Investor's Eye: Update - Reliance Industries (Huge capex to build economic moat, price target revised to Rs1,190)

 

Investor's Eye [June 24, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE     Reliance Industries Recommendation: Buy Price target: Rs1,190 Current market price: Rs1,060   Huge capex to build economic moat, price target revised to Rs1,190   Key points  In FY2014, the consolidated earnings of Reliance Industries Ltd (RIL) grew by 8% YoY largely driven by the petrochemical business. A decline in the earnings from the exploration business (due to a drop in production from the Krishna-Godavari D6 block) was compensated by higher earnings from the retail, US shale gas and refining businesses. A growth in the EBITDA of the retail venture and a significant ramp-up in the US shale business were the positive surprises in FY2014. RIL managed to impressively convert almost 100% of its EBITDA into operating cash flow and operate on negative working capital during FY2014. However, due to large capex, the free cash flow has turned negative for the first time in four to five years, as RIL is going through a mega capex cycle.  The company is having an ambitious capex plan ahead (Rs180,000 crore in the next three years) to build assets in the existing business lines (petrochemical, refinery, exploration and retail) and enter in a big way in the broadband and telecom service (under Reliance Jio) segment at a capex of around Rs 70,000 crore. During the AGM of FY2014, the management shared its ambition to be among the Fortune 50 companies in future.  We believe the RoE of RIL would remain around the current level, given the huge capex planned. But such investments are likely to create a long-term economic moat through scale and place it ahead of competition which should eventually create shareholder value in the long run. We have fine-tuned our earnings estimates and added value for the broadband business in the SOTP valuation. Consequently, we have retained Buy rating on RIL with a revised price target of Rs1,190. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards,  The Sharekhan Research Team

 

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