A strong rally on cards? Brokerages raise target price for RIL, see spike in GRMs

NEW DELHI: Analysts across brokerage firms see strong performance from Reliance Industries Ltd in the upcoming quarter. At a time when benchmark index Sensex has rallied over 4 per cent so far in the year 2015, RIL has given a negative return of nearly 3 per cent in the same period.

However, analysts do not see much of downside left in the stock and advise investors to 'buy' the stock on every decline with a target of over Rs 1000.

In a recent report, global investment bank BNP Paribas upgraded the stock to ‘buy’ from ‘hold’, and has also raised its target price to Rs 980 from Rs 911. CLSA sees a near doubling of Ebitda in three years, which should drive doubling of the stock price. However, for the next 12 months, the Asia-focused broker has a target price of Rs 1250.

"We see limited downside from the current level as earnings strength should offset uncertainty with regard to the telecom investments," BNP Paribas says in a report, adding that RIL is now past major capex plans and looks poised for earnings growth, led by its core segments.

According to analysts, strength in refining margins, driven by gasoline, combined with cost benefits to refiners now seems sustainable, which will support the price.

BNP Paribas expects GRM at $9/bbl in FY16 and $10.2/bbl for FY17. However, Credit Suisse expects the oil & gas major to report gross refining margins (GRMs) in the quarter ended March 2014, which can run up to $11 per barrel.

“The Reuters complex GRM is up US$2/bbl QoQ (QTD), helped by stronger FO/naphtha cracks. Our tracker (ex-inventories) suggests RIL GRMs can be up US$3.8/bbl QoQ (US$11/bbl)," the Credit Suisse note said.

Credit Suisse is the second brokerage after CLSA to predict higher GRMs for Reliance Industries. CLSA's recent report on the company suggested that RIL's GRMs are expected to bounce back in the fourth quarter to a six-year high.

According to the Credit Suisse note, a $1/bbl higher GRM would add Rs 7.6 (10 per cent) to RIL's FY16E EPS. It has maintained ‘outperform’ rating on the stock. It has a target price of Rs 1,040 on the stock.

"The US$13 billion spend on telecom has been a large drag on RIL. If it purchases more spectrum in the current round, capex guidance would be exceeded, while the launch of services seems some time away. At current prices, RIL refining/petchem is trading at 6.7x EBITDA after a US$14 billion negative telecom NPV," the Credit Suisse report added.