Analyst Call Tracker: Bullish calls on RIL rise as risk-reward ratio improves

According to Sham Chandak of Elios Financial Services, Reliance Industries has established itself as a dominant player in the refining, telecom, and retail sectors, with a strong possibility of achieving the same position in the renewable energy industry. This is what makes the company poised for long-term growth and presents an attractive investment opportunity.

Reliance Industries Limited (RIL) shares have fallen 9 percent over the past three months as investors turned cautious on the stock owing to its aggressive capital spending plans to expand the new green energy business and a potential increase in debt levels.

"There were also concerns around refining margins as Singapore Gross Refining Margins (GRMs) fell from their highs in the recent months," said Sham Chandak, head of institutional broking at Elios Financial Services.

“We don't know where RIL's refining margins will go in the near term as the company is an oil refiner as well as explorer. There is a lot of uncertainty surrounding the future of oil prices, especially in the wake of the sudden output cut by OPEC+ nations," Chandak said.

GRM is the difference in the value of the refined products produced and the cost of the crude oil and other feedstock used to produce them.

Chandak says prevailing uncertainty on the margin front will remain a key downside risk for the retail-to-refining conglomerate.

Attractive valuations

These challenges apart, analysts are optimistic because they say valuations have become attractive after the recent correction in stock price. Most of the company's near-term negatives are already priced in, they say.

According to Moneycontrol's Analysts' Call Tracker, the number of "buy" recommendations on the stock rose to 32 from 23 and the number of "hold" and "sell" ratings fell to three and two, respectively, from the previous 11 and four. Currently, 32 of the 37 securities firms covering the stock maintain a "buy" stance.

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Chandak is also among the analysts who see RIL as a lucrative long-term bet.

"The correction has eased valuation multiples from a Price-to-Earnings (PE) ratio of around 29 to 22. Additionally, FII (Foreign Institutional Investor) holding in the counter is at a six-year low, which helps because it means the stock is not over-owned," he said.

Demerger

Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services, shares a similar optimism. Khemka notes that while RIL's financials may face some pressure due to aggressive capital expenditures, the company's attractive valuation in its core business offers much-needed relief.

"On top of that, the company's plans to hive off its financial services business into a separate entity will unlock further value for the conglomerate," Khemka said.

The company is set to hold a shareholders meeting on May 2 to consider and approve the demerger of Reliance Industries and Reliance Strategic Investments. Post the demerger, Reliance Strategic Investments will take the name of Jio Financial Services. The company also plans to subsequently list the hived-off entity on the stock exchanges.

Khemka also expects RIL's green energy and renewable business to play out well in the long term. He also believes that investors should look at RIL from a long-term perspective because a recovery in the stock is likely to be gradual rather than a sharp uptick.

Disclosure: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.

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