 "RIL: Current weakness an opportunity for long term investors")
Reliance Industries Ltd (RIL)’s stock declined a little more than nine per cent on worries of high inventory losses, due to a steep fall in oil prices. While there could be a one-time impact in the December quarter, analysts feel the current levels offer an attractive entry point for investors.
The Street is concerned about the company’s investments in telecom business, weakness in petrochemical and refining margins, decline in KG-D6 gas production and lower-than-expected benefits from gas price rises. As a large part of these concerns have been factored in, analysts feel the sharp decline in stock prices after November 28 is unwarranted.
What will benefit the company is the weaker rupee expectation, which will boost earnings. And, the recent strengthening of petrochemical margins, on the back of maintenance shutdowns at facilities in China. Lower crude oil prices benefit the petrochemical segment, too, as basic feedstock becomes economical. Analysts at Kotak Institutional Equities have revised their FY15-17 earnings estimates (standalone) for RIL to Rs 74.5 (up 3.5 per cent), Rs 78.3 (up 2.9 per cent) and Rs 97.1 (up 6.9 per cent). This is due to weaker rupee-dollar exchange rate forecasts, lower oil and gas prices and modestly higher petchem margins among others.
While the focus in 2015 will remain on Reliance Jio’s launch, analysts are not enthused, given the high initial costs and longer break-even period.
Analysts at Kotak ascribe nil equity value to the telecom segment in RIL’s sum-of-the-parts (SOTP) calculation. This is due to potentially weak performance of the non-core businesses and also losses from the telecom segment in initial years as a key risk to their positive stance. However, even after this they arrive at a SOTP-based target price of Rs 1,110.
The focus (from a valuation standpoint) remains on the core refining and petchem segment. The segments contributed 93 per cent to gross revenues and 84 per cent at PBIT (profit before interest and tax) levels during the September quarter. Analysts are tweaking their FY16 earnings estimates, given the telecom expenditure, soft petchem cycle and the fact that fresh investments in the segments (refining, petrochemical) are likely to yield results only in FY17. However, post FY16, they remain confident of earnings growth.
Analysts at Nomura have tweaked their FY16 earnings by 11-12 per cent on the back of lower gas price increases and delays in the petrochemical cycle. But, they say, after refining/ petrochemical expansion projects are completed, earnings should appreciate sharply. Compared to only three per cent Ebitda (earnings before interest, tax, depreciation and amortisation) CAGR (compound annual growth rate) over the past four years, ex-telecom, they estimate one of 15 per cent over the next four years. Their target price for Reliance stands at Rs 1,115.The Street is concerned about the company’s investments in telecom business, weakness in petrochemical and refining margins, decline in KG-D6 gas production and lower-than-expected benefits from gas price rises. As a large part of these concerns have been factored in, analysts feel the sharp decline in stock prices after November 28 is unwarranted.
What will benefit the company is the weaker rupee expectation, which will boost earnings. And, the recent strengthening of petrochemical margins, on the back of maintenance shutdowns at facilities in China. Lower crude oil prices benefit the petrochemical segment, too, as basic feedstock becomes economical. Analysts at Kotak Institutional Equities have revised their FY15-17 earnings estimates (standalone) for RIL to Rs 74.5 (up 3.5 per cent), Rs 78.3 (up 2.9 per cent) and Rs 97.1 (up 6.9 per cent). This is due to weaker rupee-dollar exchange rate forecasts, lower oil and gas prices and modestly higher petchem margins among others.
While the focus in 2015 will remain on Reliance Jio’s launch, analysts are not enthused, given the high initial costs and longer break-even period.
Analysts at Kotak ascribe nil equity value to the telecom segment in RIL’s sum-of-the-parts (SOTP) calculation. This is due to potentially weak performance of the non-core businesses and also losses from the telecom segment in initial years as a key risk to their positive stance. However, even after this they arrive at a SOTP-based target price of Rs 1,110.
The focus (from a valuation standpoint) remains on the core refining and petchem segment. The segments contributed 93 per cent to gross revenues and 84 per cent at PBIT (profit before interest and tax) levels during the September quarter. Analysts are tweaking their FY16 earnings estimates, given the telecom expenditure, soft petchem cycle and the fact that fresh investments in the segments (refining, petrochemical) are likely to yield results only in FY17. However, post FY16, they remain confident of earnings growth.