Investment Idea : Reliance Industries Ltd.

Aggressive expansion plans to drive growth
A must have in an investor’s portfolio

Company : Reliance Industries
CMP : Rs.978
ST Target (3-4 Months): Rs. 1200
LT Target (12-15 Months): Rs. 1800
Risk : Moderate

About the Company
Reliance Industries need no introduction. India’s largest private sector enterprise and fortune 500 company, RIL, founded by Sh. Dhiru bhai Ambani and now managed by his elder son Mukesh Ambani, enjoys global leadership in its businesses being the largest polyester yarn and fibre producer in the world and among the top five to ten producers in the world in major petrochemical products. It contributes about 3% of India's GDP and is the country's largest exporter.

How does the Financials look ?
Turnover of Rs. 89,124 crore (US$ 19,976 million) against Rs. 73,164 crore for the previous year, an increase of 22%

Net Profit of Rs. 9,069 crore (US$ 2,033 million) against Rs. 7,572 crore for the previous year, an increase of 20%

Earnings Per Share (EPS) for the year is Rs. 65.1 (US$ 1.46)

Exports of manufactured products were Rs. 32,691 crore (US$ 7,327 million), against Rs.25,532 crore for the previous year, an increase of 28%

If we take into account the above valuations the stock price is ruling at a P/E of 15.

Why such a optimism on the Reliance stock ?

Current business will continue to show robust growth
Let’s see each business separately :
Oil & Gas (E&P)
RIL is the largest exploration acreage holder among the Private sector companies in India with 34 domestic exploration blocks covering an area of about 331,000 Square Kilometres. This is in addition to its interest in one exploration block each in Yemen and Oman. Reliance also has 5 coal bed methane blocks covering an area of about 4000 sqkm. The exploration of new reserves would add significantly to the topline of the company over a period of 3-5 years

Refinery and Marketing
The refinery margins were robust in all the regions as product price increases were higher than the concomitant rise in crude oil prices. The crude oil prices are expected to remain firm in the medium term due to demand –supply mismatch and hence the refinery margin would also remain robust. The company has recorded 92% capacity utilization at its refineries.

Petrochemicals
Operating rates of ethylene crackers continued to be high globally on account of sustained demand and lack of new capacities. However the petrochemical business worldwide was affected by high crude oil and natural gas prices leading to increase in cost of raw materials and reduction in profitability margins.

Reliance is world’s largest producer of polyester fibre and yarn with a capacity of 1.7 million tonnes. Reliance has a domestic market share of 51% in PFY, PSF and PET. During the year, Reliance commissioned a new polyester plant at Patalganga and Hazira with capacity of 550 KTA

RIL operates one of the world's largest and most efficient, multi-feed crackers at its Hazira petrochemicals complex

Other Group Companies doing well
IPCL has reported a 2% increase in its turnover from Rs 9,386 crore to Rs 9,597 crore. The profit after tax for the year has increased by 28% from Rs 786 crore to Rs. 1,005 crore.

Reliance Industrial Infrastructure Limited (RIIL) For the year ended 31st March 2006, RIIL has reported a 22% increase in its turnover from Rs 53 crore to Rs 64 crore. The profit after tax for the year has increased by 6% from Rs 17 crore to Rs. 18 crore. RIIL would be major driver of reliance foray into infrastructure projects and the stock price movement over last few months has already told the story lying ahead.

Reliance plans for a mega foray in retail
This is the most exciting part that will be unfolded in the time to come. Mukesh , who is known for his aggressive planning style, has already shown his mettle by adding the telecom business (now headed by Anil Ambani) to the reliance portfolio. Now, with the loss of this business to his younger brother, mukesh has eyed entry to the retail sector. This is going to be a mega foray and the project could be in range of 50000-70000 crore. This expansion will change the total dynamics of Reliance industries and would project the company as the major retail player in India. (will talk in detail about this later in a separate post)

So what are you waiting for ?
Going by the promoter background, past performance and the aggressive expansion plans, Reliance Industries emerges as a stock which should be a “must-have” in an individual’s portfolio. The current downtrend in the stock markets can be used as a opportunity to enter the stock at a fair valuation.