2014 disappoints; will 2015F see a turnaround?
So far 2014 has been disappointing for RIL: YTD, it has under performed BSE Sensex by
24%. This is the seventh successive year that RIL has underperformed, and we believe
RIL’s 2014 performance is likely to be among its worst.
We believe the sharp under performance this year was driven by further negative
developments in E&P (the low gas price hike virtually ensures that investment in E&P is
unlikely to begin anytime soon), high and rising spend in telecom (with not much clarity
yet on the timing and offering) and also a relatively weak petchem cycle.
We think the worst for E&P has already been priced into the shares. In 2015, investors
are likely to be eagerly awaiting the launch of telecom, and we think telecom
developments will be a driver for stock in near term. On the positive side, the ongoing
expansion in refining/petchem is likely to continue, and there should be increased
visibility on improved earnings growth from FY17F.
While we cut our near-term earnings estimates, ex-telecom, compared to an EBITDA
CAGR of just 3% over the past four years, we expect this to improve to a high 15% over
four years ending FY18F.With a sharp increase in RIL’s earnings growth visibility, we
think the long phase of relative underperformance is likely to end soon, and there could
be a turnaround of Reliance’s relative performance (vs Sensex) in 2015F.
Source: Nomura Research
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