Reliance Industries hot on brokerages shopping cart; rights issue, Facebook deal drive estimates

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Updated: May 04, 2020 11:28 AM

Despite reporting a fall in profits in the January-March quarter, the 10% stake sale in Reliance Jio to Facebook and the biggest-ever rights issue in India of Rs 53,000 crore that Reliance Industries announced on Friday has made brokerage firms stay firm on their ‘buy’ calls for India’s most valuable company.

Reliance Industries, BP Plc of UK, British thermal unit, ONGC fields, coronavirus lockdown, Essar Steel, Adani Group, GAILThe rights issue along with the Jio-Facebook deal and fuel retailing with energy giant BP is expected to help RIL bag a total of Rs 1.03 lakh crore.

Despite reporting a fall in profits in the January-March quarter, the 10% stake sale in Reliance Jio to Mark Zuckerberg’s Facebook and the biggest-ever rights issue of Rs 53,000 crore that Reliance Industries announced on Friday has made brokerage firms stay firm on their ‘buy’ calls for India’s most valuable company. Analysts are upbeat on Reliance Industries Ltd (RIL) claiming that the company’s efforts of foraying into the technology sector and amalgamating it with the local mom & pop stores in India is a positive step in the right direction. RIL’s effort to go zero-net-debt by March 2021 is looking to fructify with massive deals and the rights issue, giving experts another reason to give a thumbs up to the Mukesh Ambani’s firm.

The rights issue along with the Jio-Facebook deal and fuel retailing with energy giant BP is expected to help RIL bag a total of Rs 1.03 lakh crore, said brokerage and research firm Motilal Oswal in a recent note. The brokerage values Reliance Industries at Rs 1,618 per share up from its current market price of Rs 1,438 apiece. Reliance Jio and Reliance Retail are two segments of RIL that have performed exceptionally well. Jio’s EBITDA growth has been strong along with an increase in ARPU, for Reliance Retail the business has maintained strong performance despite a slowing economy. 

“We value the core segment of Refining and Petrochem at 6.0x FY22E EV/EBITDA, factoring in the enhanced delayed coker capacity, the widening of crude blend window for maximizing distillate yields prior to the IMO and the revival in Petchem margins for the company under its flexible feedstock utilization,” the report said. RIL is trading at 22x FY21E EPS of Rs 66.4 and 13.2x FY21E EV/EBIDTA, according to the brokerage firm.

RIL was expected to take a hit in the refining business as crude oil prices saw a turbulent ride in the January-March quarter. However, gross refining margins of $8.9 per barrel were way higher than most expectations. “GRM at USD8.9/bbl is much higher than estimates with its spread to benchmark widening due to lower crude purchase costs and a shift to higher-margin product slate,” Edelweiss Securities said in a research note. RIL has consistently achieved superior GRMs versus Singapore complex margins, owing to higher complexity and efficient crude processing. Edelweiss Securities has a target price of Rs 1,678 per share for the scrip. 

Although not having the Facebook deal factored in, Emkay Global estimates RIL stock price to go up to Rs 1,630 apiece. The brokerage assumes a 7% dilution in equity from the Rs 53,000 crore rights issue. “We reinstate 23x multiple in Retail. Our FY21/22E EBITDA is up 7%/6% as we slightly raise GRMs owing to better Q4 rate and retail earnings due to higher margins,” it said. 

Risks associated with RIL largely relate to the refining and chemical businesses. Lower demand domestically and globally could cause a dent in RIL’s refining and chemical margins. Edelweiss Securities said if there is any delay in the commissioning of key upcoming core projects such as  — petcoke gasification and off-gas cracker — that would significantly impact the earnings model of the brokerage on RIL. It is important to note that these estimates have not factored in the Rs 5,656 crore deal that Reliance announced on Monday morning with Silver Lake.

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