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.
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