New capex phase to fuel rally in Reliance stock: Jefferies report

In a report released after key announcements made by RIL chairman Mukesh Ambani at the company AGM on Monday, global brokerage Jefferies sees the company’s stock on an upward trajectory over a sustained recovery in GRM (gross refining margin), faster-than-expected tariff hikes in Jio, possible public listing of Jio and Reliance Retail surprising on market share gain and profitability.

In a base case scenario, Jefferies expects the Reliance Industries’ stock at Rs 2,980 with the Ebitda growing at a CAGR of 19% and PAT at 9% over FY22-25E. In a report on Tuesday, the brokerage says that in a bull case scenario, the stock can march up to Rs 3,400 or 29% from the current market price. However, lower-than-expected telecom ARPU or subscribers can lead to a valuation multiple de-rating.

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Succession: The report mentioned that the company’s blueprint was along the expected lines.

New O2C Capex: RIL also announced investment plans of Rs 75,000 crore to add polyester, PVC and carbon fibre capacity by 2026. These should add $1.5 billion to the annual Ebitda from FY27E assuming 5-year average spreads implying ~15% ROCE, the report noted.

New Energy roadmap unveiled: Jefferies estimated that besides the Rs 75,000 crore in the five giga factories, the captive solar generation could require $12.5 billion capex, and this could lower RIL’s power costs by ~$1.4bn annually.

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Growth in retail/e-tail and eye on FMCG segment: The store additions picked up last year. Ramp-up continues in new commerce, which is evident from an exaggerated growth in customer orders, along with merchant partnerships across verticals. Partnership with WhatsApp now allows for a seamless ordering on messaging platform. After creating a portfolio of own labels in grocery retail, Reliance Retail now plans to expand the presence into kirana channel, eyeing transformation into the FMCG business (from merely private labels).

Jefferies raised its capex estimate for FY23/24/25E to Rs 1.59/1.55/1.59 trillion, respectively, to factor in a higher capex in Jio, conventional O2C and new energy businesses.