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Brokerages re-rate RIL stock after Q3 earnings

At least 11 brokerages have raised their price target after RIL reported better-than-expected net profit of Rs.5,502 crore
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First Published: Mon, Jan 21 2013. 11 46 PM IST
A file photo of RIL’s Jamnagar plant. Photo: Reuters
A file photo of RIL’s Jamnagar plant. Photo: Reuters
Updated: Tue, Jan 22 2013. 12 25 AM IST
New Delhi: After being surprised by Reliance Industries Ltd’s (RIL) December quarter earnings, analysts have found new reasons for optimism and a re-rating of the stock.
Following the announcement of its quarterly earnings on 18 January, at least 11 brokerages have raised their price target on RIL.
The Mukesh Ambani-led company, India’s largest by market value, reported a net profit of Rs.5,502 crore for the three months ended 31 December, up 24% from the year earlier. Its revenue in the same period grew 10.1% to Rs.96,307 crore. The analysts’ estimate compiled by Bloomberg had pegged RIL’s net profit growth at 14.4% and revenue growth at 6.45%.
The strong show was largely led by RIL’s refining business, which saw operating profit more than double year-on-year, and its petrochemical operations, where margins improved sequentially.
On Monday, RIL’s share gained 2.35% on the BSE to close at Rs.920.05 a share, its 52-week high. The bourse’s benchmark index, the Sensex, gained 0.31% to 20,101.82 points.
Over the last one year, RIL has gained 15.97%, while the Sensex has risen 20.09%.
The brokerages that revised their price target on the RIL stock were Goldman Sachs Group Inc., Deutsche Bank AG, ICICI Securities Ltd, Citigroup Global Markets Inc., Edelweiss Securities Ltd, IDFC Securities Ltd, Standard Chartered Bank, Motilal Oswal Securities Ltd, Barclays Capital Inc., Kotak Institutional Equities Research, and Bank of America-Merrill Lynch.
What analysts like is that the improvement in earnings is the result of core operations returning value rather than non-operating income inflating the bottom line. In the December 2011 quarter, other income (earned mostly through treasury operations on RIL’s excess cash) contributed 30% to its pre-tax profit. This proportion dropped to 25.4% in October-December 2012.
Goldman Sachs, in its report dated 21 January, said it expects RIL’s gross refining margin—the difference between the value of petroleum products sold and the cost of processing crude—to improve between fiscal 2013 and 2015 on “refining capacity delays, closures and improving oil demand”. The brokerage added that it continues to believe that “RIL’s major capex (capital expenditure) in core segments will lead to a structural improvement in its margins and cash returns over medium term.”
Positive updates on RIL’s shale gas business in the US, the launch of its telecom venture, or value-accretive acquisitions in its core business, could be catalysts for a stock re-rating, Goldman Sachs said.
Though RIL’s hydrocarbons exploration and production business continues to flounder, with turnover and profitability steadily falling over the last several quarters, analysts are bullish on its prospects. This is partly due to guidance provided by RIL at the analyst meet on Friday, and in part because of the recent regulatory clearances received by the company for future exploration work.
Various brokerage reports, including Goldman Sachs’s, that were issued after the analyst meet said the RIL management indicated that the decline in natural gas production from the D6 reservoir in the Krishna-Godavari (KG) basin would be arrested by fiscal 2015, and volume ramp-up from specific fields within the reservoir would begin by fiscal 2017.
“We believe the recent improvement in the pace of regulatory approvals indicate a change in policy stance on the oil and gas sector where delayed approvals over the past two years adversely affected exploration and development activity,” Deutsche Bank said in a report dated 19 January. “Over the next year, we expect progress on integrated development of KG D6, restarting of exploratory drilling, and an almost doubling of natural gas price to support the stock.”
UBS Securities India Pvt. Ltd, in a report dated 19 January, said a potential move by the government to raise gas prices post 2014 was another potential trigger for RIL in the near future.
Barclays, however, does not expect “material EPS (earnings per share) growth until
2016”, when RIL’s offgas
cracker, petcoke gasification project and new exploration and production projects begin. RIL has announced a capital expenditure plan of $12 billion for over the next five years to augment capacity at its integrated refining and petrochemicals complex at Jamnagar in Gujarat.
“Even so, questions on growth will recur unless Reliance builds a deep $25-30 billion project inventory in its core energy space, in our view,” Barclays said in its report dated 21 January. “Its diversification efforts (organized retail has yet to break even; telecom, to launch in 2013, will be capex intensive) have been a drag on return ratios.”
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First Published: Mon, Jan 21 2013. 11 46 PM IST
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