Reliance Industries Ltd’s third quarter of FY13 PAT at Rs 5,500 crore (up 24 per cent y-o-y and 2 per cent q-o-q) was above our estimates of Rs 5,060 crore mainly on account of higher than expected GRMs (gross refining margin) at $9.6/bbl (our expectation was $8.5/bbl) and lower than expected effective income tax rate at 20 per cent (our expectation of 22 per cent).

We have revised our target price to Rs 867/share (from Rs 771/share earlier) to factor: 1) higher GRM at $8.6/bbl in FY13 and FY14; and 2) Higher refining and petro chemical valuation multiple at 6.5x FY14E EV/EBITDA (vs 6x earlier) given improving margin environment. RIL valuation seems stressed at 12.5x FY14E EPS and 8.1x FY14E EV/EBITDA given 1) increased share (> 80 per cent) of cyclical refining and petro chemical businesses at EBITDA level due to falling KG D-6 gas production and 2) concern of RoE at sub-12 per cent in FY14. Hence, we maintain our ‘Hold’ rating on the stock and advise investor to enter at lower price point.

(Business Line does not assume responsibility for the recommendations sourced from third party brokerages).

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(This article was published on January 21, 2013)
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