How to play Reliance post stellar Q4 nos

Tarun Lakhotia of Kotak Securities say the fair value estimate of Reliance Industries, based on FY17 numbers is Rs 1,040 per share, which is valuing refining and petrochemical segments is at 6 times EV/EBITDA.

In an interview to CNBC-Tv18, he says the investments in core business projects is what is going to drive earnings growth. the investments in telecom is something where there is not much of clarity with respect to the timing, strategy as well the expectation on value accretion.Below is the transcript of Tarun Lakhotia's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What have you made of the results in terms of the stock price, that has already run up, have you raised your stock price and what is your view, will it take a breather now or are you expecting it to now start discounting higher revenues next quarter as well?A: We have not changed our target price. Our fair value estimate based on FY17 numbers is Rs 1,040 which is valuing, refining and petrochemical segments at 6 times EV/EBITDA and not ascribing any equity value to shale gas or telecom ventures.I think from the stock point of view, if you look at the total capital employed of the company, they have a capital employed of USD 61 billion out of which 20 percent is in telecom segment as on date, 13 percent is in shale gas and about 17 percent is in the core business projects. So if I add that, almost 50 percent of their gross capital employed is not generating any returns as on date.Going forward the investments in telecom would comprise of about 25 percent of their balance sheets or the capital employed and another 25 percent would come from the core business projects. The latter half is where we all are optimistic on that is going to drive strong earnings growth at least on the standalone basis. The former half is what is worrying the market at this point of time that how much losses will the telecom venture make in the initial years and how should we value that given the lack of clarity both on the timing and strategy of the telecom foray.Latha: Your idea of latter half and former half -- latter half means second half of the year or does it mean something else?A: I meant basically the investments in core business projects is what is going to drive earnings growth and the investments in telecom is something where there is not much of clarity with respect to the timing and strategy as well as what kind of value accretion may happen in the business if at all it may.

Sonia: Will refining be the main driver of growth even in FY16 and what is your expectation as far as gross refining margins (GRMs) are concerned for the quarters to come?A: We are building in about USD 8.6-8.7 per barrel GRM as compared to last fiscal year as more like a flattish number. From the current levels of what they reported in the previous quarter, we are expecting some moderation to come through as you would see some addition on the global refining capacity in the latter half of this year.Anuj: What about the disappointment in the shale gas and with the kind of new realities that we now live in, what kind of consolidated numbers would you look at for next financial year or this current financial year?A: As of now, shale gas business at a USD 54 per barrel average crude price for the last quarter made EBITDA of USD 91 million, which is barely sufficient to cover their interest charges and depreciation. Going forward we are expecting some rebound in crude prices, which I think would ease out or at least improve profitability for shale gas business as well. Having said that, I don’t think the consensus is ascribing much value to the shale gas business. So it is unlikely to be the driver of the stock point of view.Latha: Some equity analysts were speaking about the company giving some details in the E&P activities in India itself, they being bullish on further wells being drilled in KG-D6, can you tell us what you got from the analysts call and whether you are bullish on that part more gas getting drilled from KG-D6?A: The company is indeed preparing itself to start a few development work in the satellite discoveries in the filed where they have identified reserves and also got the approval. However, having said that, the domestic gas price of USD 5 does not make it viable enough or at least the economics are not attractive enough for them to pursue those investments. So I think the company might defer it which is what we are building in that their gas volume from the conventional assets or KG-D6 block would only come from FY18 or FY19 onwards. Till then -- of course it is contingent on some relief on the domestic gas pricing part.Sonia: You did mention that your target price for the next one year stands at about Rs 1,040. can you give us some slightly longer-term price in the sense you spoke about the telecom business a little bit of caution over there, just going forward in the next one-two years, how much of a drag could that business be on the overall earnings of the company and what would your two year target price stand at?A: If I just rule forward my numbers to FY18 basis, my fair value would come to around Rs 1,200-1,250. So that will be my two year target price on the stock. This is assuming the value region, which I have built in the telecom remain status quo.On the telecom bit, I think the company once they launched their telecom business, the telecom services, you will get an idea on what kind of offering they are going to come up with and in a few months time you will see what kind of subscriber additions happen on that side, which will then give us more comfort on estimating what value generation can happen from that business. So I would wait for the launch