More analysts have turned bullish on Reliance Industries post its second quarter numbers, given positive management commentary. Currently, 34 analysts have a buy rating on the stock compared to 32 buy calls a month ago, according to Bloomberg data. The number of ‘hold’ ratings have fallen to 2 from 4 , and the number of ‘sell’ ratings are down to 2 from 3.
The management's comments about reducing net debt, using cash flow for investments, and cutting capital spending in 2024 is being viewed positively by the street as it will help strengthen the company’s balance sheet.
Other factors that could reduce debt and boost the stock's value compared to peers include selling retail warehouses, growing retail revenues, restocking chemical inventories in India, tightening in the global fuel market due to China's refining capacity limits, and increasing gas/oil production. These factors are expected to increase RIL's net asset value (NAV) as debt decreases and cash flow improves, even as the company ploughs $17 billion annually into capex for the next three years, analysts say.
Centrum Broking sees digital and retail as growth drivers for Reliance, backed by oil & gas. It expects the O2C (oil-to-chemicals) business to provide cash for future investments. With the 5G rollout, the company can improve services and increase tariffs. Centrum Broking remains optimistic about Reliance's growth, and sees the stock attractively valued at 9 times and 8 times FY24E(estimated) and FY25E EV/EBITDA, respectively.
In Q2, RIL's EBITDA was Rs 41,000 crore, slightly beating analyst estimates, driven by O2C and retail. Net income was Rs 17,400 crore. Consumer businesses grew 20% in H1FY24, with retail up 33 percent and digital services up 16%. Consolidated EBITDA increased by 16% YoY, benefiting from the energy sector's 7 percent growth and the MJ field's ramp-up. Jio is showing signs of improvement in net additions, with ARPU growth expected from 5G services and home broadband. In H1FY24, operational cash flow covered 90% of RIL's capital spending of Rs 78,500 crore. Net debt reduced by Rs 8,000 crore to Rs 1.2 lakh crore due to capital raising.
According to JM Financial, concerns over the company’s debt are exaggerated. It see RIL's net debt peaking in FY24 and gradually decreasing. Capex will be funded by internal cash generation, and the company's commitment to keeping net debt to EBITDA below 1 times provides confidence, the JM Financial report said. RIL could achieve a 14-15% EPS CAGR over 3-5 years, driven by Jio's rising ARPU, ongoing Retail growth, and omni-channel expansion.
O2C EBITDA increased by 7% quarter-on-quarter to Rs16300 crore on improved refining margins in diesel, jet fuel, and gasoline, as well as better PVC and ethane cracking economics. However, this was partly offset by factors like export taxes, narrower Russian crude discounts, and softness in PE, PP, and polyester spreads. Recent corrections in refining margins and a cautious petrochemical outlook could limit short-term O2C earnings, according to analysts.
Oil & gas EBITDA was up 19% quarter-on-quarter at Rs4800 crore, slightly below expectations due to commissioning costs for the MJ field. KG gas production increased from 21 to 28 mmscmd and is expected to reach 30 mmscmd in the coming months, although the HP/HT ceiling price was reduced from October 2023. Analysts anticipate steady growth in digital services and a slight decline in O2C due to planned maintenance, while the retail and energy sectors are expected to benefit from the festive quarter and MJ field ramp-up.
HSBC Global Research is positive about Reliance's core businesses - O2C, retail, and digital services, seeing them as self-sustaining and profitable. They expect new energy investments to drive growth but require initial capital. While retail and digital still have ongoing capital expenses, these should decrease as 5G rollout completes in December 2023 and retail assets may attract new investors through InvIT. O2C may not perform strongly due to economic factors and new capacity additions. These factors may impact the stock's performance in the short to medium term, HSBC said.
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