Buy Reliance Industries, target Rs 1,465: Sharekhan
Buy Reliance Industries Ltd. at a price target of Rs 1465.
The current market price of Reliance Industries is Rs 1,276.
Time period given by the brokerage is one year when Reliance Industries price can reach the defined target.
View of the brokerage on the conpany:
Implementation of IMO regulations to benefit refiners as diesel cracks could increase significantly: International Maritime Organisation (IMO) has approved a reduction in sulphur content to 0.5 per cent for marine fuels used by the global shipping industry starting from January 2020 vs. current sulphur content limit of 3.5 per cent. The new limit is applicable to all ships outside emission control areas (ECAs) such as Europe and North America (where sulphur limits are already at 0.1 per cent). Industry experts expect a shift in demand from high sulphur fuel oil (HSFO) to diesel as the preferred marine fuel and consequently expect incremental diesel demand of 2 mbpd-3 mbpd (much higher than the average incremental diesel consumption of 435kbpd over CY2000-CY2017). Hence, diesel cracks are expected to increase significantly from the current level of $13-14/bbl. Moreover, price differential between light-heavy crude oil could widen as demand for heavy crude (high sulphur content) is expected to reduce with likely change in refinery configuration post implementation of IMO regulations. Moreover, refiners would require shutdown in CY2019 to implement changes in the refining configuration and, thus, create supply shortages in the near to medium term. Thus, we believe refining margins especially for complex refiners could surprise positively over FY2019E-FY2020E.
RIL likely to be the biggest beneficiary of change in IMO regulations: We believe complex Asian refiners such as Reliance Industries Limited (RIL) are expected to benefit the most given the higher share of diesel at 40 per cent in the overall refinery product slate and ability to process heavy crude. We highlight here that for every $1/bbl increase in refining margins, RIL’s FY2019E-FY2020E EPS would increase by nearly 6 per cent and its valuation would increase by nearly Rs 45/share. We currently model gross refining margin (GRM) of $12/bbl for FY2019 and FY2020.
Outlook – Robust for core refining and petrochemical businesses; Digital services on strong footing: We remain optimistic about strong earnings growth for the petrochemical segment on account of feedstock advantage from ethane imports projects and full benefit from commissioning of Refinery Off Gas Cracker (RoGC). Further, refining margins are expected to remain strong supported by robust outlook for middle distillate crack spreads (diesel, kerosene and ATF) and gradual ramp-up of petcoke gasification project. Moreover, robust subscriber addition, continued revenue market share gain and launch of broadband services would result in sustained improvement in the financials of its digital services business over the next couple of years.
Valuation – Maintain Buy with a revised target price of Rs 1,465: We have revised our earnings estimates for FY2019 to factor higher subscriber base for the telecom business, offset by higher interest cost and lower profitability in the exploration and production segment, given the declining domestic gas production along with weakness in U.S. natural gas prices. We largely maintain our FY2020E EPS. We have increased our price target (PT) to Rs 1,465/share to reflect higher valuation for the telecom and retail businesses. Moreover, we see upside to our earnings estimate and PT if the likely positive impact on refining margin from implementation of IMO regulation materialises for complex refiners such as RIL. We maintain our Buy rating on RIL as we remain positive on the earnings growth momentum (expect 19 per cent PAT CAGR over FY2018-FY2020E).