A Constructive Case For Reliance Infrastructure
BMI View: The stock price of one of India's largest infrastructure companies Reliance Infrastructure appears to have broken out of its long-term downtrend, which, coupled with the near-record low valuations on offer, suggests a more constructive long-term outlook. While we believe that the macroeconomic backdrop and business environment of India have improved in recent months, several milestones need to be achieved for Reliance's stock price to really take off from here. They are a break in its near-term resistance line, greater evidence of project execution, and favourable government rulings.
The stock price of one of India's largest infrastructure companies Reliance Infrastructure appears to have broken out of its long-term downtrend, consolidating above its multi-year resistance line to reach around INR412.00 at the time of writing. This, coupled with the near-record low valuations on offer, suggests a more constructive long-term outlook for the stock. While the firm's financial position is concerning (i.e. high net debt, negative free cash flow), the value of the company has prices such vulnerabilities in. The price-to-earnings ratio and price-to-book ratio for Reliance Infrastructure currently stands at 4.8x and 0.4x respectively. This is close to the record low of 3.6x and 0.3x in August 2013, and amongst the lowest ratios in the Indian infrastructure space.
Furthermore, we believe that the macro outlook for India could start to heal from next fiscal year, FY2014/15 (April-March). We are forecasting India's real GDP growth to improve from 5.0% in FY2013/14 to 5.6% in FY2014/15. This is not only due to an improvement in India's export outlook, but also due to an improvement in India's credit conditions (see 'External Adjustment To Pave Way For Rate Cuts In 2014', October 10 2013). By the end of FY2014/15, we are expecting rate cuts to bring down India's benchmark interest rate to 7.00% from the current 7.50%, while the Indian rupee is expected to appreciate to INR55.00/US$ from the current INR62.00/US$.
|A Technical Change|
|Reliance Infrastructure - Share Price Performance, Eight Year Time Horizon, INR|