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| Summary of Contents STOCK UPDATE Reliance Industries
Recommendation: Buy
Price target: Rs1,190
Current market price: Rs958 First-cut analysis of Q2FY2015 results Key points - In Q2FY2015, the earnings of Reliance Industries Ltd (RIL) grew by 5% YoY to Rs5,742 crore despite 7% decline in revenues, due to a better margin in refining business. The earnings growth YoY was mainly driven by higher refining margin at $8.3/bbl compared with $7.7/bbl in Q2FY2014. However, sequentially earnings were flat (up 2%) as softer GRM QoQ offset gain from better margin in petchem business.
- RIL managed to earn GRM of $8.3/bbl in Q2FY2015, a premium of $3.5/bbl over the regional benchmark (Singapore complex GRM) due to wider crude differentials and sourcing advantage. However, due to lower crude prices and supply recovery from Libya, GRM of RIL turned softer sequentially. Though, the petchem business witnessed a better margin QoQ, but the earnings of exploration business remain depressed both due to weak production in KG-D6.
- RIL managed to sustain a healthy GRM and reported better earnings than streets estimate. Further, we believe the on-going expansion of its downstream business would be the next earnings driver in the next two to three years. Currently, the stock is available at 13x and 12x, FY2015E and FY2016E earnings respectively and the valuations are lower than its historical average. We retain our Buy recommendation on the stock with a price target of Rs1,190. We shall come out with a detailed note soon.
Infosys
Recommendation: Buy
Price target: Rs4,500
Current market price: Rs3,943 Inspiring confidence, upgraded to Buy with price target of Rs4,500 Key points - In Q2FY2015 the revenues of Infosys in the reported currency grew by 3.2% QoQ to $2,201 million (revenues up 3.9% in constant currency terms, volumes up by a decent 3% and realisation up by 0.6% QoQ). On the margin front, the EBIT margin improved by 100BPS to 26.1%, driven by higher utilisation and offshore shift. The net income rose by 7.3% QoQ to Rs3,096 crore.
- Dr. Vishal Sikka has given a strategic roadmap to take Infosys back to its old way of predictable and sustainable earnings performance in the coming quarters. Going forward, the emphasis will be on enhancing the service delivery and product innovation through higher usage of automation, innovation and operational efficiency, as well as on new technologies like big data analytics and design thinking among others. In the coming quarters, Dr. Sikka will share the detailed plans of his strategy and its financial implications.
- The transition process of a strategic roadmap is a long-drawn process. However, Infosys has already been in the transition mode for the last one and half years, ie since Narayana Murthy took over the leadership in June 2013. We believe under the leadership of Dr. Sikka the transition process will accelerate and get over by Q4FY2015. We expect to see a predictable and sustainable earnings performance in FY2016 and FY2017. We have introduced our earnings estimate for FY2017 in this note; we expect a 12% earnings CAGR over FY2015-17. At the current market price of Rs3,943 the stock trades at 16.0x and 14.2x FY2016E and FY2017E earnings respectively. Given the positive leadership change, more importantly, the possible deployment of cash of $5.54 billion (as at the end of Q2FY2015), which is a strong re-rating trigger, and the roll-over of the target multiple to the FY2017 estimates, we upgrade Infosys to Buy from Hold with a revised price target of Rs4,500, which is 16x the FY2017E earnings.
| | | 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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