CLSA upgrades rating for RIL to 'outperform', puts target price at Rs 850

MUMBAI: Asia Pacific-focussed broker CLSA upgraded Reliance Industries to 'Outperform' on Friday and increased its 12-month target price for the stock to Rs 850. In a note to clients, the broker said that the "under-weight trade on Reliance is over" and the stock could see upsides from production ramp-ups, capacity expansion, higher gas prices and an aggressive buyback programme.

The stock was upgraded by one notch from an 'Underperform' rating and is one level below 'Buy', the highest rating the broker assigns. "Adverse exploration and production news flow, lack of growth and severe consensus downgrades from lofty valuations drove a 40 per cent underperformance in the last five years. We expect these to reverse," CLSA's analyst Vikash Kumar Jain said in the note. RIL shares gained 3 per cent on optimism following the report, the highest intraday gain in a month, and closed at Rs 791 on BSE on Friday.

The analysts said that after three years of 30-40 per cent cut in consensus EPS, further downgrades could be limited and expectations are "at benign levels." "While near-term earning momentum is weak, doubling of Ebitda over 2013-17 to $13 billion and a 15 per cent CAGR in net profit will drive 3 percentage point expansion in return on equities. This will correspond to $10 billion of cumulative free cash flow despite $25 billion capex plan," Jain said.

The CLSA report comes as a breather for investors of the Mukesh Ambani-led company after its shares see-sawed through the year on growing pessimism on falling gas production in its flagship KG-D6 fields. However, CLSA believes such downgrades may come to an end. "Our analysis of disclosures by partners suggest likelihood of large reserve upgrades as integrated development plans for D6 and other blocks are approved over the next 12-18 months. These approvals will also pave the way for doubling of gas production from current levels to above 60mmscmd by FY17," it said. Besides, petrochemicals capacity will be boosted by over 60 per cent due to RIL's $12 billion downstream expansion. RIL's aggressive buyback programme will support the stock and may even be extended.

"Given RIL's cash, weak near-term earnings momentum and likely unfinished buyback quantity we expect the buyback to be extended by a year," the report said. "While we would like to see a deeper project inventory, its aggressive buyback should support the stock in the near-term even as earnings acceleration drive a 60 per cent increase in our some-of-the-parts price to Rs 1,310 per share (up 70 per cent) by March 2016. In our view, the under-weight trade is over," it added.