Reliance Industries gains 5% as Morgan Stanley maintains overweight stance

Shares of Reliance Industries (RIL) rallied 5 per cent to Rs 1,298 on the BSE on Tuesday after Morgan Stanley maintained an 'overweight' stance on the stock. The foreign brokerage revised target price of RIL to Rs 1,469 from Rs 1,349, earlier.

At 10:27 am; RIL was the top gainer on the S&P BSE Sensex and Nifty 50, which were up 0.30 per cent each. Since May 3, from its all-time high level of Rs 1,417, RIL had underperformed the market by falling 12 per cent, as compared to 0.33 per cent rise in the benchmark index till Monday.

Analysts at Morgan Stanley expect recovery in energy earnings after the trough (both refining and petrochemicals) seen in Q1FY20. 

The brokerage maintained its bullish on expectation that earnings will improves with better refining margins, lower tax rate and cheaper gas feedstock cost. This, combined with a reduction of balance sheet leverage, should de-risk earnings growth and increase investor confidence on the 17 per cent earnings CAGR seen for F2019-22e, which is amongst the top quartile vs. its regional energy and telecom peers, Morgan Stanley said.

“Recovery should be slow, but slowing supply (either through rebalancing in the industry or slowing capacity additions) should support margins. We believe the target of zero net debt by F2021 will help lower investor concerns about debt (which has increased steadily over the past seven years),” the report says.

Adding: “As we approach IMO implementation on January 1, 2020, diesel margins have risen 9 per cent YTD since end-2018 and gasoline margins have improved as refineries try to maximize diesel output by lowering gasoline output. As well, cheaper gas prices should keep RIL's operating cost inflation low. We also lower our tax rate forecasts by 400bp and for F2020 and F2021 to reflect the new corporate tax rate of 25.2 per cent.”

Analysts at IIFL, too, maintain their bullish stance on the company. RIL, they believe, is a peculiar case within the oil & gas space, whereby the weakness in the petrochemical segment is partly offset by the strength in refinery performance and the scale-up in consumer businesses (R-JIO and R-Retail), set to drive the overall earnings growth.

"We maintain RIL’s consolidated earnings CAGR of 11% till endFY22ii, driven by the non-oil businesses (37% share in overall Ebitda). Our SoTP values RIL’s oil-t-chemical (O2C) business at enterprise value (EV) of $67 billion on FY21 and, to that extent, offers upside potential. RIL is our top pick in the sector, as its earnings remain relatively insulated in a volatile commodity price environment. Key triggers to watch are: induction of investor in fibre InviT; details on the Aramco transaction, and visible reduction in net debt," wrote Harish Dole, an analyst tracking the company at IIFL in a recent report.