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Reliance Industries (RIL) shares outlook is optimistic after Q2 results

October 25, 2021 02:19 PM

Reliance Industries (RIL) shares outlook is optimistic after Q2 results
Reliance’s oil-to-chemical business revenue grew 58 percent YoY in Q2 mainly on account of better realizations driven by the increase in oil prices and higher volumes. The segment’s EBITDA rose by about 44 percent YoY and 4 percent quarter-on-quarter.

Reliance Industries (RIL) shares traded marginally lower on the National Stock Exchange on October 25, as the Nifty 50 index, too, declined, although analysts are broadly pleased with the company’s September quarter results announced on October 22.

They were especially satisfied with Reliance’s retail business, where revenue surpassed pre-pandemic levels. The easing of the second Covid-19 wave’s restrictions meant that the retail segment recovered as demand improved.

Core retail year-on-year revenue growth stood at 16 percent in Q2. Footfalls recovered to 78 percent of pre-pandemic level compared with 46 percent in Q1. Analysts expect footfalls to improve as consumer sentiment improves, provided a potential third covid wave doesn’t hit the country and stall business recovery.

Emkay Global Financial Services analysts assigned a higher multiple for RIL’s retail business in keeping with its peers.

“Our revised enterprise value for Reliance Industries (RIL) shares 84 percent stake in retail stands at Rs 5.97 trillion (RS 4.83 trillion earlier), based on 40 times December 2023 estimated EBITDA (36 times June 2023 estimated EBITDA earlier),” Emkay Global Financial Services said in a report on October 24. EBITDA (earnings before interest, tax, depreciation and amortization) is a key measure of profitability for companies.

Target price

The broker increased its target price by 18 percent to RS 2,750 but retained its ‘hold’ rating. Reliance shares traded at about RS 2,620 on the NSE after closing at RS 2,627.40 on October 22.

“Our target price increase is driven by rollover, higher multiple for retail (based on peers), introduction of new energy in stop (based on announced invested capital), higher GRMs, and lower debt,” Emkay’s analysts said.

stop refers to the Sum-of-The-Parts valuation methodology where the value of each division is ascertained separately and added together to arrive at the total value of the firm.

There is a fair share of excitement over the strong rebound in gross refining margins (GRM), the amount refiners earn from turning each barrel of crude oil into fuel products. Improving demand on the lifting of pandemic-led restrictions on travel unsurprisingly have a positive influence on refining margins.

“We project RIL’s refining margins at $11.5 per barrel and $12 per barrel over FY23 and FY24 (up 89% and 97% over FY21), driven by demand recovery and supply rationalization/delays in planned capacity additions,” Morgan Stanley Research said in a report on October 25.

Also Read : Reliance Industries(RIL) to buy 40% stake in Sterling & Wilson Solar for RS 2,850 crore

Reliance’s oil-to-chemical business revenue grew 58 percent YoY in Q2 mainly on account of better realizations driven by the increase in oil prices and higher volumes. The segment’s EBITDA rose by about 44 percent YoY and 4 percent quarter-on-quarter.

RIL’s oil and gas segment performed well, too, although telecom unit Jio’s net subscriber additions were muted. Overall, RIL’s consolidated EBITDA increased by 11 percent to RS 26,020 crore in Q2 vis-à-vis the June quarter. EBITDA growth stood at 37 percent YoY.

To be sure, the outlook for many of Reliance’s segments is on a strong footing. Investors seem to be capturing a good portion of the optimism into the share price. RIL’s shares have appreciated as much as 32 percent so far this calendar year. This may cap significant upsides from a near-term perspective.

“As key segments (oil-to-chemicals, retail, Jio) are reflecting premium valuations, in our view, further rerating would have to come from a higher renewables option value,” JP Morgan India analyst Pinakin Parekh wrote in a report on October 23. “We currently build in around $10 billion in renewable option value.”

Additionally, investors should keep a close eye on news flow about the oil-to-chemicals stake sale to Saudi Aramco.

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