Despite a massive underperformance at the bourses since the last six months, analysts are turning optimistic on Reliance Industries (RIL). Those at Jefferies, for instance, say that the company is a proxy play for India’s consumption growth story.
The key catalysts for the stock, according to a Jeffries note, include faster-than-expected market share gain in retail, oil-to-chemicals (O2C) stake sale, recovery in gross refining margins (GRM), potential public listing of Jio and even a possible banking licence going ahead. That apart, analysts feel any tariff hike in Reliance Jio (RJio) – its telecom venture – will also aid performance.
With balance sheet adequately de-levered, proceeds from a strategic stake sale in the O2C business will create a sizeable war chest for the company, analysts say.
“Revival in energy business profitability and moderation of capex in Jio turning it free cash flow (FCF) positive FY22E onwards will accrete to it. We project recurring FCF of over $6 billion per annum from FY22E,” the Jefferies note said.
Among 36 analysts’ recommendations on Bloomberg, 24 recommend buying the stock. The highest target price (best case) among them is Rs 2,900 – up around 38 per cent from the current levels. Meanwhile, 7 analysts recommend a ‘hold’, while 5 analysts recommend selling the stock.
At the bourses, however, the stock has been an underperformer – falling nearly 6 per cent since October 2020 as compared to 28 per cent rise in the S&P BSE Oil & Gas index and 32 per cent rally in the S&P BSE Sensex during this period, data show.
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RJio, analysts believe, should further consolidate its leadership position going ahead with 25 per cent EBITDA CAGR and gain 450 basis point (bps) revenue market share to 42 per cent by FY23E. With organised retail, only 12 per cent of overall retail and Reliance Retail (RR) bigger than the next 10 retailers combined, it is in pole position for growth leadership. Their contribution in consolidated EBITDA, analysts say, should increase from 37 per cent in FY20 to 49 per cent in FY23E.
The likely rise in gas consumption is another positive for the company. According to reports, India’s gas production has risen by 6 per cent, or 4.6 mmscmd, in the past two months to 82.3 mmscmd (January 2021) as gas output from eastern offshore fields rose 3.4x, or 4.4mmscmd. This, analysts say, has largely been on account of a ramp-up in production at the RIL-BP fields.
On the other hand, ONGC’s output saw a 1 per cent decline to 6.2mmscmd over November 20 – January 2021 period. Production by Oil India / private onshore players rose a small 0.6/8.4 per cent YoY over the same period. The continuation of these initial signs of rising output, said analysts at CLSA, will help turn investors into believers of India’s gas production rebound story.
“Nearly all of the incremental rise in production at the eastern offshore fields was likely from ramp-up in output in the R-Cluster in KG-D6 block of RIL-BP that started in December 2020. RIL-BP expects its R Cluster field in KG-D6 to reach peak output of 12.9 mmscmd in 2021. Reliance and ONGC’s guidance suggests India’s domestic gas production will rise over 40 per cent in the next two-to-three years,” wrote Vikash Kumar Jain and Surajdev Yadav of CLSA in a March 4 note.
Those at JP Morgan, too, say there are ample catalysts for the stock. While any stake sale to Aramco would be positive, they say with O2C accounting for around 37 per cent of the consolidated enterprise value (EV), Jio Platforms (subs and ARPU) and Retail (JioMart roll out) should remain the key drivers for the stock. That said, they have maintained a neutral rating on the stock for now.