CLSA upgrades RIL to buy; sees stock at Rs 2,955 in a year's time

Global research and broking firm CLSA has upgraded the stock of Mukesh Ambani-controlled Reliance Industries (RIL) to ‘buy’ from ‘outperform’, and expects the counter to hit Rs 2,955 in a year’s time – up 23 per cent from the current levels and around 3.7 per cent from its previous target of Rs 2,850.

"We believe RIL is at a good entry point to play its long-term promise across multiple big India themes as well as top-quintile near-term earnings growth among Nifty. Clear progress in Jio and retail as well as a doubling of the valuation of listed and unlisted comps of these business over the past 18 months and some value for new energy should easily justify the gap in its current price and their conservative value. RIL remains a great way to play the long-term themes of rising share of organised retail and ecommerce, digital and technology penetration through Jio and its focus on new energy. The IPO of Jio and Retail could be big triggers to play out within 24 months,” wrote Vikash Kumar Jain of CLSA in a January 30 note.

Reliance Jio, following its peers Bharti Airtel and Vodafone Idea (Vi), hiked its prepaid tariff plans by around 20 per cent across the board (including around 21 per cent in base JioPhone level plans) in November 2021. The new tariff came into effect starting December 1. 

In the December 2021 quarter (Q3FY22), Reliance Jio’s net profit rose 8.8 per cent to Rs 3,795 crore on a year-on-year (YoY) basis, driven by revenue growth and increase in data consumption. Revenue from operations for the quarter grew 5.7 per cent to Rs 20,597 crore, partly aided by the tariff hike taken by mobile service providers in November 2021. Average revenue per user (ARPU) in Q3 stood at Rs 151.

Since its mid-2020 stake sale, the RIL's retail segment too, according to CLSA, has seen further improvement as a dominant player. These include a 35 per cent rise in selling area to 40m square feet, a 20x expansion in merchant partnerships under Jio Mart Grocery, doubling in number and frequency of ordering for Jio Mart, a 3x rise in online product assortments and the start of merchant partnerships in Jio Mart Digital, CLSA said.

“The last two years have also seen the valuation of unicorns in the space similar to Reliance’s businesses rise by 1.6x to 12x with a median spike of 150 per cent. In our opinion, definitive business progress in Retail and Jio as well as a spike in the valuation of comps along with some value for the recently launched new energy business should easily justify the $27 billion difference in current market cap and our conservative valuation,” Jain of CLSA wrote.

Positive momentum across businesses viz. tariff hike in Jio, strong expansion in Retail, a higher oil-to-chemicals (O2C) margin and rising gas prices in E&P drives 29 per cent/34 per cent YoY growth in their FY23 Ebitda/PBT, and puts RIL into the top quintile on near-term profit growth on the Nifty.

“RIL has underperformed Nifty by 5 per cent in CY21. We forecast 22 per cent Adjusted EPS CAGR over FY22-24E driven by 33 per cent CAGR in Reliance Retail and 21 per cent CAGR in Jio EBITDA. This is ahead of the corresponding Nifty Consensus EPS CAGR of 16 per cent. We expect RIL's underperformance to reverse and reiterate ‘buy’ with a price target of Rs 2,950,” wrote analysts at Jefferies in a recent report on the company.