Nomura Financial Advisory and Securities has reiterated 'Buy' on Reliance Industries (RIL) with revised target price of Rs 1,175 from Rs 1,120 as against current market price (CMP) of Rs 959 with 22.5% potential upside in its report.
Commenting on the investment rationale, Nomura said, RIL's 4Q was strong operationally, with EBITDA 6% ahead of our estimate. Refining was the key surprise- the high reported GRM of USD9.3/bbl (estimate of USD8.7/bbl) enabled RIL to report the highest-ever refining EBIT. Petchem was also surprisingly resilient (EBIT down 1% q-q vs our expectation of a 12% decline). Only E&P was weak due to weak PMT production and lower sales. While the stock has done well recently (up 20% from recent lows in end-Feb, vs 7% for Sensex), we think the outlook will get even better post election. An early gas price hike will likely be a key trigger, but the E&P investment climate may also markedly improve.
RIL's large USD13 billion petchem/refining expansion will be key driver of earning growth over FY15-17F. PFY expansion is fully online. While there are some delays in a few projects, we will not be unduly worried.
Post election, we expect the new government to decide fast on the gas price issue (KG-D6 price/contracts expired on March 31). In our view, an easy way out would be to adopt the already notified Rangarajan formula. We now factor in a gas price increase from 1 Jul (1 Apr previously). For KG-D6, we continue to see a good case for a retroactive hike from 1 Apr 2014.
We fine-tune our earnings model by trimming our FY15-16F EPS estimates by 1-2% to reflect the delayed gas price hike and slower petchem ramp-up, but offset by marginally higher refining GRM. We roll-forward our SOTP-based valuation to FY16F and our TP increases to Rs 1,175 (from Rs 1,120).''
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