Brokerage house Bernstein remains bullish on bluechip stock Reliance Industries (RIL) despite an 8 percent decline since May 2022. The brokerage has an 'outperform' call on the stock and has raised its target price to ₹3,360 from ₹2,830 earlier, indicating an upside of 39 percent. The brokerage said that it sees strengths across all segments of the firm.
The stock has lost around 2 percent in 2022 YTD whereas added 13 percent in the last 1 year.
O2C Business
As per Bernstein, RIL's refining margins could rise to a record level of $25.5 per barrel in FY23, up from $9.8 per barrel in FY22, with supply shortage and lower feedstock prices.
"Reliance continues to be a core holding for any portfolio looking to take advantage of the secular growth in the Indian economy. Refining has been exceptional with record margins and expansion of the O2C business into downstream chemicals which still has decades of growth ahead," the brokerage said in its recent note.
It further pointed out that RIL has also taken advantage of Russian crude, but this may not be sustainable given increased scrutiny. It estimates oil-to-chemicals (O2C) can also achieve record EBITDA of ₹84,500 crore (60 percent YoY) which is 25 percent higher than consensus estimates of ₹67,600 crore. However, it added that the key risk ahead is a recession that leads to a sharp decline in the margins next year.
"O2C earnings are expected to increase more than in any other segment in FY23 driven by record refining margins as a result of exceptional market conditions, triggered by a reduction in supply of refined products from Russia and also from China," said the brokerage.
JIO and Retail
Commenting on the telecom business, the brokerage believes that Jio is set to deliver strong results on the back of tariff hikee. It added that the stage is set for more tariff hikes driven by stable industry structure and govt reforms.
It also noted that e-commerce accelerated with digital and new commerce accounting for 19 percent of core retail sales.
"Reliance retail growth outlook has improved as the economy opened up. Store additions remained strong. We expect retail revenues to grow at over 30 percent CAGR driven by strong store additions. Core retail EBITDA to be steady at 10.5 percent," it said.
"The build-out of JioMart (e-Commerce) and omnichannel presence, scaling up of the Jio platform, and investments in new energy to accelerate energy transition will all contribute to growth. With Reliance in the midst of a secular growth phase, we expect the combined Ebitda for the four businesses to increase by 20 percent CAGR in the next 4 years," the brokerage said.
EBITDA
Overall, for the firm, Bernstein expects FY23 EBITDA of ₹1,76,500 crore, up 48 percent from its EBITDA in FY22 of ₹1,19,300 crore, which is also more than the current consensus of ₹1,47,000 crore. According to Bernstein, the O2C business' contribution to the total Ebitda is likely to be 48 percent in FY23.
"Based on our estimates, we believe company EBITDA can more than double from FY22 to FY26 to ₹2,47,000 crore mainly through growth in new energy, digital and retail, while the O2C will see earnings normalise FY24 onwards as refining margins regress to the longer-term average," it added.
"Beyond FY23, the digital and retail businesses will grow at a faster rate which will limit the EBITDA contribution from O2C to around 20-30 percent of total EBITDA. This still remains significant. Digital was the largest contributor to EBITDA in FY21 at 38 percent, which will continue to represent 36 percent of total EBITDA over the next 5 years. Retail (offline + online) will grow from 12 percent of total EBITDA in FY22 to 23 percent by FY26," Bernstein forecasts.
If RIL can execute its new energy business strategy as planned, the brokerage expects a nearly 10 percent EBITDA contribution by FY26.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
