Big global broker turn bullish on the Reliance story

Reliance Industries has always been a special stock. Apart from being the largest company by sales, profits and market capitalization, Reliance is also a key player in the start-up ecosystem in India. It is hardly surprising that a slew of brokers like JP Morgan, Morgan Stanley and Jefferies have upgrade the target price of Reliance Industries. The stock has been a solid outperformer over the last few years. In fact, JP Morgan upgraded Reliance rating from “neutral” to “Overweight” with a price target of Rs.3,170 crore. 

With the current price of Reliance Industries at Rs2,659, it leaves an upside potential of 19.2% on the stock. The stock is also expected to outperform the Nifty and the Sensex. On a year to date basis, Reliance has already outperformed the Nifty index by 21%. Reliance remains among the few large companies in India with a positive earnings revision cycle giving a robust GRM scenario. GRM refers to gross refining margins.
JP Morgan has raised its EPS estimate for RIL by 19% for FY23 and 17% for FY24.

The assumption is that there would be a sharp pullback in the diesel and gasoline cracks from current record levels. However, RIL was best positioned among the oil refiners to buy and process arbitrage barrels. On the other hand, the RIL upstream business consisting of oil and gas extraction should benefit from rising domestic gas prices and higher volumes. Unlike popular expectations, tech meltdown in the US did not impact RIL despite rich valuations.
 

Reliance is in a sweet spot for numerous reasons. Its oil extraction business is likely to benefit from higher crude prices. Its oil refining business is likely to gain from improved gross refining margins per barrel. At the same time, it is quickly ramping up its retail busies while the Jio business has been a crown in the jewel considering that the average revenue per user (ARPU) has risen sharply . Its energy business is also having a tough time with its proposed shift to green energy in a big way.

Expectations are pretty heavy on the tone of the RIL AGM but the bottom line is that markets are expecting Reliance to make announcements on the future of its O2C business, challenges in oil, focus on green hydrogen etc. There may not be concrete time lines, but another group, Adani Group, has been moving very aggressively and that would play on the top of the mind of the company.