Upgrade RIL to a ‘buy’ rating with an target price of R980. We also roll over our target base by a quarter to Jul15-Jun16 earnings (3:1 earnings ratio for FY16 and FY17). We see limited downside from the current level as earnings strength should offset uncertainty with regard to the telecom investments.
Strength in refining margins, driven by gasoline, combined with cost benefits to refiners (from low crude prices) now seems sustainable. Also, strength in chemical margins post the Chinese New Year bodes well for MEG, PVC and PP, which have bounced back sharply. In addition, petchem expansions and the pet-coke regasifier should strengthen RIL’s operating earnings (with an ebitda CAGR of 19.5% for FY15-17e).
RIL is now past the major capex plans ($12 billion for petchem and $10 billion for telecom) and looks poised for earnings growth led by its core segments. We expect GRM at $9 per barrel and $10.2 per barrel for FY16/17 (inclive of $1.7 per barrel from the pet-coke regasifier project). Petchem ebitda should also see a CAGR of 32.6% over FY15-17.
Telecom is the key concern with lack of clarity restricting us from incorporating it into our RIL valuation. We estimate FY17 to be the first full year of operations and potential losses of $900 million to $2 billion, largely driven by interest expense and depreciation.