After an around 8 percent decline from its recent peak of ₹2,635.17, hit on July 19, 2023, brokerage house Jefferies believes that the valuation of Reliance Industries has become favourable, making it an attractive opportunity for investors. The brokerage has retained its ‘buy’ call on the stock with a target price of ₹2,950, implying an upside of 21.5 percent from its current market price of ₹2,428.10 (as on September 6).
As per the brokerage, strong Chinese demand and speculative positions in diesel have rallied refining margins and the brokerage expects the robust refining margins to help protect against potential downside risks to the Street estimate for Reliance's oil-to-chemical business EBITDA.
The brokerage also noted that refining strength and Chinese real estate stimulus will cushion the oil-to-chemical segment's earnings in FY24.
However, it cautioned that the strong global refining margins might not last. It believes that the reintroduction of export duty on refined products will cap the margin growth at roughly 25 percent of Reliance's refining output.
The report predicts reduced capital intensity in Reliance Jio and Reliance Retail by FY25, which will lead to more robust free cash flow for the company.
Upside Scenario
In this case, the brokerage has set a target price of ₹3,300 per share, indicating a 37 percent upside. In this scenario, Jefferies assumes:
1) Likely tariff hike by Jio: One of the key drivers of the bullish outlook is the anticipation of a tariff hike by Reliance Jio, said the brokerage. A successful implementation of a tariff hike could lead to improved financial performance for the company and thus could positively impact its stock valuation.
2) Listing of Jio: The brokerage also expects a possibility of listing of RIL's telecom arm Jio which will generate more investor interest and drive valuations.
3) Market share gains by Reliance Retail: Jefferies also expects Reliance Retail to continue gaining market share at an accelerated pace. The retail sector has been a focus area for Reliance, and if it continues to expand and capture a larger market share, it can contribute positively to the company’s overall revenue and profitability, noted the brokerage.
4) JioMart's GMV: The brokerage also expects Jiomart’s Gross Merchandise Value (GMV) to surpass expectations, especially with the upcoming festive season, which will be a positive sign of strong customer demand and growth.
Stock Price Trend
The brokerage has shed 6.5 percent in the last 1 year but is up 5 percent in 2023 YTD, giving positive returns in 6 of the 9 months in the current calendar year. While it is flat in September so far, the stock shed 5.5 percent in August. It has rallied the most in July, up over 10 percent and shed the most in January, down 7.5 percent.
According to a MintGenie poll of 32 analysts, 12 have a ‘strong buy’ call on the stock, 12 have ‘buy’, 5 have ‘hold’ and 3 have ‘sell’ recommendations.
Earnings
Last month, the company posted June quarter numbers, missing expectations. It reported a year-on-year (YoY) drop of 11 percent in the consolidated net profit for the quarter ended June 2023 to ₹16,011 crore. Meanwhile, its consolidated revenue declined 5.3 percent YoY to ₹2.11 lakh crore. Sequentially, the consolidated topline declined 2.5 percent, and the bottom line fell steeper by 17 percent.
The drop in revenue was primarily due to the weak performance of the oil-to-chemicals (O2C) business. Revenue from this segment plunged nearly 18 percent YoY to ₹1.33 lakh crore. This business constituted 63 percent of RIL’s topline in the reporting quarter. However, both retail and digital services businesses reported double-digit growth this quarter.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.
