Shares of Reliance Industries (RIL) which were trading weak over past two weeks gained most on Monday following its better-than-expected first quarter earnings announced on Saturday. The stock gained 2% to Rs 997.35 on the National Stock Exchange after hitting day's high of Rs 1,007.75.
The shares have gained 11% this year but lags behind the benchmark Sensex, which has jumped 21% so far.
In fact, RIL counter was the second-worst performer on the key index in the past month. The refiner and petrochem producer reported 5.5% jump in net profit for the first quarter at Rs 5,649 crore, higher than street estimate of Rs 5,435 crore. Lower interest and depreciation costs along with slightly better refining margins aided higher profit compared with a year ago quarter.
Most brokerage houses -- both domestic and international – have assigned `neutral' to `positive' rating on the stock although majority have maintained `buy' or `accumulate' rating on the stock. Several of them hiked their target price to more than Rs 1,000 per share. Most notable have been Edelweiss (revising the price upwards to Rs 1,192 from Rs 1,064), Citi (to Rs 1,144 from Rs 1,049) and IIFL (which upgraded to `buy' from `sell' with target price of Rs 1,200.)
"RIL remains on track to reverse the last three years track record of stagnant earnings and moderating return ratios over FY15-17E, via the $12 billion downstream expansion and improving regulatory environment. The downstream expansion underpins around 14% CAGR in consolidated EBITDA over FY14-16E, while higher gas price for upstream could reinvigorate the segment, providing more upside potential," IDFC said in a post earnings note.
IDBI Capital which is overweight on the stock revised the target price to Rs 1,130 from Rs 1,100. The brokerage also revised its EBITDA/PAT estimates upwards by 1%-3% for FY15 to factor in strong growth from retail business and lower interest expense during the quarter.
"We believe healthy GRM, higher petrochemical volume, strong polymer margin, robust growth in shale gas and retail business would drive future growth," the brokerage added.
Apart from the likely gas price hike, the company's telecom foray and expansion of petrochemical facilities would also be the driving force for the stock over next two years. However, an overhang remains on the company due to lingering issues related to KG-D6 gas output and related legal disputes. Many analysts who did not wish to be quoted believe that in the legal dispute over the production sharing contract, government's side appears weak and RIL was most likely to win the case.
"The stock could give around 15-20% return from the current market price over the next one year. As more clarity emerges on gas price and projects like pre-coke gasification coming online and retail business gaining more traction, further changes in earnings estimates are expected," Gagan Dixit, oil & gas analyst at Quant Global Research, said.
The company's gross refinery margins (GRMs) fell to $8.7 per barrel from $9.3/bbl in the March in line with 6% sequential fall in benchmark Singapore complex margins.
"We expect the refining business to face headwinds going forward on account of higher capacity additions compared to demand. To our mind, lack of demand growth would have a negative impact on RIL's petchem margins," brokerage LKP said in a note, which has a `neutral' rating on the stock with target price of Rs 994.
Dixit of Quant Research, however, believe that the recovery in petchem margins would be faster than the refinery margins. Refining would remain a concern unless global demand for fuels improve, he said.
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