Reliance Industries Ltd's (RIL) shares gained almost 2 percent in morning trade on the National Stock Exchange on October 11, with the stock touching a new 52-week high buoyed by optimism around the two new energy business acquisitions announced on Sunday. Over the last one month, the RIL stock has appreciated by around 11 percent vis-a-vis 3.5 percent gain in the Nifty 50 index in anticipation of these big corporate announcements that promise to alter the complexion of the company and pave the way for the next phase of growth for the conglomerate.
“The Rs 200-300 per share increase in the RIL stock in the past month is primarily owing to the optimism on the upside from the company’s new energy businesses. The recent deals will bring in the technology that will eventually help the four proposed giga factories,” says Probal Sen, senior vice president at Centrum Broking Ltd.
That’s not all. The outlook for RIL’s other businesses has improved, too. For instance, refining margins have seen an uptick. Benchmark Singapore gross refining margin (GRM) has averaged at $3.8 per barrel in the September quarter, up from $2.1 per barrel in the June quarter. GRM is the margin refiners earn from turning every barrel of crude oil into fuel products. Note that Singapore GRMs have remained strong, improving further in the ongoing December quarter as well.
Add to that, petrochemicals margins have been robust.
Analysts from Jefferies India said in a report on October 11, “We see potential for 10-12% upgrade to consensus O2C (oil-to-chemical) Ebitda estimates for FY22E if China sticks to its climate goals till the Winter Olympics in February 22.” Ebitda is earnings before interest, tax, depreciation and amortisation - a key measure of profitability for companies.
RIL’s telecom business is expected to cough up good numbers for the September quarter with strong subscriber additions. Moreover, there is also a reasonable amount of excitement about RIL’s retail business. In general, rising pace of vaccinations and the gradual opening up of the economy is expected to lead to a recovery for all retailers and RIL won’t be an exception to this. Recently, Reliance Retail Ventures has entered into a master-franchise agreement with 7-Eleven, Inc.
In keeping with the improving business scenario, Kotak Institutional Equities’ analysts have raised their SoTP (sum of the parts)-based fair valuation of the RIL stock to Rs 2,800 based on September 2023 estimates from Rs 2,260 earlier. This factors in “(1) option value of Rs 50 for the new energy business, (2) higher ARPU scenario for Jio, in line with our medium-term outlook for the telecom industry, and (3) higher multiple of 35 times Ebitda for extant retail business noting a robust recovery in demand environment and acceleration in shift towards the organized segment post COVID.”
SoTP refers to the Sum-of-the-Parts valuation methodology. Here, the value of each division or segment of the company is determined separately and ultimately added together to arrive at the total value of the firm.
To be sure, investors should note that despite the recent outperformance, the RIL stock has underperformed the Nifty 50 index significantly over the last one year. Currently, the stock trades at around Rs 2,684 a piece. Going by Kotak’s target price, it could mean that upside may be limited from hereon.
What next then?
Investors should keep a close eye on potential tariff hikes in the telecom sector. Further, news flow on the O2C stake sale to Saudi Aramco is another moniterable. Lastly, progress on the company’s renewable business remains to be seen. “We believe RIL is well-positioned to capitalise on sufficiently large opportunity in the domestic solar business underpinned by anticipated growth in renewable power generation and recent policy initiatives for solar business including PLI scheme and customs duty protection,” wrote Kotak’s analysts in a report on 11 October.
On Sunday, RIL’s subsidiary, Reliance New Energy Solar (RNSEL) acquired 100 percent stake in REC Solar Holdings at an enterprise valuation of $771 million. RNSEL will also acquire 40% stake in Sterling & Wilson Solar.
Overall, according to Sen, “Incremental upside is now likely to come from FY24 earnings outlook.” That is also likely to be the first full normal year post Covid.
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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