Buy RIL for target price of Rs 1200: IDBI Cap

Sudeep Anand of IDBI Capital Markets Services is upbeat on Reliance Industries and has a buy on the stock with a target price of Rs 1200.

The next trigger for the stock would be launch of Reliance Jio and the commentary on its expected performance.

In the first quarter, he expects the gross refining margins around USD 10.2 per barrel versus last year same quarter at USD 10.2 per barrel and refining EBIT of 8 percent at Rs 5,500 crore. The overall EBITDA would be round 9 percent year on year at Rs 10,100 crore, says Anand.Below is the transcript of Sudeep Anand’s interview to Sonia Shenoy and Latha Venkatesh on CNBC-TV18. Sonia: There is an expectation that there could be lower gross refining margins (GRM) this time and that could drag down the profitability. What are the numbers that you have come out with? A: Refining margins have come down to USD 5 per barrel as against last quarter of USD 7.7 per barrel. At the same time, at Reliance, we are expecting a GRM of USD 10.2 per barrel against last year same quarter of about USD 10.8 per barrel. but overall if you see, the earnings before interest and taxes (EBIT), we are expecting about 8 percent growth in year-on-year (Y-o-Y) growth in your refinery EBIT to Rs 55.3 billion.

At the same time, if you look at petrochemicals, we have seen an expansion of polymer and polyester margins in this quarter. So, we are expecting strong petrochemical EBIT margin of 14.2 percent against last year same quarter of 12.7 percent. So, these two, both the segments on the profitability side, we will be seeing an expansion in the growth. So, overall, we are expecting earnings before interest, taxes, depreciation and amortisation (EBITDA) growth of about 9 percent Y-o-Y to Rs 101 billion and net profit growth of about 6 percent Y-o-Y to about Rs 66.8 billion. Latha: What about the profit expectation for the quarter itself? What is the exact number you should be waiting for and what kind of a GRM will satisfy the street? A: Profits, we are expecting Rs 66.8 billion for this quarter and GRM we are expecting USD 10.2. So, this time, we are expecting some profit comes from your inventory gain, that will give the higher GRM for the company. Sonia: So, from the second half of the year, the focus will shift to the telecom launch and a lot of the new projects that the company is commissioning. What kind of an earnings uplift do you expect from the second half and I am just trying to understand where the next trigger will come in for the stock which has not performed at all over the last couple of years? A: Next leg of your rally would be based on its commentary on Reliance Jio and the performance of Reliance Jio. As well, the company is commissioning two major projects, which is expected to come by end of this financial year. So, the performance of both the projects will be a trigger for the company and overall, we are expecting about 8 percent compounded annual growth rate (CAGR) on a profit after tax (PAT) level for Reliance and expecting an earnings per share (EPS) of about Rs 97.8 for FY17 and Rs 106 for FY18. Latha: The price has not gone anywhere, what is your price target? A: We have a buy recommendation with a target price of Rs 1,200. Disclosure: Network 18, which publishes moneycontrol.com, is now part of the Reliance Group.