RIL becomes brokers’ favourite; Morgan Stanley upgrades to overweight

MUMBAI: Shares of Reliance Industries gained momentum and surged as much as2.67 per cent in intraday trade after Morgan Stanley upgraded the stock to ‘Overweight’ from ‘Underweight’ and raised its target price to Rs 1,062 per share. According to the brokerage, the good news outweighs the bad news in the company. The stock ended day at Rs 824.7, up 1.77 per cent.

"FII ownership and valuations are at multi year lows. With ~70 per cent of US$40bn capex for F14-18e now behind, profits are finally set for a three-year CAGR of >15 per cent," the report said.

Morgan Stanley expects RIL’s earnings to grow 50 per cent over F15-18e, driven by downstream expansion.

"Our deep analysis suggests that RIL’s four downstream projects would add >50 per cent to EBITDA at US$70/bbl oil. The project commissioning starts F4Q16. Even on a stressed crude oil price of US$40/bbl, we estimate projects to add US$2.2bn or >37 per cent to current EBITDA," the report said.

Analysts at Morgan Stanley are of the view that RIL’s telecom foray concerns are also moderating due to improving regulatory environment and cheaper spectrum portfolio vs. incumbents.

Recently foreign brokerages such as Credit Suisse and CLSA came out with reports predicting higher Gross Refining Margins (GRMs) for the company. Credit Suisse sees the company’s GRMs to rise as high as $11 per barrel.

According to Credit Suisse note, a $1/bbl higher GRM would add Rs 7.6 (10 per cent) to RIL's FY16E EPS. It has maintained Outperform rating on the stock. It has a target price of Rs 1,040 on the stock.

CLSA expects RIL’s GRMs to bounce back in fourth quarter to a six-year high to $10.3 per barrel.

"Driven by improvement in naphtha crackers, petcoke spreads, higher light-heavy crude differentials and shrinkage in internal loss due to the lower Brent price, Reliance Industries’ 4QFY15 refining margin could rise US$3/bbl QoQ to a six-year high ofUS$10.3/bbl,"the CLSA report said.

The improvement in refining margins can help RIL to clock a record quarterly net profit in next quarter. The massive refining expansion should drive Reliance to an all-time high quarterly PAT of Rs 62.5 billion in 4Q, the CLSA said.