The spectacular growth of Reliance Industries Limited (RIL) has caught the fancy of foreign investments firms. Today, Bernstein raised the target price by 17.66 per cent to Rs. 3,360 from its earlier target of Rs. 2,830. This price is around 33 per cent over the current price of the RIL.
Bernstein foresees a three-fold jump in RIL refining margins.
“Refining margins could rise to record levels of $25.5/bbl in FY23 (up from $9.8/bbl in FY22) with supply shortage and lower feedstock prices,” Bernstein said in its latest report.
The report says that refining has been exceptional with record margins and expansion of the oil to chemical (O2C) business into downstream chemicals, which still has decades of growth ahead.
“The build-out of JioMart (e-Commerce) and omni-channel 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 earnings before interest, taxes, depreciation, and amortization (EBITDA) for the four businesses will increase by 20 per cent CAGR in the next 4 years,” it said.
Bernstein said that the stage is all set for Jio to deliver strong results driven by tariff hikes.
“We believe the stage is set for more tariff hikes driven by stable industry structure and govt. reforms,” the report said.
Incidentally, last quarter, Jio had posted stellar numbers in terms of revenue per user. In telecom space, it is measured in terms of average revenue per user (ARPU), which expanded by 21 per cent on a yearly basis to Rs. 167.6 on the back of a tariff hike and improved subscriber mix.
E-commerce is another segment of RIL, where Bernstein expects accelerated growth.
“Reliance retail growth outlook has improved, as the economy opened up. Store additions remained strong (overall ~15,200 stores). We expect retail revenues to grow at 30 per cent plus CAGR driven by strong store additions,” Bernstein said in the report.
Last year, RIL had announced its foray into the green energy business. The objective is understood to be driven by a desire to become a supplier of the equipment that India will need for its green energy revolution. The company has invested a little over $1.5 billion across new energy partnership and acquisition till date. It has acquired four companies, and become a strategic partner in three companies, in this regard.
“Overall, Reliance is building a fully-integrated end-to-end renewables energy ecosystem for customers through solar, batteries, and hydrogen. No other energy company is investing across the entire new energy value chain. But if Reliance can pull this off, then the value creation and earnings potential will be substantial,” the report added.
According to the Bernstein report, O2C business is still the largest contributor of EBITDA in FY23 at 48 per cent. 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 per cent of the total EBITDA.
“This still remains significant. Digital was the largest contributor of EBITDA in FY21 at 38 per cent, which will continue to represent 36 per cent of total EBITDA over the next five years. Retail (offline and online) will grow from 12 per cent of total EBITDA in FY22 to 23 per cent by FY26,” the report added.
Incidentally, JP Morgan’s investment thesis is also on same lines as the Bernstein report.
“Our upgrade to overweight is driven by global views of strong refining environment, including RIL’s non-energy business valuations continuing to hold up. We value O2C at an enterprise values of $83bn, and value retail at $121bn with a Jio Mart value of $40bn. We also assign a 2x investment value for the proposed green energy/renewable investment,” JP Morgan said in its report.
Today, the share price of Reliance closed in the green, at Rs. 2,580.15, up by 2.08 per cent, despite the broader market being in the red zone.
