CLSA recommends reducing underweight stance on Reliance Industries

MUMBAI: CLSA is bullish on oil & gas major Reliance Industries and has maintained its outperform rating. The brokerage is of the view that the downgrade cycle for the stock is over, and has recommended investors to reduce underweight stance on the stock

The brokerage is of the view that the company’s net profit is likely to expand following a sharp QoQ expansion in GRMs.

“Although our modelled $1.6 per barrel QoQ GRM bump is lower than the Qo rise in most benchmarks (US$2.2-2.9/bbl), 2QFY13 would be third best quarter in Reliance’s history. More importantly, this will be the first time in last five years when annualised quarterly net profit run rate will surpass the annual consensus profit forecast,” the report said.

“In our opinion, this is testament to relative benign consensus earnings estimates after five-year earnings downgrade cycle involving 30-45 per cent cut in consensus EPS estimates. Moreover, this may also signal a near culmination of this painful downgrade cycle,” it added.

CLSA expects Reliance Industries’ EBITDA to double in the next five years.

“After over 40ppt under-performance in last five years, valuations are now near historical averages. A combination of the $12 billion downstream expansions, near doubling of gas price and rise in gas production should lead to doubling of Ebitda in the next five years after three years of decline. This will also drive a 45 per cent increase in our SOTP to Rs 1310/share by March 16. We recommend investors to cut their under-weight stance on Reliance,” it said.

The company’s buyback programme will help the company to maintain stock price even if the markets were to weaken.

“While refining margins have remained resilient in October so far, we build in some moderation going ahead. Nonetheless, we highlight that Reliance could buy nearly 1.2 million shares/day if it were to complete its 120 million shares buyback (ending Jan’13). This gives it enough ammunition to support the stock if markets were to weaken,” the note said.

At 10:04 am, the stock was at 814.70, down 0.16 per cent, on the NSE. It touched a high of Rs 821 and a low of Rs 813.25 in early trade.