We upgrade Reliance Industries (RIL) to buy with a revised target price of R1,040 (+4%), as the CMP adequately factors, erosion of earnings/valuation from its telecom foray and weaker economics of core-business projects in a lower crude-price environment. In the medium term, the following moves could help create value for shareholders, commissioning of ongoing projects, foray in fuel retailing, listing of retail entity and strategic divestment in its telecom business.
We believe RIL could consider a buyback at CMP, given manageable leverage at the consolidated level even as a major capex cycle nears completion over the next 12 months. A meaningful buy-back programme will provide comfort to the investors and protect any further downside from continued concerns about its telecom business. If the company considers cancelling treasury shares, it would remove the unnecessary complexity and optically increase RIL’s EPS by 9.9%. RIL does not need to raise equity capital in the long run, given its likely large free cash flow generation from the core businesses and ability to secure long-term loans at attractive yields.
While we expect strong earnings growth at the standalone level, the consolidated earnings trajectory will be muted due to losses from the telecom business in the initial years and limited contribution from other businesses. Nevertheless, the stock is inexpensive at 10.2X FY16 adjusted standalone EPS and is already discounting telecom losses to continue in perpetuity, which we believe is inappropriate and unlikely.
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