We upgrade Reliance Industries (RIL) shares to ‘add’ from ‘reduce’ with a revised 12-month forward sum-of-the-parts-based target price of Rs 870 per share (earlier Rs 855). The beginning of a significant capex cycle (over $15 billion) in its core businesses will translate into growth in volumes for the petrochemical and exploration and production (E&P) segments and enhancement of margins for the refining and petchem segments.
We compute FY17e standalone earnings per share (EPS) adjusted for treasury shares) at Rs 105 assuming full utilisation of expansion projects, reasonable margins for core businesses, revival in gas production and gas price of $8 per mmBtu gas price. We compute fair value of Rs 1,050 (FY17e EPS basis) assuming a midcycle ex-growth P/E (price-to-earnings ratio) of 10 times. The current stock price offers a reasonable upside assuming successful commissioning of expansion projects and a supportive operating environment.
Improvement in core business margins augurs well; expect clarity on gas prices soon: We expect RIL to benefit from the recent improvement in global refining and petchem margins. Singapore complex refining margins have improved by $3 per barrel in the past one month. Also, petchem margins in recent months are significantly higher than CY12 levels. We expect an upward revision in domestic gas prices in the near term (to be effective from April 2014 for RIL), as the Cabinet will take a decision on the oil ministry’s recommendations of higher gas prices by the end of June 2013.
Rupee to the rescue, if margins disappoint: Shares of RIL offer a good hedge against a weak rupee. Our current exchange-rate assumptions are Rs 56 per dollar for FY14, Rs 55.50 (FY15), and Rs 55 (FY16). An increase of R1 against the dollar would increase RIL’s FY14e and FY15e EPS to Rs 67.70 and Rs 70.30, respectively from our base-case EPS estimates of Rs 65.70 and Rs 68.30. A weaker rupee would result in higher prices in rupee terms for products and raw materials of RIL’s refining and petchem segments and, hence, will translate into higher conversion margins. RIL’s E&P segment will also benefit from a weakening rupee given higher realisations.
Core-business projects to augment earnings: Here are RIL’s proposed core-business projects, which will augment earnings over the next few years.
Petcoke gasification project: The company plans to spend $4 billion on