There is no point of talking about the general fundamentals of Reliance Industries, I’m sure each one of you know that it is amazing. RIL is a 2,00,000 crores revenue making company, I mean it has to be something to be so huge. So we will shift our attention to the company’s financial results that are coming this FY11 and how it should impact the stock price in FY11.

Reliance Industries Hasn’t Performed Yet

So to start with, let me tell you that Reliance is one such stock that hasn’t been performing at all for a year now. However recently if you look, RIL seems to be out performing the market indices. We saw RIL hovering around 1050 when Nifty was close to 6300 and now when Nifty is below 6100, RIL is close to 1080. Is this an indication that Reliance is heading for a break out? Well maybe and if that is true, it will be purely relating to the results that the company is going to give in the upcoming quarters of this and next fiscal year. As I said in my previous post, the company’s market capital has to play along with the net profit of the company. As of FY09 earnings and current stock price of 1080, the net profit ratio is coming to 4.5% of market capital. I wasn’t surprised why RIL did not perform in the whole year, guess what? It was fairly valued!

Financial Results Discussion

However things should change this year because of the kind of profit growth the company is giving. June 09 figures indicated a sales turn over of 32,000 crores and a net profit of 3,636 crores. June 10 figures showed a sales turn over of 58,000 crores and a net profit of 4,850 crores, a jump of nearly 30% YoY. The net profit for the coming September quarter is also expected to be close to 30% growth YoY basis. Now I clearly remember that RIL was reacting to this good results in June however then came the bad news of gas output margin not increasing or seeing difficulties on the very results day which caused the stock to go down, made a low of 920 as well. But I guess all such bad news are over and we don’t really expect any bad news in coming quarters. So if the company is really going with a 30% increase of net profit on YoY basis, then the whole valuations will change.

If company gives a 30% rise in profits for 2 quarters, even if company gives only 10% rise in next 2 quarters, there will be a 20% annual growth. 20% annual growth from preceding year means net profit of FY11 can be seen around 19,500 crores. This assumed net profit, if we compare with current Market Capital of 3,53,000 crores, comes to a 5.5% ratio, much ahead of my 4% limit of high valuation set for each company. Even if that ratio has to come down to 5%, we can safely assume that fair valuations for Reliance will anything above 10% from current levels. So my targets for Reliance by end of FY11 would come close to 1200-1250. We can see such levels in Reliance unless market crashes. This is a pure fundamental based call from my side.

Buy Reliance Industries with targets of 1250!

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