Mukesh Ambani’s Reliance Industries Ltd. (RIL) has been upgraded to a ‘Buy’ rating by global brokerage and research firm UBS, from their earlier ‘Neutral’ tag. In a report, analysts at UBS said that after a period of low growth due to macro headwinds and energy cyclicality, RIL is now entering a growth phase in all three segments — energy, consumer retail, and Jio. So far this month, RIL’s share price has dropped 2.8% to now trade at Rs 2,050 per share. The stock has underperformed the benchmark Nifty 50 this month and even so far this year.
UBS believes improving demand for energy, the ramp-up of digital/omnichannel platforms and new stores reopening, and JioPhone Next’s launch and competitive entry tariffs to be the potential drivers for RIL up ahead.
Turnaround in O2C business
Reliance Industries is expected to witness a turnaround in oil-to-chemicals (O2C) earnings over financial year 2021-2024 helped by regional refining margin recovery and near-term support to petchem spreads. “We see limited downside to current O2C valuations given improving fundamentals and proposed stake sale to Saudi Aramco,” UBS said. The long-awaited strategic partnership with Saudi Aramco could be completed during the current financial year. UBS added that although valuations and terms, of the deal are awaited, it could fund RIL’s $10 billion investment in New Energy.
What could trigger Jio’s growth?
Coming to Reliance Jio, UBS sees JioPhone Next’s launch, competitive spectrum footprint, and bundled plans with attractive entry tariffs as potential growth drivers. “We believe ARPU (average revenue per user) could grow 8-10% on-year basis over financial years 2022-2025, driven by tweaks to existing plans and upcoming $50 smartphone,” they added.
Telecom operators are believed to be taking a cautious step when it comes to tariff hikes. “Owing to the weak macro environment, we think telcos have been cautious about pushing a sizeable “across-the-board” tariff hike similar to the December 2019 hike. We expect tariff hikes to be gradual and likely come more in the form of minor tweaks to existing plans, such as reducing data allowances in certain plans and driving selective upgrades,” UBS said.
Reliance Retail revenues to treble
Although Reliance Retail’s earnings have been cut as UBS postpones Future Retail’s integration, the brokerage firm still believes that Reliance Retail’s revenues could treble in the next 3-5 years. This growth is expected to be driven by accelerated store openings across segments, a ramp-up of digital and omnichannel platforms, and organic and inorganic merchant onboarding to aid New Commerce’s growth.
UBS has pinned a base case target price of Rs 2,500 per share on RIL. The bull case target price has been set at Rs 3,150 per share and the bear case target is set at Rs 1,800 apiece.