Foreign brokerage JP Morgan India has upgraded its rating on Reliance Industries to ‘overweight’ from ‘neutral’ on Thursday and set a price target of ₹3,170 by June 2023.

“In our view, RIL is among the few large companies in India with a positive earnings revision cycle ahead, given the strong refining and gas environment,” it said, adding, “Our upgrade to OW is driven by: global view of strong refining environment though we build in a decline in product cracks from current levels; and RIL’s non-energy business valuations continuing to hold up.”

Key risks

However, the key risks included fall in refining margins to January levels and sharp decline in consumer business valuations, it said.

JPMorgan expects RIL’s outperformance to continue (RIL has outperformed the Nifty by 21 per cent YTD), given the upside risk to consensus earnings estimates. “We increase our FY23-24 EPS estimates by 19 per cent/17 per cent. We upgrade to OW with a revised June 2023 PT of ₹3,170, based on FY24 v/s earlier Neutral rating (December 2022 PT of ₹2,575),” it added.

Better placed

The earnings estimates imply a sharp pullback in diesel and gasoline cracks from current record level, but RIL remains among the best-positioned refiners globally, given: its ability to buy and process arbitrage barrels; diesel-heavy slate; and, export focus. RIL’s upstream business should benefit from rising domestic gas prices and higher volumes.

“While RIL’s product hedging means there is unlikely to be a complete pass-through of spot cracks, overall we see the O2C business-reporting improving profits for the next few quarters. While PE spreads remain weak, strong PX should result in steady petrochem profits,” the global brokerage firm added.

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