RIL: Ahead Of Q3 Result, Whats' Next ?

RIL has to sustain over 1095-1110 for 1150*-1220;

Otherwise, may correct up to 975-935---

Market is expecting Q3 GRM of over $12 & EPS around 23.15,
which may be bit overstretched---

CMP:1073

Sale either below 1067 or on rise around 1095-1110;

TGT: 1035-1020-975*-935

TSL>1125

Note: Consecutive closing above 1125 for any reason, RIL may further rally to 1150 area, which is again a strong supply zone and sustaining above that target may be 1190-1220-1280 and 1350-1650 & 1725-2150 in mid to long term (FY:17-19).

Recent rally of RIL is very rare, considering the Nifty & Oil are making fresh lows and RIL is doing just the opposite. 

The street is anticipating the Q3 GRM of around $11 (QOQ- $10.6 & $7.3 YOY and an EPS of around 20.40 (QOQ-21.95 & YOY-17.80). Present SGX GRM is around $8 and because of RIL's efficiency and technology, there may be $3 premium over SGX as par recent trend.

There is a market buzz before Q3FY16 result on 19-th Jan that, this time RIL may report GRM of over $12 & an EPS of around 23.15 which will be above analysts median expectations.

Analysts are expecting the stock out performance in 2016 on the back of lower crude oil prices, which will boost its refining & petrochemical (R&P) margins, although there may be inventory losses & diesel cracks because of steep fall in crude oil. As par some analytics, falling WTI/Brent spread may also help RIL.

For the last few years RIL under performed the broader market and corrected by around 30% from its May'14 top of around 1145 to March'15 low of around 800, primarily due to huge capex and concern over viability of its telecom operations (R-Jio).

As par reports, RIL is investing around $55 bln till 2018 to expand its core business (R&P) and R-Jio. Out of these, around $30 bln investments in R&P will be commissioned in 2016 and is expected to boost up the bottom line (EPS) & improve its ROE. RIL has so far invested around $15 bln in R-Jio.

The recent rally in the stock was also supported by an assumption  that beside expansion in the R&P, there is also an expansion in backward integration in 2016-17 backed by $4 bln capex, which will save cost and increase the GRM by $2-2.5. 

Moreover, gas cracker and the petro gasification projects, which convert petcoke into fuel, will replace imported LNG and expected to drive down costs and savings up to $1.5 bln/year.

Analysts are also hopeful about its retail business, which is also doing well and may contribute to some extent in the bottom line of RIL in the coming days. 

Also, there are some market talks that RIL may launch its OLA/Uber version of taxi service in a big way backed by its complete value chain, such as own fleets (taxis), fuel (CNG) and e-commerce (R-Jio) in the coming months, although denied by the company.

As par some estimates, every $1 improvement in GRM and $100/mt improvement in petrochem segment translates into an incremental growth in EPS by around 8.5%.

Analysts are expecting RIL to maintain & improve its bottom line (EPS) in its core R&P business backed by its huge investments in the segment for the last few years that increases its operational efficiency across the value chain, despite slump in WTI /Brent crude.

Telecom business may burn cash for RIL for the first few years and as par some SOTP calculations, it may reduce projected FY-16 fair value of RIL by 285/-  to 1140/- (1425-285).

There are also some technical reasons for RIL to flare up recently as some large institutions & HNIS were short in the scrip on the hope of crash in crude oil prices, who were forced to cover at every major/minor dips on the back of relentless recent rally in the stock (up by more than 35% in last nine months from late March'15).

Another reason may be that, RIL was largely under-owned by institutional investors, specially the FII and after the recent spate of upgradation (1300-1400 range), some block deals are also happening in the counter regularly and L&T is being replaced by RIL to some extent in the "Long only portfolio of Asia-Pacific".

Now, all eyes will be on Q3FY16 result and some more clarity & visibility on its telecom operations----will the RIL is able to generate a GRM of above $12, which is at 50% premium of current benchmark SGX GRM of around $8 ? 

Will the R-Jio is able to beat the street APRU amid single digit ROE in the telecom industry, which is poised for a fierce competition ?  Will R-Jio be able to change the "One India" into a new ecosystem of VOIP-4G so quickly ?

Also there will be some headwinds in the form of US Shale gas assets, ongoing legal disputes with ONGC over KG gas disputes, in which RIL's partner BP has decided to co-operate with the AP Shah panel committee, despite RIL has questioned the jurisdiction of the same and sought arbitration. The estimated dispute over the gas theft as alleged by ONGC is around $1.7 bln.

Now, all the above good news flow may has been already priced in by the RIL scrip, considering its recent rally. Technically, the stock may be in the extended 3-rd wave of daily EW cycle, the target of which should be around 1130 (as par text book) and the scrip already ran much above that to near 1190. If the present 3-rd wave continued, then next target may be 1130-1150, if sustained over 1095-1110 zone. In the alternative scenario, culmination of 3-rd wave around 1095 and start of corrective 4-th wave & subsequent wave cycles (5-th & A-B-C) may bring it down to 975-935 zone in the days ahead before start of fresh rally (after Q3 & Q4FY16 result and commercial launch of R-Jio).

Considering the risk reward ratio, buy on dips around 975-935 may be better for portfolio investment in RIL in the present market conditions (7325-7850 zone).

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