What's powering the rally in Reliance Industries' stock?

It has mostly been a one-way street for Reliance Industries’ (RIL) stock that has moved up nearly 7 per cent since November 25, 2022 to hit Rs 2750 levels now. The S&P BSE Sensex, during this period, has gained nearly 2 per cent, data shows.

So, what’s behind the rally in the country’s most valued firm by market capitalisation?

The recent surge in RIL’s stock price, according to A K Prabhakar, head of research at IDBI Capital is due to a clutch of reasons, which includes the proposal to demerge the financial services business into a separate entity, rollout of 5G services and oil prices coming down.

“The stock is reacting to all these developments and is playing catch up. It has been a relative underperformer in 2022. The recent news developments have given legs to the counter, and I expect it to move up by 10 – 15 per cent from the current levels in the next 12 months,” Prabhakar said.

Meanwhile, RIL-owned Jio Financial Services (JFS) could become India’s fifth largest financial services firm, said analysts at Macquarie in a recent report. The firm, it believes, can disrupt the payments business and become a threat to other fintech models. HDFC Bank, State Bank of India, ICICI Bank, and Axis Bank are the four top companies in the business. 

“Assuming 6.1 per cent stake in RIL realised over time, with Rs 1 trillion net worth JFS could be the 5th largest financial services firm in the country,” wrote Suresh Ganapathy, Aditya Suresh, and Param Subramanian of Macquarie in the report.

At the bourses, RIL now trades at its highest level since June 10, 2022, while its record high stands at Rs 2,855, hit on April 29. In the last three months, the stock has moved up nearly 7 per cent as compared to 8 per cent rise in the S&P BSE Sensex, data shows.

Another key reason for the recent stock surge, according to analysts at Jefferies, is the hope that the government may withdraw export duties on diesel and aviation fuel, which they believe will benefit RIL. This belief stems from a fall in crude oil prices that have slipped from a high of around $127 a barrel in 2022 to around $83 a barrel now, translating into a fall of nearly 35 per cent.

Export duties on refined products (gasoline, diesel & ATF) were announced in July when the regional refining benchmark was trending near record highs. Refining margin has fallen around 60 per cent since, eliminating any room for windfall gains, but export duties on diesel/ATF have been reduced by only around 20 per cent. Duties on gasoline were rolled back in mid-July as gasoline spreads declined sharply.

 

“Export duties on steel were withdrawn when steel prices fell around 24 per cent from the peak though conversion margins were higher than the 10-year average. We estimate $2 per barrel impact on RIL's overall refining margins from the ongoing export duties. Removal of the same would boost FY24 earnings before interest, taxes, depreciation and amortisation (Ebitda) by $1 billion (5 per cent) and remove a key regulatory overhang,” wrote Bhaskar Chakraborty and Niraj Todi of Jefferies in a recent note on the company. They maintain a 'buy' rating on the stock with a price target of Rs 3,100, which is nearly 13 per cent higher from the current levels.