Shares of Reliance Industries (RIL) can give healthy returns in the medium to long term.
The stock has underperformed the benchmark Sensex significantly in the last one year; it is down 12 percent against a two percent fall in the benchmark Sensex.
However, now the stock look poised for healthy growth.
Top global firms such as Jefferies and CLSA are positive about the stock as they believe the company's foray into financial services and the ramp-up of its FMCG business along with the telecom and retail segment will augur well for the oil-to-telecom behemoth.
On April 1, global brokerage firm Jefferies maintained a 'buy' call on the stock and raised the target price to ₹3,100 from ₹3,060 earlier, implying a 33 percent upside potential in the stock price.
In the upside scenario, Jefferies has a target price of ₹3,450, an upside of 48 percent, and in a downside scenario, Jefferies has a target price of ₹2,250, a downside of 3 percent.
"RIL's foray into financial services with Jio-FS (Jio Financial Services) will open the opportunity to play in India's consumer and commercial loans and NLF (non-lending financial) side," said Jefferies.
Jefferies expects all necessary approvals for the listing of shares of JFS to be in place by September. It underscored that JFS will commence lending activities immediately and proceed for regulatory approvals for asset management, life and general insurance which may take 12-18 months.
Jefferies believes JFS's key advantage will be low funding cost, better access on the back of the group's high credit rating, and ownership of a 6.1 percent stake in RIL.
As per the brokerage firm, the group also aspires to foray into non-lending financial businesses like life and general insurance and AMC where it can even take an inorganic route and benefit from recent regulatory change that allows banks to have up to nine insurance partners. Payments business may be built to acquire customers, as standalone economics are quite weak, Jefferies said.
Jefferies believes an aggressive stance of JFS could impact payment banks and NBFC lenders.
"We watch out for the build-up of team and platforms for tech, analytics, payments, recoveries, and compliance that take time to stabilise and are difficult to build inorganically. An aggressive stance could impact players in payments (like Paytm, Phonepe) and NBFC lenders like Bajaj Finance. We watch for attrition at banks and NBFCs," said Jefferies.
The brokerage firm underscored JFS has a net worth of nearly ₹28,000 crore and including MTM (mark to market) gains on a 6.1 percent stake in RIL, it may rise to ₹1.1 lakh crore. Still, from a regulatory perspective, the core network may be nearly ₹14,000 crore ($1.7bn) once the cost of investment in RIL is deducted (more than 10 percent of net worth).
Therefore, Jefferies said, JIO FS may over the next few years look to raise capital to fund growth or support cash-backed M&A (mergers and acquisitions) as the need to write off goodwill will bring down capital.
"Based on core net worth of Jio-FS ( ₹14,000 crore) and the value of the stake in RIL ( ₹1 lakh crore) with PB range of 3-5 times as well as holdco-discount of up to 40 percent (based on benchmarks), we value Jio-FS in the range of ₹90,000-1,50,000 crore that implies ₹134-224 per share in RIL's SoTP," Jefferies said.
"We incorporate ₹179 per share as the base case valuation for JFS in our SoTP. Our target price (for RIL) rises to ₹3,100 (factoring in the fully diluted share base) implying a 33 percent upside. The stock trades near our bear case valuation and offers favourable risk-reward," said Jefferies.
A couple of weeks ago, global brokerage firm CLSA also gave a buy call to the stock, pegging the target price to ₹2,970 after the stock's valuation came down significantly due to the recent correction.
Moreover, the ramp-up of its FMCG business, the launch of Airfiber to catapult wireless broadband penetration and a new affordable 5G smartphone to monetise its pan-India standalone 5G network by the end of 2023 along with an IPO of Jio and/or retail are all possible large triggers in the second half of the financial year 2023-24 (2HFY24).
"We believe a lack of launches and growth areas has kept the stock subdued over the past 18 months. This could change in 2HFY24 as we expect the company to start offering its portable 5G device (Jio Airfiber) to ramp up wireless broadband additions and launch its affordable 5G smartphone as it monetises its pan-India standalone 5G launch by end-2023," said CLSA.
"Recent brand launches (Independence, Campa Cola) suggest we could see visible strides in Reliance’s FMCG foray in 2023. With three years having passed since the stake sale to PE investors, we see a good chance of a Jio and/or retail IPO in the next 12 months. Despite rising 5G capex, consolidated leverage should remain under control and well below 2 times Ebitda," CLSA said.
According to a MintGenie poll, an average of 31 analysts have a ‘strong buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firms. These do not represent the views of MintGenie.
