Margins of key chemicals have surged in recent months, a move that is likely to benefit Reliance Industries.
RIL share price has slipped over 2% in the last one month while the Nifty 50 has zoomed 11.5% in the same time period. Index heavyweight Reliance Industries Ltd’s recent underperformance follows its 165% rally between March and September. However, now trading at Rs 1,984 per share, down 20% from its 52-week high of Rs 2,369, has RIL corrected enough for investors to start accumulating it again?
Rebound in petchem margins
Brokerage firm Kotak Securities believes that the rebound in petrochemical margins along with a possible tariff hike by the telecom industry are the key catalysts that might help RIL’s stock price. “We expect RIL to benefit from a sustained sharp recovery in Asian margins for key petchem products in recent months from the lows of the fourth quarter of calendar year 2019, which will help in mitigating weakness in refining even as it recovers gradually,” Kotak Securities said in a report.
Margins of key chemicals have surged in recent months, a move that is likely to benefit RIL. Spreads for polyethylene, polypropylene and PVC over naphtha have increased sharply in recent months, reflecting a healthy pickup in demand from packaging, consumer and healthcare segments and slower additions to capacities. “We expect margins to improve to US$196/ton in FY2022 reflecting a sustained recovery in global demand and slower additions to polymer capacity amid weak economics of coal-to-olefins projects,” the report said. Refining margins are expected to recover gradually.
Tariff hike to help Jio
After having completed the stake sale in Jio Platforms to global investors such as Facebook, Google, PIF, among others, the next move that will aid the telecom and digital services division of RIL will be a tariff hike. “In our view, Jio may welcome a hike in telecom tariff by the industry, wholly or at least partly, in order to improve its own business economics as potential revenue streams from other digital initiatives may take time to shape up,” Kotak Securities added.
Jio has been the largest revenue gainer despite lower increase in Average Revenue Per User (ARPU) post the tariff hike of last year. In the previous quarter, Jio’s APRU came in at Rs 145 per month while Bharti Airtel had an ARPU of Rs 162.2 per month. However, net addition of subscribers was healthier for Jio along with a larger revenue.
“The sharp 32% underperformance of RIL versus the broader markets over the past two months offers an opportunity to accumulate. A near-term improvement in outlook for O2C and telecom business may lead to a rerating of the stock, which may also act as a hedge against any weakness in the broader markets,” the brokerage firm said. With an ‘Add’ rating on RIL, Kotak Securities has a fair value of Rs 2,150 per share.
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