Reliance Industries is hovering near its 52-week low; dips nearly 14% from December highs; Is now the time to buy?

Shares of Reliance Industries, the country's largest company by market value, have been witnessing a continuous fall since the beginning of December last year, falling from ₹2,755 apiece to the current price of ₹2,367, losing 14% of their value. This fall in the stock price has brought it near its 52-week low level of ₹2,180, which it last reached on March 08, 2022.

The dip in the stock price can be attributed to a variety of factors, including the overall market sentiment, and the company's financial performance in the December quarter. Following the Q3 earnings release on January 20, the company's stock experienced a correction of 5.14% over the next 11 trading sessions. 

The company posted a 15% drop in its net profit to ₹15,792 crore, impacted by high finance costs and other expenses. However, the domestic brokerage firms said the company's Q3 performance was in line with their estimates, and maintained thier bullish outlook on the stock. 

Recently, another domestic brokerage firm Systematix Institutional Equities, initiated coverage on the stock with a target price of ₹2,825 apiece, signalling an upside potential of nearly 19.35% from the stock's latest closing price.

Reliance Industries operates through four key business verticals: O2C, which encompasses its oil refineries, petrochemical plants, and fuel retailing operations. The second is retail, which includes both brick-and-mortar stores and e-commerce channels. The third is digital services, which incorporate its telecom arm, Jio. Finally, the company's fourth vertical is new energy.

The brokerage stated that the company is expanding aggressively in all four Business verticals.

Reliance Retail

According to Systematix Institutional Equities, Reliance Retail's revenue and EBITDA are projected to grow at a CAGR of 86% and 23% over FY22-FY25E. This optimistic forecast is based on several factors, including the addition of numerous stores in recent years, increased online presence, and a positive trend in foot traffic.

The brokerage noted that Reliance Retail has added 4,400 stores, for a cumulative total of 25.7 million square feet in the last six quarters. At its recent annual general meeting (AGM), management shared its vision to triple its retail business over the next 3-5 years, banking on a wider reach, an enhanced product range, and deeper online penetration, it added.

Reliance Retail recorded a whopping 42.7% CAGR in revenue over FY17–22, with a 60% CAGR in EBITDA during this period. However, growth slowed to 15% in the last three years, largely impacted by COVID.

Strong store additions and deeper penetration have led RIL Retail to significantly outperform peers in almost all segments, given its robust product portfolio, pan-India presence, and strong footfalls.

At the end of 3QFY23, the total number of stores had expanded significantly to 17,225 from 3,616 in FY17, while the total area had also grown substantially to 60.2 million square feet from 13.5 million square feet in FY17. 

According to the brokerage, RIL is poised for continued growth, driven by its omnichannel presence in key verticals such as Reliance Digital, Fashion & Lifestyle, and the grocery segment, as well as the scaling up of the Jio platform and deeper penetration of JioMart.

Digital services

In just five years since its launch, Jio has become the largest company in India's wireless telecom sector, boasting a current subscriber base of approximately 433 million, growing 26% CGAR since FY17.

The company has garnered 40% market share in terms of the number of subscribers while commanding 50% of the data traffic market share. However, recent quarters have seen a significant decline in Jio's wireless subscriber growth. 

As a result, the brokerage predicts a net addition of 20 million subscribers for fiscal years 2024 and 2025, representing less than 5% year-over-year growth, which would bring Jio's total subscribers to approximately 480 million by the end of the fiscal year 2025.

On the other hand, the brokerage is expecting the non-mobility subscriber base to grow faster. This is due to the rapid expansion of Reliance Industries' fibre-to-the-home (FTTH) broadband business, which is expected to grow by almost 75% and cover 9 million households by the end of FY23. However, it's important to note that data usage per household is currently capped at 300 GB per month.

"We expect the robust growth to continue over the next few years; Jio’s enterprise broadband too is seeing good traction, and the company plans to expand to 50 million small and medium enterprises," said the brokerage.

Systematix valued the company's organized retail at 32x and its digital services business at 13x EV/EBITDA, arriving at a valuation of ₹1,170 and ₹918 per share, respectively.

Oil-to-Chemicals

In the O2C segment, the brokerage said sharp fluctuations in GRM, and petrochemical margins have caused huge margin volatility in RIL’s O2C business over the last few quarters.

However, the opening up of China could bring cheer to petrochemical margins, as nearly 40% of petrochemical gets consumed in China.

Furthermore, starting from February 2023, Europe has implemented a complete ban on the import of Russian petroleum products. This move is likely to increase the demand and price of petroleum product cracks, particularly diesel. Before the ban, Russia was exporting around 500-600kbpd of diesel to Europe, but now Europe is expected to seek alternative sources of supply from Asian countries. As a result, diesel spread is anticipated to remain at elevated levels, as reported by the brokerage.

The brokerage has allocated an 8.5x FY25E EV/EBITDA value to the O2C business ( ₹783/share), which is 10% higher than that of global players. This valuation takes into account the complexity of the business as well as its potential to generate higher margins due to greater levels of integration.

Besides, Systematix expects Production from the KG-basin is likely to go up to 30 mmscmd in FY24E from 19 mmscmd currently, following the start of production from the MJ field.

The brokerage has conservatively factored in the gas price of USD 11.0/9.5 per mmbtu for FY24E/FY25E, respectively, from USD 12.5 per mmbtu currently as global prices have started correcting.

Comfortable debt levels persist despite increasing Capex

Reliance has announced a total capex of a whopping ₹8.6 trillion in the last decade, of which 46% was for consumer businesses. However, of the total capex of ₹4 trillion incurred by the company during FY20–9MFY23, a mere 7% was dedicated to the consumer business, including spectrum purchases.

The company plans to invest heavily in petrochemical expansion, new energy, 5G spectrum, 5G rollout, and regular capex in all segments. Overall, the brokerage forecasted a capex of ₹1.4 trillion, ₹1.3 trillion, and ₹1.4 trillion during FY23E, FY24E, and FY25E, respectively.

Consequently, it expects FCF to remain muted during FY23E–FY25E, despite the company generating OCF of ₹1.4–1.5 trillion. Net debt is expected to increase from ₹1.4 trillion in FY23 to ₹1.8 trillion in FY25E. Yet, the brokerage anticipates the EBITDA/net debt to remain comfortable at 1x, with net debt/equity at 0.2x (flat from current levels).

30 analysts polled by MintGenie on average have a 'buy' call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.