Brokerages bullish on Ambani's mega plans; see up to 20% upside in the stk

While most brokerages remain optimistic on the road ahead for the company and welcomed its 'green initiative', most analysts say the execution of the same hold key to growth for the company

Most brokerages have given a thumbs-up to Mukesh Ambani’s mega investment plans unveiled in the company’s 44th annual general meeting (AGM) on Thursday. The market, however, does not seem to be in sync with this – at least for now – with the stock losing 2.4 per cent in Thursday’s trade and another 2.3 per cent on Friday. With this, the counter has lost ground continuously for five sessions and wiped off over Rs 60,000 crore in market capitalisation (market cap) during this period.

While most brokerages remain optimistic on the road ahead for the company and welcomed its ‘green initiative’ and the Rs 75,000 crore investment plan spread over three years, most analysts say the execution of the same, focus on achieving the targets set for the retail business vertical and the rollout of Reliance Jio’s smartphone – JioPhone Next – hold key to growth for the company.

 

Here’s how leading brokerages have interpreted the statements.

Jefferies

Rating: Buy

Target price: Rs 2,540

This year's AGM focused on RIL's renewable energy transition plan. The plan is essential given that a significant portion of its conventional energy assets will approach end of life over the next two decades. The energy transition will allow RIL to participate in India's energy consumption growth story over a longer horizon. The plan sounded ambitious with little details but should improve its Environmental, Social, and (Corporate) Governance (ESG) score. The O2C stake sale is expected to close this year. Jio announced an affordable smartphone launch in September 2021. Its keenness on 5G services may lead to a 5G capex cycle and hit free cash flows (FCF) / return on capital employed (ROCEs) but may consolidate the market. Omni channel growth will be key focus in Retail. Our capex forecasts will move up as more details emerge. Maintain Buy.

CLSA

Rating: Outperform

Target price: Rs 2,250

The company expressed hopes of closing a sale with Aramco this year. Clarity on the new energy forary is useful. Any big take-up of new smartphones and progress in omni-channel Retail will also be important triggers.

JP Morgan

Rating: Neutral

Target price: Rs 2,250 (earlier Rs 2,055)

The key highlight was the Rs 10 billion capex in green/renewable business over the next three years. We build in Rs 100/share in our target price for this new energy/renewable business. The company is clearly embarking on its new capex cycle, which looks smaller at this stage versus the previous cycles. Value accretion will increase as RIL ramps up execution on these businesses.

Motilal Oswal Financial Services

Rating: Buy

Target price: Rs 2,430

Using sum-of-the-parts (SOTP) methodology, we value the O2C business at FY23 EV/EBITDA of 7.5x, arriving at a valuation of Rs 764/share for the standalone business, and adding Rs 68 for the E&P assets. Ascribe an equity valuation of Rs 847/share to RJio on FY23E 20x EV/EBITDA and Rs 755/share to Reliance Retail on FY23E 35x EV/EBITDA, factoring in the recent stake sale. The higher multiple for the Digital business captures the revenue opportunity, potential tariff hikes, and opportunity in the Feature Phone market. The higher multiple for the Retail biz captures the acceleration in store openings, digital commerce, and the new JioMart platform.

Emkay Global

Rating: Hold

Target price: Rs 2,330

We await additional details on the JioPhone Next, such as specs and pricing, though factoring in Jio’s aggression and underlying fundamentals of being affordable, the price point should be at a steep discount to current handset ASPs. Its success will also depend on bundled services and features. Jio and Google Cloud have also entered into a strategic relationship to power 5G in enterprise and consumer segments.

We raise FY22-24 earnings per share (EPS) by 2-4 per cent, factoring in higher petchem and gas income and up EV/EBITDA multiple of Retail to 36x from 31x. We embed a 10 per cent premium to cash to account for new energy upside.

Kotak Institutional Equities

Rating: Attractive

Target price / fair value: Rs 2,200

We expect the retail segment to rebound in FY2022-23 led by a recovery in demand, continued store expansions, omni-channel operations and operating leverage. Core revenues are likely to recover to Rs 1.17 trillion in FY2022 and rise to Rs 1.56 trillion in FY2023. Earnings before interest, taxes, depreciation and amortisation (EBITDA) margin to increase to 9.3% in FY2022 and 10% in FY2023E. We like the long-term transition roadmap, albeit see limited upside to our estimates and valuation in the near-term.

Centrum Broking

Rating: Buy

Target price: Rs 2,170
 

We await more details in the coming months on the economics of the big-ticket projects as well as the potential of the JioPhone, and leave our estimates largely unchanged for now. We note that Adani Green Energy (3.5GW of solar operational, 10GW in development, total target of 25GW) trades at 7-8x capital employed. So, even at a fraction of that for RIL (2x), Rs 233/share can be added to enterprise value (EV). Even excluding this, EPS CAGR of 20% is materially ahead of peers.