New Delhi: Morgan Stanley on Tuesday upgraded its rating on Reliance Industries amid expectations of annual cash flows of USD 6-8 billion in the next three years from stronger petrochemical and refining business.
Morgan Stanley upgrade RIL to "equal-weight" from "underweight", maintaining its target price at Rs 703, citing attractive valuations.
Despite taking "unconstructive" view on RIL's core business, the brokerage firm in its report said the company was trading at multi-year lows, making its valuations "compelling."
It saw little downside for the stock with the company's ongoing buyback programme also gaining momentum.
"RIL's stock price has lagged the Sensex by 10 per cent since January?s announced share buyback, and by 18 percent in past 12 months. It is now at multi-year lows. But the buyback has gained momentum, especially below Rs 700 per share. Thus, while unconstructive on the core, we now see little downside," it said.
Morgan Stanley said RIL repurchased about USD 271 million worth of its share (16 percent of its overall committed programme), with most of its purchases at levels under Rs 700 per share, which could cushion downside.
But RIL's core business of oil and gas exploration could "still be an issue" with natural gas production from its eastern offshore KG-D6 fields "now at 35 million standard cubic meters per day, down from 80 mmscmd peak".
While the company plans to submit an integrated field development plan to boost reserves and production, "key hurdles seems to be capex and pricing issues," it said, adding that the contribution from shale gas could partially offset the negatives.
"We expect shale gas to start contributing meaningfully from this year onwards," it said.
Petrochemical and refining look lackluster, but it saw limited downside to margins. The key would be "stronger-than-expected petrochemical and refining cycle".
It said "RIL has strong cash flows from operations of USD 6-8 billion per annum in the next three years. It has announced plans to spend USD 10-12 billion in petchem over five years, and a similar amount in its E&P business, implying capex of USD 4-5 billion annually".
On the downside was the risk of government deciding to put a penalty on RIL for declining production and a sharp decline in global economic growth that would likely compress projected petrochemical and refining margins.
Investments in telecoms and retail could fill the gap but these would be longer gestation projects and are highly exposed to competitive landscapes.
First Published: Tuesday, May 29, 2012, 12:34