Why Are Brokerages Bullish On Reliance Industries?

In March, shares of Reliance Industries Limited (RIL) lost value as oil prices plunged to less than $30 a barrel and investors feared that it would not only reduce the company's refinery margin but also push back its Saudi Aramco deal that was vital to reducing its debt.

Reliance Industries: Quotes, News

BSE 1350.8518 (-1.33%)

NSE 1350.5018.7 (-1.38%)

This week, the tide changed for the oil-to-telecom conglomerate and rose over 3 percent on Friday after several brokerage houses made buy calls on the stock seeing the RIL's decision to diversify into the consumer-based business like Reliance Jio and Reliance Fresh will help curb the risks associated with the nationwide lockdown.

According to HDFC Securities, the company's shares have corrected by 25 percent in the last four months from its peak due to concerns of a global economic slowdown in the market and the brokerage sees a possible upside of 18 percent in the stock to Rs 1,400 from the current level.

"RIL stock has corrected by 25% from its peak over the past 4 months driven by global economic slowdown concerns. Our view that the stock price correction is overdone, and the stock should outperform, is premised on 1) Non-cyclical domestic consumer business accounting for 56% of FY21E EBITDA (31% in FY19), 2) The stock factoring only an $3.0/bbl FY21E refining margin, 49% lower than Global Financial Crises (GFC) quarterly trough and 3) Interest Coverage ratio of 4.3 times and Net Debt/EBITDA of 1.6 times in FY22E (12-35% better than the FY19 lows)."

On the other hand, Goldman Sachs sees a sharp upside of 34 percent in the stock from the current level.

"We expect a rapid recovery for RIL's earnings driven by 60 percent Ebitda (earnings before interest taxes depreciation and amortisation) growth for the telecom business in FY21 on account of higher ARPU (average revenue per user), recovery in oil prices and refining margins as supply demand trends improve in 2HFY21 (October-March), and turnaround in the retail business once lockdown restrictions are lifted," it said in its note.

Global research firm CLSA has a buy call on the stock but has cut target to Rs 1,500 from Rs 2,010 per share. It is of the view that RIL's Q4 standalone profit is likely to fall 16 percent from the previous quarter, adding that Jio's EBITDA may rise 16 percent QoQ and that of retail by 42 percent on YoY basis.

Further, according to a BloombergQuint report citing sources, RIL raised Rs 8,500 crore in three-year bonds as the NCD issue received good response despite the bonds being unsecured and primarily aimed at refinancing its existing debt.

As of 31 December 2019, the company had reported net debt of Rs 1.53 lakh crore.

In August 2019, Chairman Mukesh Ambani pledged to cut the Reliance group's net debt to zero from about $21 billion (as of March 2019), reassuring investors' worries of the company's liabilities.