Every barrel of crude oil becomes more valuable once it is turned into diesel or jet fuel. Right now, that price gap is at record levels, and the brokerage house Nuvama believes Reliance Industries (RIL) is well placed to profit from it.
The brokerage has a ‘Buy’ rating on the stock and a target price of Rs 1,766. That is about 45% above the current market price. According to the brokerage report, RIL could report stronger earnings in the Q2FY27.
The key driver behind this is its oil-to-chemicals business.
Let’s take a look at what the brokerage house is saying –
Why refining margins matter for Reliance
The biggest change in Nuvama’s outlook comes from refining margins. Refineries make money by converting crude oil into products such as diesel and aviation turbine fuel (ATF). The difference between the value of these products and crude oil is known as the refining margin, or crack spread.
The brokerage house in its report added that the gasoil and ATF crack spreads have reached record levels. This has happened as geopolitical disruptions have affected fuel supplies and Chinese exports have remained muted.
Nuvama expects these elevated margins to continue. The brokerage said, “Middle distillate cracks at record high; shall stay elevated.”
It also expects lower refinery utilisation and maintenance activity globally to keep fuel supplies tight.
Q2 earnings could surprise
The improvement in refining margins has also changed the brokerage’s expectations for the company’s Q2 performance as well.
According to the brokerage report, consolidated EBITDA could rise 17% year-on-year to Rs 53,700 crore. Profit after tax (PAT) is estimated to increase 15% year-on-year to Rs 209 billion.
The oil-to-chemicals (O2C) segment is expected to be the biggest contributor. Nuvama estimates O2C EBITDA at Rs 20,700 crore, up 38% year-on-year and 22% quarter-on-quarter.
Crude throughput is also expected to increase 10% quarter-on-quarter to around 20 million tonnes.
RIL: Digital business a source of earnings growth
Reliance’s digital business could provide another source of earnings growth. According to Nuvama, Digital EBITDA could rise 16% year-on-year to Rs 21,900 crore. This is expected to be supported by higher average revenue per user (ARPU) and subscriber growth.
The brokerage estimates ARPU to increase 3% year-on-year, while subscribers could grow 7%. Meanwhile, the retail business may remain under pressure. Retail EBITDA is estimated to decline 1% year-on-year, partly because of a higher base in the year-ago period.
RIL: What could support the stock ahead?
Nuvama also sees several longer-term drivers for RIL. The brokerage expects Reliance’s New Energy (NE) business to eventually become an important contributor to earnings.
It believes the business could add more than 50% to PAT over time and potentially influence the valuation of the O2C business. The brokerage said, “Golden refining era underway; multiple growth drivers.”
Reliance’s net debt stood at around Rs 1.23 trillion, according to the report. Nuvama believes the relatively modest debt position keeps its weighted average cost of capital (WACC) under control.
The brokerage also maintained its view of sustainable refining margins above $10 per barrel.
The brokerage noted, “Our Golden Refining era thesis for sustainable $10+/bbl in GRM is intact.”
Disclaimer: This article is based on research reports from one or more brokerage firms and is for informational purposes only. The views, target prices, and recommendations expressed are those of the respective brokerage firms and do not reflect the official policy or position of Financial Express. This should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor before making any investment decisions.