Reliance Industries (RIL) shares have under-performed the BSE-30 by 98% since April 2009 due to its weak EPS growth (CAGR of 4% for FY08-13) and de-rating of its E&P. However,RIL has outperformed BSE-30 to date in FY14 by 3%.
In our view,this recent outperformance is due to expectations that RIL is on the cusp of a strong earnings growth phase and its E&P is set to turn around. However,we do see risks. RILs FY15-16E GRM could be significantly lower than assumed and its gas price may not be hiked in April 2014. Until clarity emerges on these concerns,we remain Neutral.
RILs E&P was de-rated as its KG D6 reserves were cut by over 65% and gas production declined by over 75% since 1Q 2010. We now expect its reserves and E&P Ebit to rebound sharply in FY15E,but off a low base post a sharp dip. However,we do not see RILs E&P valuation and earnings going anywhere near peak expectations before the de-rating. There is some uncertainty on KG-D6 gas price from April 2014.