Reliance share valuation ‘favourable’ after correction, Jefferies raises price to Rs 2,950

Reliance share valuation ‘favourable’ after correction, Jefferies raises price to Rs 2,950

Jefferies India, a reputable brokerage firm, has expressed a positive outlook on the valuation of Reliance Industries Ltd stock, despite a recent 7.5 percent decline in its price from its record high. However, the firm has issued a cautious note regarding the sustainability of strong global refining margins.

Here’s an expansion of the key points in Jefferies’ assessment:

1. Favorable Valuation: Jefferies India believes that the current decline of 7.5 percent in Reliance Industries Ltd’s stock price from its record high presents an attractive opportunity for investors. This suggests that the stock is trading at a relatively lower price compared to its peak, making it potentially favorable for those looking to invest or increase their holdings.

2. Buy Rating: Despite the recent price decline, Jefferies has maintained a ‘buy’ rating on the stock. This rating indicates the brokerage firm’s confidence in the long-term prospects of Reliance Industries Ltd. It suggests that they believe the stock has the potential for future growth and is worth considering for investment.

3. Increased Target Price: Jefferies has raised the target price for Reliance Industries Ltd’s stock to Rs 2,950 per share. This represents a significant increase of 22 percent from the current market price. A higher target price implies that Jefferies expects the stock to appreciate in value over time, and this increase reflects their optimism regarding its performance.

4. Caution on Refining Margins: While Jefferies is positive about the stock’s overall valuation and growth potential, they have sounded a note of caution regarding global refining margins. Refining margins are a crucial factor for companies like Reliance Industries Ltd, as they operate in the refining and petrochemicals industry.

The firm suggests that the strong global refining margins experienced recently may not be sustainable in the long term. This caution highlights the importance of considering both potential upsides and risks when investing in the stock.

In summary, Jefferies India’s assessment of Reliance Industries Ltd stock is largely positive, with an emphasis on the attractive valuation, a ‘buy’ rating, and an increased target price. However, they are mindful of the volatility in refining margins and advise investors to take this factor into account when making investment decisions related to the company’s stock. Investors should conduct their own research and consider their risk tolerance before making any investment decisions based on this analysis.

The report from Jefferies India highlights several key factors that play a role in protecting against potential downside risks for Reliance Industries Ltd’s oil-to-chemical business EBITDA:

1. Robust Refining Margins: The strong global refining margins act as a protective factor for Reliance Industries Ltd. These margins help generate significant revenue and profits from the company’s refining operations. Even if there are challenges in other segments of the business, such as the oil-to-chemical segment, the strong refining margins can provide a buffer, ensuring a steady source of income.

2. Export Duty Consideration: Jefferies points out that the reintroduction of export duty on refined products is a factor to be mindful of. Export duties can impact the profitability of exporting refined products, and this may limit the margin growth for Reliance’s refining output. The report suggests that this cap on margin growth is estimated to be around 25 percent of the company’s refining output. This is an important regulatory aspect to consider when evaluating the overall potential of Reliance Industries Ltd.

3. Reduced Capital Intensity: The report also anticipates reduced capital intensity in Reliance Jio and Reliance Retail by FY25. This reduction in capital expenditure can lead to more robust free cash flow for the company. Robust free cash flow is advantageous as it provides flexibility for the company to reinvest in growth opportunities, pay down debt, or return value to shareholders through dividends or buybacks.

In summary, Jefferies India’s report underscores the importance of robust refining margins as a protective measure for Reliance Industries Ltd, especially in the context of potential downside risks to the oil-to-chemical business. They also highlight the impact of export duties on refining margins and anticipate reduced capital intensity in other segments of the company, which can contribute to stronger free cash flow. These factors collectively contribute to their positive outlook on the company’s stock and its long-term prospects. However, it’s essential for investors to consider these factors alongside their own investment objectives and risk tolerance when making investment decisions.

Jefferies India’s upside scenario for Reliance Industries Ltd’s stock is quite optimistic, and they have set a target price of Rs 3,300 per share, which represents a substantial 37 percent increase from the current valuation. Here’s an elaboration of the factors contributing to this optimistic target:

1. Likely Tariff Hike by Jio: One of the key drivers of the bullish outlook is the anticipation of a tariff hike by Reliance Jio. Tariff hikes in the telecom sector can significantly impact revenue and profitability. If Jio successfully implements a tariff hike, it could lead to improved financial performance for the company, which, in turn, could positively impact its stock valuation.

2. Possible Listing: Jefferies also mentions the possibility of a listing, which could refer to Reliance Jio’s potential initial public offering (IPO). IPOs can generate substantial investor interest and drive valuations higher. If Reliance Jio were to go public, it could unlock additional value for Reliance Industries Ltd shareholders.

3. Market Share Gains by Reliance Retail: Jefferies expects Reliance Retail to continue gaining market share at an accelerated pace. The retail sector has been a focus area for Reliance, and if it continues to expand and capture a larger market share, it can contribute positively to the company’s overall revenue and profitability.

4. Jiomart’s GMV: The report also mentions the expectation of Jiomart’s Gross Merchandise Value (GMV) surpassing expectations, particularly with the festive season approaching. GMV is a crucial metric for e-commerce and retail businesses, and exceeding expectations in this regard can be a positive sign of strong customer demand and growth.

In summary, the upside scenario presented by Jefferies India is based on a combination of factors that have the potential to drive Reliance Industries Ltd’s stock price significantly higher. These factors include tariff hikes by Jio, a potential listing, market share gains by Reliance Retail, and the strong performance of Jiomart during the festive season. It’s important to note that this is an optimistic scenario, and actual results may vary. Investors should conduct their own research and consider their risk tolerance before making investment decisions based on these projections.