Brokerages bullish on RIL post Aramco deal buzz, Jio's commercial launch

The announcements saw the stock rally over 8 per cent in intra-day trade on the National Stock Exchange (NSE) to Rs 1,257 levels on Tuesday

From a possible deal with Saudi Aramco for a 20 per cent stake in the company’s oil-to-chemicals (O2C) business segment and the commercial launch of Jio GigaFiber on September 5, the slew of announcements made by Reliance Industries’ chairman Mukesh Ambani in its 42nd annual general meeting (AGM) on Monday have been taken positively by brokerages, who now maintain a ‘buy’ rating on the stock from a 12-month perspective.

The announcements saw the stock rally nearly 12 per cent in intra-day trade on the National Stock Exchange (NSE) Tuesday - registering its biggest single-day gain at the bourses in 10 years. READ ABOUT IT HERE

Here’s how leading brokerages have interpreted the statements:

JEFFERIES

We like this clear intent to lighten the balance-sheet even if the central plank for now is Aramco picking up a non-voting instrument that will give it a 20 per cent economic interest in its refining & petrochem (O2C) business. In return, Aramco will also get a board seat at Reliance and has also assured 0.5mbpd of oil supplies at market prices. For Reliance, though, this complex structure prevents a ring-fencing of O2C cashflow until it is transferred to an SPV in about five years.

Given the focus of Jio on SUBSCRIBERS and usage, we expect market repair to take over 12 months. Further, competitive intensity in the near-term will remain high, especially in the post-paid segment. We retain our underperform rating on VodaIdea. While Bharti is better placed, near-term challenges remain for earnings, especially in the Enterprise/DTH/Home segment.

NOMURA

We note that RIL - Saudi Aramco is still at a non-binding letter of intent stage, and will likely be complete only by March 20F. Assuming around $15 billion payout from Aramco to RIL standalone and 20% of petchem/refining EBITDA being attributable to Aramco, we estimate on a ball-park basis, the transaction to be value dilutive by about 6% for RIL’s FY21 standalone EPS. 

But, in our view, this transaction will allay investor concerns on RIL's high debt levels. In our view, the completion of this transaction will reduce RIL’s net debt (around $22 billion at FY19 end) by nearly $15 billion, and will pave the way for RIL’s target of being zero net-debt by FY21F end. Maintain buy rating with a target price of Rs 1,600.

MACQUARIE

The transformation of RIL to the likes of Alibaba/Amazon/Softbank etc is well underway. With the lion’s share of time-spent discussing plans for its consumer and tech businesses, RIL’s potential shareholder register continues to widen. We upgrade RIL to outperform following the stream of bullish newsflow at the company’s AGM. Our SOTP-based target has increased to Rs 1,370 to reflect Aramco’s premium bid for RIL’s refining and chemicals business. Our cautious stance on RIL’s free cash flow (FCF) outlook has not changed, but perhaps this is moot in view of the growing optionality.

EDELWEISS SECURITIES

Reliance Industries announced a non-binding letter of intent to sell 20 per cent stake in the oil-to-chemicals business (refining +petchem) to Aramco at an enterprise value of $75 billion. This is the fourth divestment announced by the company this year. We note that during a similar divestment / split spree in 2006 the share price had jumped 38%.

The transaction with Aramco enables value unlocking and is in line with RIL’s stated objective of achieving zero net debt. We continue to retain ‘BUY/Sector Outperfomer’ rating on the stock with target price of Rs 1,655/share (implied valuation at 12.5x FY20E EV/EBITDA).

ANTIQUE STOCK BROKING

Foray into Telecom is increasingly becoming apparent as a means to an end and not an end to itself. In our view the vision shared in  AGM speech would not only go on to revive the investment sentiments in RIL's stock but could also aid in a valuation re-rating of the O2C business, the deal with Saudi  Aramco being the new bench mark of the value.  Therefore we raise our target price to Rs 1,360/share (from Rs 1,245/share) and upgrade the stock to BUY (from HOLD).