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Buy Reliance Industries - STOCK UPDATE - Sharekhan
Posted On : 2011-12-02 10:12:10( TIMEZONE : IST )
Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,040
Current market price: Rs798
GRM slumps to dent refining business
Out of its three key businesses (upstream exploration, refining and petrochem), Reliance Industries Ltd (RIL) has been struggling with the upstream exploration business which is witnessing lower than expected gas production and regulatory issues. Now, the refining business could also come under stress due to a slump of over 30% in the Singapore gross refining margin in the past couple of weeks.
The declining gas production and a slump in the gross refining margin (GRM) can potentially result in a downgrade in RIL's FY2012 and FY2013 earnings estimates despite the benefits of rupee depreciation. According to our sensitivity analysis assuming the GRM stays at the current level or even deteriorates from here, RIL could undergo a 4-6% downgrade in FY2012E earnings and 11-12% downgrade in FY2013E earnings.
At present we are not changing our estimates. We are waiting for the volatility in the GRM to settle down before making any revisions. RIL is trading at 12x its FY2012E and 11x its FY2013E earnings. It is available at around 6x on the enterprise value (EV) to EBITDA multiple. We retain our estimate for the time being and maintain our Buy rating on the stock with a price target of Rs1,040.
View and valuation: We are not revising our estimates as of now and await further establishment of the current trend of a lower GRM in the coming days. Nevertheless, we have tried to capture the downside risk in case RIL's GRM slips and remains lower in line with the Singapore GRM. We believe the declining gas production from KG D6 and a lower GRM would continue to put downside risk on the company's earnings. However, an appreciating dollar helps the company to a certain extent in notching better revenues in rupee terms. Given the three factors playing their respective impact on the company's earnings, we believe there is downside risk on the company's earnings to the extent of 4-6% in FY2012 and 11-12% in FY2013 if the trend of a low GRM continues for the rest of the year. Though we have not revised our estimates, we highlight the downside earnings risk for RIL from a lower GRM.
Currently, the stock is trading at 12x its FY2012E and 11x its FY2013E earnings. It is available at around 6x on the EV to EBITDA multiple. We retain our estimate for the time being and maintain our Buy rating with a price target of Rs1,040.
