Brokerage firm Kotak Institutional Equities believes Reliance Industries (RIL) stock is poised for healthy gains and the recent correction is a good point in the stock.
The brokerage firm has a ‘buy’ call on the stock with a target price of ₹2,900 (earlier ₹3,000), implying a 32 percent upside from the stock's March 24 closing of ₹2,203.50 on BSE.
The stock hit its 52-week high of ₹2,855 on April 29, 2022, on BSE. As of March 24, the stock is down 23 percent from that level. The stock has underperformed the equity benchmark significantly in the last one year.
Kotak finds RIL’s recent underperformance puzzling as the outlook across key verticals is sanguine.
"In energy, earnings would likely remain robust (high margins/lower export tax in refining, rising volumes/elevated prices in E&P (exploration and production), petchem spreads recovering)," Kotak said.
"In telecom, rising competitive intensity and likely delay in tariff hikes until the 2024 elections. However, this would effectively lead to a duopoly and result in accelerated market share gains for R-Jio," said Kotak.
"In retail, recent acquisitions, store expansions and entry in new verticals prompt us to believe that Reliance will have market leadership across several verticals," the brokerage firm added.
Investment rationale by Kotak
Energy outlook remains robust: As per Kotak, though diesel cracks have moderated in the refining business, the decline has been largely offset by higher cracks for other products.
"Overall, refining margins remain robust. Lower diesel cracks have also led to a lower impact on the export tax. In petchem, margins have likely bottomed. In E&P, rising KG-basin production and elevated HPHT (high-pressure high temperature) prices would further boost near-term earnings," said Kotak.
Reliance Jio: Kotak underscored that the tariff hike is likely delayed, but market share gains to accelerate R-Jio’s recent aggression in postpaid and unlimited 5G data offerings has raised competitive intensity, and likely delays in tariff hikes until the 2024 general elections.
"We now build in a 20 percent smartphone tariff hike from June 2024 (earlier September 2023). However, we believe delays in the tariff hike would effectively lead to a duopoly and result in accelerated market share gains for R-Jio. We expect Capex intensity to moderate after the 5G rollout," said the analyst.
Reliance Retail: Kotak believes the aggressive offline and online expansion will continue. Kotak expects Reliance Retail to post over 30 percent core retail revenue CAGR over FY2023-25, driven by aggressive new store expansion (nearly 10 mn sq. ft annually) and expansion of online commerce (across digital, fashion, Jiomart and pharma).
"This expansion will require significant incremental Capex over the next few years but will ensure Reliance Retail’s leadership across several verticals," said Kotak.
"The FY2023 revenue run-rate is weaker than expected (significant decline in handset sales), but we believe growth should normalize from FY2024E. We ascribe an overall EV of ₹9.3 lakh crore to retail and ₹1.4 lakh crore value to its new commerce ventures ( ₹1,436 for RIL)," said the brokerage firm.
Kotak has lowered its 2024-25E EBITDA by 4-5 percent, largely driven by the delayed tariff hike assumption in R-Jio.
"We revise our fair value to ₹2,900 from ₹3,000 largely due to a cut in R-Jio valuation and higher net debt assumption. With the 5G roll-out completing in 2023, we think the Capex would moderate from current elevated levels, but would remain at ₹1-1.1 lakh crore, driven by expansion in retail and new energy investments," said Kotak.
"After the recent correction, we believe at the current market price, the market is not ascribing any value to RIL’s new commerce and FMCG forays, new energy or duopoly benefits in R-Jio. It also seems to factor in a much lower multiple (nearly 25 times EV/EBITDA versus our base case valuation of 32.5 times) for retail and nearly ₹50000 crore higher net debt," added Kotak.
According to a MintGenie poll, 32 analysts on an average have a ‘strong buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.