RIL's earnings to grow 16% CAGR over FY14-17

Stock trading at 11x, significantly cheaper than Sensex: Analysts

Reliance Industries Ltd (RIL) is definitely a company to watch in 2015.

The company is expected to roll out its fourth generation (4G) broadband services.

Second, though crude oil prices have been declining steadily, the Street is not concerned about the margins of complex refiners like RIL. In fact, analysts are building in an earnings growth in the coming years, as the company’s capacity expansion across businesses will be complete and the  margins are headed for a cyclical improvement.

RIL’s margins are also set to see a cyclical pick-up, as demand for petrochemical products improves globally. With incremental gas output and a plan to monetise the retail venture, returns could be higher from the stock.

Axis Capital expects a 16 per cent earnings CAGR (compound annual growth rate) over FY14-17, led by new capacities, firm cyclical margins and incremental gas production.

Though crude oil is expected to remain weak in 2015, the company’s gross refining margins are expected to improve from current levels, as it has put in place a sourcing strategy and  global refining capacity additions are expected to match demand growth. Also, the light-heavy crude differential is expected to benefit complex refiners like Reliance.

Kotak Institutional Equities expects complex refining margins to remain firm at mid-cycle levels, as 2.5 million barrels per day of incremental global oil demand in calender year 2015-16 will be largely offset by two million barrels per day of net additions to refining capacity and 0.5 million barrels per day of increase in Organization of the Petroleum Exporting Countries’ natural gas liquids supply.

Also, polymer margins are expected to rebound over the next two years, as global cracking utilisation is expected to increase as capacity additions (3.7 per cent CAGR) are expected to lag demand growth (4.7 per cent).

Not all analysts believe in this theory. Some believe the capacity additions will outstrip demand growth and a fall in cotton prices would impact polyester players.

Analysts have factored in the losses emanating from the rollout of Reliance Jio services later next year. High fixed costs would also result in higher amortisation and depreciation costs.

Kotak is factoring in Rs 3,500-4,500 crore as charges from both and Rs 2,000-2,500 crore as interest costs over FY16-17. Despite the overhang of the telecom venture, analysts believe the stock is trading at 11 times its FY16 standalone earnings, cheaper than the Sensex, which is trading at 16 times.