Reliance share price may see 35% upside, says Jefferies; assumes petchem margin recovery, Jio tariff hikes

Reliance Industries share price gained on Wednesday after Jefferies maintained a Buy rating on the stock as it sees faster revenue growth in the retail segment and accelerated broadband traction in Jio.

The global brokerage house has a target price of ₹3,125 per share, in its base case, implying an upside of 22%. It believes risk reward is favorable with forward Ebitda multiples at 5-year average for 16% Ebitda growth estimates in FY24.

In its base case, Jefferies expects 20% EBITDA CAGR in Jio over FY22-25E, helped by around 472 million subscribers at ₹200 ARPU (average revenue per user) and 36% EBITDA CAGR in Retail over FY22-25. It projects 19% Ebitda CAGR in refining and 16% growth in petchem segment during the same period.

However, in its upside scenario, Jefferies expects the stock to reach ₹3,450, assuming recovery in GRMs and petchem margins ahead of its estimates and faster consolidation in telecom, leading to tariff upside in Jio.

Additionally, it also assumes possible public listing of Jio re-rating valuation multiple and sees Reliance Retail gaining market share faster-than-expected and Jiomart's gross merchandise values (GMV) coming in ahead of expectations in this scenario.

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In its meeting with investors in the energy and chemicals sector at a recent UK roadshow, Jefferies saw investors were focused on earnings growth and returns on incremental capex in Reliance Industries.

“Investors were keen to understand scalability of retail on the back of increased capex, sustainability of improving refining and petrochemical spreads, monetization of 5G capex in Jio, status of green energy capex and possible timelines for de-merger,” Jefferies said in a note.

The brokerage house believes Jio Broadband traction to aid 5G monetization and improve margin. With a near 100 million potential broadband addressable market up for grabs, Jio has aggressive market share targets.

“Jio has cornered 55% incremental market share in broadband subscriber additions. Jio's intra-city fiber route-km is 7x that of Bharti's but monthly broadband subscriber additions are 2-2.2x. We expect broadband sub adds to accelerate augmented by rapid FWA rollout. Margins should increase as cost of data on 5G is only a fraction of that on 4G,” said the brokerage.

In RIL’s retail business, Jefferies expects footfall to improve in FY24-25E on Future Group floor space amalgamation in FY23 that is expected to drive improvement in thruput per sq ft resulting in operating leverage. 

It also expects on-year decline in capex in FY24-25E as it sees room for faster revenue growth and higher margins on 32 million sq ft added over FY22-23.

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Meanwhile, RIL’s O2C business saw recovery in Singapore GRM (gross refining margin) to $5.5 from $2.2 in early May on maintenance shutdown of 2 mbpd across Asia.

“Russia's share of India’s oil imports at 42% in May is contributing $5/bbl additional margin to RIL. Petchem margins are improving on inventory correction and improving demand in China. Lower US ethane prices are also aiding margins,” the report said.

However, elevated capacity additions in China are likely to cap margins below long term average in FY24E. 

The key catalysts, according to Jefferies, would be sustained recovery in GRM, faster than expected tariff hikes in Jio, possible public listing of Jio and market share gain in Reliance Retail.

At 1:30 pm, the shares of Reliance Industries were trading 0.57% higher at ₹2,561.15 apiece on the BSE.

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