Upgrade Reliance Industries to overweight on attractive valuations: Morgan Stanley

Upgrade Reliance Industries (RIL) to ‘overweight’ with a price target of R1,062 per share. RIL’s profits stagnated for the last five years, leading to under performance of 80%. FII ownership and valuations are at multi year lows. With 70% of $40 billion capex for F14-18e now behind, profits are finally set for a three-year CAGR of >15%.

Valuations are now compelling and FII under-ownership is at a five-year high. With higher confidence in F17e earnings, P/E is 9x and P/B is 1.x – near 10 year trough. Even relative P/B of 0.4x versus the Sensex is at a ten-year low.

Profits are expected to grow 50% over F15-18e. RIL is spending $15.5 billion on four downstream projects; we project they will add ~$3.1 billion in ebitda. Our deep analysis of these projects under various oil price scenarios suggests 37% higher ebitda even with oil at $40 per barrel.

Outlook is getting better for the telecom business. RIL has invested ~20% of its capital employed in telecoms. This has been our biggest concern. However, the launch is nearing, the regulatory environment has improved; spectrum auction bidding was rational, and the 4G ecosystem is improving. All indicate a better business case.

Reliance Industries Limited (RIL)