UBS upgrades Reliance Industries from Neutral to Buy

It is not often that you get to see an elaborate and luxurious upgrade for a stock that is already the most valuable stock in the Indian stock market. But that is exactly the case with Reliance Industries, which has been recently upgraded by UBS Securities, after RIL declared its results for the June 2022 quarter. In fact, UBS has done two things. Firstly, it has raised the shares of RIL from Neutral to “BUY”. Secondly, it has set a rather generous price target for Reliance Industries in the range of Rs2,900 to Rs3,150 on the upside. 

That is substantial upside on the stock from the current levels. For instance, as of the close of trading on Wednesday, 27th July, the stock of Reliance Industries closed at a level of Rs2,422 per share. If you look at the current target range provided by UBS Securities, then it has a conservative upside target of 19.74% from the current market price and a more aggressive upside target of 30.05% from the current market price. That leaves substantial upside room for investors since this is a 12-month target for Reliance Industries.

What is it that has induced UBS to give such an aggressive upside target for Reliance Industries. One of the major triggers for Reliance Industries, as UBS sees it, is the new investment opportunities to deploy large cash flows profitably. According to UBS, the real big boost for the company will arise from the $20 trillion global renewables opportunities, which also includes renewable energy, batteries and hydrogen. This is the total potential by the year 2070 and that is the net-zero emissions opportunity they are betting on.

According to UBS Securities, the Reliance Industries New Energy business can invest around $36 billion in new energy over the next 10 years. However, that is not yet factored into the price since the granular details of the same are not available at this point of time. According to UBS, the new energy opportunity has the potential to add $35 billion in market cap to Reliance Industries by the year FY30. If that is discounted back to the FY24 estimates, it would approximately translate into a value-add of Rs234 per share to the SOTP valuations.

If you break it down, the targets set by Reliance Industries are rather elaborate. For example, Reliance Industries is currently targeting 20GW solar photovoltaic (PV) manufacturing capacity. This would be integrated with 90 KTPA polysilicon from Jamnagar factory, which is one of the bases for its green energy initiatives. Then there is the battery energy storage system (BESS) manufacturing facility of 20 GWh. All these are yet to be reflected in the potential valuation and this price targets only scratches the surface.

Of course, that is the new energy business. However, UBS is also extremely positively on the existing retail and digital ventures of Reliance, with both the business verticals expected to grow much faster. For instance, UBS believes that once the outcome of the 5G auctions are known, then the real scaling that Reliance Digital can do would be visible and that should also give a boost to its valuations. In addition, the actual plan of the retail business creating the end to end retail value chain ecosystem is yet to be factored into valuations.

According to UBS, when these parts are added up and looked at as a whole, the real valuation of Reliance should be evident, at least to begin with. If the plans pan out as envisaged, there would be a persistent and consistent value creation by the various businesses of Reliance Industries. Of course, that would be more into the future, but for now the business plan does look future perfect.