Reliance Industries - Upgrade to Buy - Angel Broking

We upgrade Reliance Industries (RIL) from Neutral to Buy. The stock price has declined by 14% over the past one month on account of concerns on the possibility of the government rolling back the announced gas price hike. However, these concerns are overdone in our view.

On expectations of the Fed tapering off QE-3 and elevated domestic current account deficit, the INR continues to weaken against the USD. This, in turn, has resulted in tightening measures by the RBI which is not likely to support the domestic cyclical businesses' earnings growth in the near-term. RIL, on the other hand, generates a majority of its revenue from exports while it has relatively better pricing power in the domestic market. Moreover, cheap valuations (10.1x FY2015 PE) make it a better play than other defensives such as FMCG, Pharma and IT stocks in our view.

Refining segment to gain due to INR depreciation: INR has depreciated against the USD by 8% over the past one month. Since RIL exports a significant proportion of its refined products, INR depreciation results in higher realizations and hence higher profits for RIL. We opine that RIL is well-poised to benefit from the domestic currency depreciation going forward.

Regulatory concerns on gas price hike overdone: During June 2013, the Cabinet Committee of Economic Affairs (CCEA) had announced to raise gas price to ~US$8.4/mmbtu effective April 1, 2014 for a period of five years. However, since then there have been concerns on price hike by some of the political parties. Hence, RIL's stock price has declined to factor in the uncertainty on gas price hike. However, in our opinion, the government is unlikely to rollback the gas price hike given its focus on increasing domestic gas production and its intent to lower energy imports going forward. Hence, we believe that the gas price hike is likely to stay.

Outlook and Valuation: RIL is likely to be a key beneficiary of the increase in gas price. Moreover, higher gas price will incentivize RIL to explore gas blocks which were unviable previously. Over the medium term, the company is likely to benefit via upcoming polyester capacity, petcoke gasification and off gases cracker. We upgrade the stock from Neutral to Buy with a SOTP-based target price of Rs. 956.

Source : Equity Bulls

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