to be slightly better, but could be offset by weaker petchems margins, with earnings driven by capacity growth.
We factor in gas price reform, but a turnaround in production is likely to be slow, in our opinion.
We value the refining/petchem businesses at 6.5x/7.5x EV/Ebitda, in line with or at a slight premium to regional peers. We value the E&P business at R174 per share, and investments at book value.
Upside risks to our call are better refining/petrochemical margins, and higher-than-expected gas prices (reference is $8.4/mmbtu), while downside risks are a delay in gas price increases and a significant increase in RIL JIO capex.
We believe RIL’s fundamentals remain on a solid footing — refining margins are expected to trend upwards this year, with a better match in demand-supply. We continue to expect gas price reform, aiding clarity in terms of production trajectory and investments.