Mukesh Ambani-controlled Reliance Industries Limited (RIL) reported a standalone net profit of Rs 7,704 crore for the quarter ended September 2016 (Q2 FY17), a 17.9% jump from the Rs 6,534 crore profit after tax (PAT) reported in the previous corresponding period.
At the consolidated level, however, net profit at Rs 7,206 crore, was 22.9% lower as compared to Q2 last year. The results came in post market hours on Thursday. On Friday, the stock lost over 1% by 930am on the National Stock Exchange (NSE) at Rs 1075 levels. It hit an intra-day high of Rs 1,097. By comparison, the Nifty50 was trading 0.3% lower at 8,675 levels.
So should you buy the stock post the results? Here’s what leading brokerages and research houses suggest.
Robust petchem and refining came in line with our estimate. Projects – Refinery off-gas cracker (ROGC), petchem, and ethane imports – are nearing mechanical commissioning in 1Q17 and petcoke project (PGP) by June-17. We expect these projects to add around $2 billion in F18 EBITDA and $3.2 billion in F19, the first full year of commissioning.
Our price target of Rs 1,280 is the base case value derived from our sum of the parts (SOTP) valuation. We value the petrochemical and refining businesses at target EV/EBITDA multiples of 7.5x and 6.7x, respectively, in line with the global averages. To capture the value of downstream projects (which are nearing completion), we use the average EBITDA of F18e and F19e, which we consider sustainable levels.
RIL stock has just been a market performer year-to-date (YTD) after outperforming the Sensex by over 15% during the first three months of CY2016. We think current valuations are attractive. F18e P/B of 1.1x is near a 10-year low, and F18e P/E of 13x is at a 10% discount to its 10-year historical average.
Reliance’s EBITDA was largely in line with our estimate though petrochemical earnings surprised positively. Management maintained timelines for key petrochemical projects but pushed back petcoke gasifiers by at least a quarter with full impact now likely only by Jan-18. Capex in 2Q declined quarter-on-quarter to $2.6 billion but full year capex is almost certain to exceed guidance, with $8.6 billion already spent including on spectrum. Maintain Hold.
Our fair value of Rs 1040 for Reliance is based on a SOTP of the different businesses and implies 14x FY18E P/E. Key risks include higher/lower downstream profits; positive/negative surprise on Jio performance post launch; corporate action.
Also Read: Reliance Jio says adding 0.6-1.1 million customers every day
We raise FY17-19 EPS by 6.9%/1.2%/1.2% to reflect second quarter results and updated volume cost and other income trends. Hence we increase our FY18 SOTP-based 12-month target price to Rs 1180 (earlier Rs 1175). Maintain Buy as we like RIL’s exposure to three themes: (1) high refining complexity; (2) improving free cash flow as capex intensity declines, (3) organic earnings growth. Key risks: Lower refining/petchem margins, project delays.
As regards Jio, RIL has yet to guide the commercial rollout date by which depreciation will get charged to the profit & loss account. The regulator has approved the company’s tariff plan that envisages nil charge for voice calls. However, the regulator has also asked the company to stop the current promotional offer of free services to new customers by 3 December 2016.
We have increased our target price to Rs 1,078 from Rs 1,042 as we roll forward valuation by a quarter and incorporate a new discount rate for India (down from 9.5% to 9%) as per the HSBC house view. Our target price implies potential downside of 1%, and we rate the stock Hold. Key upside/downside risks include higher/lower GRM or petchem margins and higher/lower gas production.
Over the next three-nine months, RIL intends to commission projects with investments of around $40 billion (75% of its market cap). Completion of ethylene offgas cracker and paraxylene capacities are expected in this quarter, while petcoke gasifier should be in 1HCY17. Management expects the commercial launch of the telecom venture RJio over the next few months.
Also Read: Reliance Jio isn’t a ‘punt’ but a well-engineered business: Ambani
We believe that any change in the regulatory environment of the oil and gas sector and a downturn in global commodity prices/margins are key risks for RIL. Exploration and production activities face risks such as volatility in oil and natural gas prices, as well as operational, financial, geological and meteorological issues. Moreover, any delay in the planned launch of its telecom venture or a lower revenue ramp-up could be a key risk to the stock price. Out 12-month price target is Rs 1,235.
While completion of downstream projects and firm cyclical margins will improve PAT going ahead, roll-out of telecom business will reduce valuation overhang. We expect RIL’s PAT to grow at 14% over FY16-18. We are positive on R-Jio, which is backed by fastest speed, unmatched spectrum, strong content, wide-scale fibre network and easy availability of 4G-VoLTE handsets. Maintain BUY with target price of Rs 1,300.