Reliance Industries: 8 Key reasons why Jefferies has raised earnings estimates and sees more upside for the stock price
- Stock Market Today: Reliance Industries share price after rising 32% since closing lows in October'2023 is trading near 52-week highs seen recently. Here are 8 Key reasons why Jefferies sees more upside for the stock
Reliance Industries Ltd share price has risen more than 30% since its closing lows in October'2023. While the investor confidence on Reliance Industries earnings prospects has improved significantly with Retail business and Jio businesses showing regular uptick in earnings, there was some weakness seen in Reliance Industries Oil to chemicals (O2C) business as was evident from Q3 Results. Analysts now see rebound in in earning prospects for Oil to Chemical business of Reliance Industries with strengthening of Diesel spreads and those for Petrochem.
A crack spread is the overall pricing difference between a barrel of crude oil and the petroleum products refined from it.
Analysts at Jefferies India Pvt Ltd said that the robust global middle distillates demand, 5-yr low diesel inventories and Red Sea disturbances have firmed up diesel spreads 40% since December. Ethane economics are supporting petchem spreads.
Jefferies India have raised Reliance Industries FY24 and 25 Ebitda estimates by 2% and 1% on near-term oil to chemicals strength. The Peak capex in Jio and Retail are also behind.
8 Key reasons why Jefferies has upgraded earnings estimates
Robust middle distillate demand: Global diesel demand remains resilient as China's diesel demand remains stable while growth trajectory is seen in India's demand. Global aviation fuel demand grew more than 20% year-on-year in October-November period, nevertheless it is is still 7% below pre-Covid levels implying continued strength in the coming months.
Diesel inventories in Asia, Europe near 5-yr lows: They Diesel inventories are at 5-year lows in key markets in Asia and Europe making diesel margins susceptible to supply disruptions, said Jefferies.
China's diesel exports remain muted: China's export of diesel have declined 51% year-on-year in October to December quarter of fourth quarter of Calendar Year 2023 keeping regional supplies tight supporting regional margins.
Red Sea disturbances tightening supplies: Red Sea shipping route has seen disturbance with rise in Houthi attacks during past few months. The route accounts for 14% of global refined product supplies. Tanker transit by Red Sea has fallen over 50% since December, said analysts at Jefferies. This has led to longer shipping times and delayed supplies driving up diesel spreads by around 40% since December. Forward curve suggests diesel spreads could remain elevated into first quarter of FY25.
Venezuelan crude to aid margin: Reliance Industries is tapping opportunities for sourcing Venezuelan oil and is said to be in discussions with PDVSA, the Venezuelan state-owned oil and natural gas company, to source oil, since the US has removed sanctions. Jefferies analysts point out that Reliance Industries has been the largest buyer of Venezuelan crude in the past (15% of its refinery feed) and should benefit from the prevailing $ 8 a barrel discount to Brent on landed basis.
Petchem segment earnings are set to improve: Ethane cracking economics is aiding petchem spread as per Jefferies as Reliance Industries. A Sharp fall in US ethane prices in January-February in response to the warmest winter on record is aiding petrochemicals profitability when margin from naphtha cracking prevails at decade-low. Reaince uses 1.5mmtpa (million metric tonne per annum) US ethane as feedstock in its petrochemical business.
FY24-25 Ebitda estimates raised on O2C strength: Jefferies analysts expect Oil-chemical Ebitda to rise 22% sequentially in 4Q FY24 estimated. The expect the refined product market to remain tight into first quarter of FY25 and have raised FY24 and 25 O2C Ebitda estimates by 5% and 3% respectively. They have raised Reliance Industries FY24 and FY25 consolidated Ebitda estimates by 2% and 1% respectively on near-term Oil to chemical strength. Ebitda stands for earnings before interest tax depreciation and amortisation.
Capex moderating and Free cash flows improving; Jefferies:
With pan-India 5G network rollout completed and sharp moderation in Retail capex, Jefferies expect Reliance Industries second half FY24 estimated capex to be 20% lower than first half. Stock trades cheap relative to Nifty, they said and have maintained Buy ratings with price target of ₹3,140.
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