After nearly a year,Reliance Industries (RIL) is back on analysts radar. In the last three months,the RIL shares have seen at least nine upgrades in analyst ratings. As a result,it currently holds the highest proportion of buy recommendations since July 2012. As per analysts polled by Bloomberg,27 of 52 analysts currently have a buy rating on Reliance Industries,which works out to 52% of the total ratings on the stock. Only 4% of the total ratings advise a sell on RIL. This is a stark contrast to the picture just six months ago in January 2013,when 30% analysts recommended a buy on the stock,while more than 23% had a sell rating. Meanwhile,the hold or neutral ratings on the stock have come down moderately from 47% to 44% over the last six months. * BSE Sensex * NSE Nifty In early April,a correction in the stock to a five-month low had led to renewed interest in the stock as valuations turned attractive. However,in the last two months,a series of positive developments,including a new gas discovery in its flagship KG-D6 block,increased reserve estimates for the KG-D6 block released by partner Niko Resources and a telecom tower pact with RCom,have lifted the outlook on the company. As a result,the RIL stock has gained 5% to R803.8 in the last three months against a 0.7% increase in the Sensex during the period. Analysts are particularly enthused by the companys plan to invest R1.5 lakh crore over the next three years,which is likely to enhance the capex in the company's core business. In the last one-and-a-half years,due to a fall in its refining margins,RILs volume growth has come down substantially and is reflected in its net earnings,which saw a y-o-y decline in three of the last five quarters. As per Kotak Institutional Equities,which recently upgraded the stock to add for the first time since February 2012,the capex cycle in RILs core businesses will translate into higher volume growth for the exploration & production (E&P) and petchem segments and enhanced margins of these segments. The recent gas discovery in the KG-D6 block is also expected to add to the earnings for RIL. Edelweiss Securities has pegged the value of the recent gas discovery at R29 per share and increased its 12-month target price on the stock to R1,036 based on renewed confidence in the companys growth prospects. Experts are also citing a likely upward revision in domestic gas prices by the government from the current $4.2 per mmbtu to $8 as a key catalyst that could significantly boost RILs margins from 2014-15. In the wake of these optimistic developments,the RIL stock is seen as reasonably valued at current price levels. The stock is currently trading at 11.4 times its trailing 12-month earnings,which is a 17% discount to its five-year average valuations. In 2013 so far,it has matched the performance of the Sensex by losing 4.2% in value. Since 2008,RIL has consistently underperformed the Sensex. JPMorgan,in a note,said RIL is trading at the lower end of its historical averages and is now in line with its peer group in terms of valuations. The brokerage house,which recently upgraded the stock to neutral,believes that the adverse news flow is likely to have limited downside impact on the stock and a turnaround in the cyclical businesses could lead to expansion in trading multiples.
