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The stock of Reliance Industries jumped as high as 6.4 per cent on Friday, as Jefferies bet on its petrochemicals business. The stock, after climbing to a high of ₹2,105 on the BSE, closed at ₹2,094.90, up 5.90 per cent.
According to Jefferies, the operating profit from Reliance Industries Ltd’s petrochemicals business could see a sharp jump if current spreads sustain. This could add up to 14 per cent to consolidated operating profit of the diversified conglomerate with business interests across oil refining, petrochemicals, exploration and production, retail and digital services, the brokerage firm said..
Jefferies reiterates its ‘buy’ rating on RIL with a target price of ₹2,580. Reliance was the biggest gainer on the BSE Sensex and Nifty. About 21.58 lakh shares were traded at the BSE and over 2.60 crore shares on the NSE.
O2C transaction
“Polymer spreads are at decade-highs on strong downstream demand. Polyester chain spreads, well below decade highs on large capacity addition, are recovering gradually. RIL’s petchem portfolio spread is tracking 30 per cent ahead of JEF estimates. Petchem EBIDTA could be 50 per cent ahead of JEF estimates if current spreads sustain in FY22. This could drive 14 per cent upside to our consolidated EBIDTA estimates,” it said and added: “Sustained strong performance increases the likelihood of the O2C transaction.”
“At the current stock price, valuing the energy business at long-term average multiples, we are left with ₹1,150/share as imputed value of RIL’s stake in Jio and Retail,” it said and added that this is in line with the valuation offered by PE funds that bought stakes in Jio and Retail in Q1-FY21.
“In our view, sustained strong petrochemical performance improves the likelihood of O2C stake sale in FY22. This could lead to a reversal of the 40 per cent Nifty underperformance. Our PT (₹2,580) represents 30 per cent upside,” it added.
According to Bloomberg, based on analyst tracker data, “Of the 37 analysts tracking the company, 25 recommend a ‘buy’, eight suggest a ‘hold’ and four rate it ‘sell’.
Key factors to drive stock
Jefferies has set an upside price target of ₹3,150 based on key factors such as “strategic stake sale in O2C business re-rates multiples, recovery in GRMs ahead of our estimates, faster consolidation in telecom leads to tariff upside in Jio, possible public listing of Jio re-rating valuation multiple and Reliance Retail gains market share faster than expected has the potential.”
However, key risks are lower-than-expected telecom ARPU or subscribers, valuation multiple de-rates refining/petchem margins may be lower due to extended impact from pandemic, elevated cash burn in e-commerce, valuation multiple de-rates, and free cash flows don't materialise. In that event, the price target on the downside is ₹1,850, said Jefferies.
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