Going into overdrive

RIL stock has at best been a market performer for the past three years, due to stagnant earnings, valuation de-rating and downgrades in recommendation. Only 38% of analysts have an OW/Buy recommendation on RIL currently, which is near an all-time low, reflecting excess pessimism.

Valuation precedes earnings revival: We forecast earnings to nearly double over four years following a mostly committed, substantial capex of $30 bn. FY14e (estimates) revival may seem mild, but we refer to FY05-08 when more than 2x(times) PBV (price to book value) re-rating was driven by strong growth forecasts due to similar visibility on capex (capital expenditure).

Growth turnaround triggers may be even closer than expected, especially as the market is oblivious to the 48% year-on-year growth in RIL’s retail business in H1FY13 and given that petchem (petrochemicals) capacities are to kick in from as early as FY14.

Hike target price to R1,100, highest on street: We raise FY15e PAT (profit after tax) by 6% (3% ahead of consensus), and estimate profit growth to accelerate to around 25% per annum in FY15-17e. We hike our target price by 34% to R1,100 (implied FY14e PER—price-equity ratio—of 15x, mid range historically); & upgrade our recommendation from Neutral to Outperform.

Escalating growth triggers

(i) Retail turnaround, hidden trump-card: Retail is a long-gestation, low margin business with high operational leverage. After 7+years of investments and re-structuring, we feel RIL Retail is poised to turn around. We conservatively forecast a 30% 5-year CAGR in turnover to $8 bn and

... contd.