Brokerages like CLSA, Bank of America Merrill Lynch & Barclays turn bullish on RIL ahead of Q3 show

MUMBAI: Leading fund houses such as CLSA, Bank of America Merrill Lynch, Barclays and others have upgraded Reliance Industries (RIL) ahead of its December quarter (Q3 FY14) results.

Brokerages expect the Mukesh Ambani-run RIL's earnings growth to improve substantially from the next fiscal year (FY15), driven by projects that double most of its petrochemical capacity and boost its refining margin (GRM). Brokerages also expect RIL's oil and gas business to see a turnaround in the next fiscal.

They expect RIL's earnings to grow at 19% (EPS CAGR) over fiscal year 2014-2016. Most of the brokerage houses have set an average price target of Rs 1,050 for the stock, which is almost a 20% upside from the current level. CLSA says RIL may consider another share buyback, which may limit the downside for the stock.

"We have upgraded RIL to 'Buy' and have raised its price target to Rs 1,050. We expect operating profits to double in the next three years due to gas price hikes from April 2014, increase in gas production, and refining expansion. There's a possibility of another share buyback as regulatory moratorium ends in February 2014, and the stock is within 15% range of the last average buyback price," said Vikash Kumar Jain, analyst at CLSA.

RIL's stock performance has been disappointing in the past five years due to weak earnings growth and de-rating of its oil and gas business. However, analysts say RIL's oil and gas business is expected to see a turnaround from the next fiscal year (FY15), driven by gas price hike and rebound in production and reserves. The stock is currently trading below historical average multiples, thus making valuations attractive.

"We have upgraded RIL to 'Buy' from 'Neutral' and have raised the price target to Rs 1,001 from Rs 925, as the issues that have hurt its stock performance are likely to be resolved. The immediate trigger for rating upgrade is the recent sharp recovery in gross refining margins (GRM). RIL may report its highest ever quarterly profit in fourth quarter of fiscal year 2014," said Vidyadhar Ginde, research analyst at Bank of America Merrill Lynch.

Analysts also expect positive news from its subsidiaries. They expect its organised retail business to turn profitable, and the US shale gas business to grow in scale. The launch of RIL's 4G telecom operations and the recent rise in US shale gas prices are also seen as supportive factors for the stock.

"We have raised our price target to Rs 1040 from Rs 900. The near-term catalysts for the stock are rising refining margins and the final government notification on higher gas prices which nearly double gas realizations from April 2014. The valuations are looking attractive as RIL is trading 10%-30% discount to its global peers," said Somshankar Sinha, analyst at Barclays.