Reliance Industriesí (RIL) shares have under-performed the BSE-30 by 98% since April 2009 due to its weak EPS growth (CAGR of 4% for FY08-13) and de-rating of its E&P. However, RIL has outperformed BSE-30 to date in FY14 by 3%.
In our view, this recent outperformance is due to expectations that RIL is on the cusp of a strong earnings growth phase and its E&P is set to turn around. However, we do see risks. RILís FY15-16E GRM could be significantly lower than assumed and its gas price may not be hiked in April 2014. Until clarity emerges on these concerns, we remain Neutral.
RILís E&P was de-rated as its KG D6 reserves were cut by over 65% and gas production declined by over 75% since 1Q 2010. We now expect its reserves and E&P Ebit to rebound sharply in FY15E, but off a low base post a sharp dip. However, we do not see RILís E&P valuation and earnings going anywhere near peak expectations before the de-rating. There is some uncertainty on KG-D6 gas price from April 2014.