Brokerages approve RIL's growth plan, expect 30% gain in stock

After the announcements were made at Reliance Industries’ 42nd annual general meeting (AGM) on Monday, the stock surged over 12 per cent on Tuesday — registering its highest single-day rally in 10 years. Many brokerages still see a 15-30 per cent upside in the stock from the current market price of Rs 1,275 apiece. On Monday, markets were shut on the occasion of Eid.

Announcements related to the non-binding agreement with Saudi Aramco for a 20 per cent stake sale in RIL’s refining and petchem business and plans to monetise its consumer business (Jio and retail) turned brokerages positive on the stock. “These AGM announcements should dispel fear over leverage and set the stage for the next leap for RIL’s technology and consumer businesses,” analysts at CLSA said.

The key trigger for the stock is RIL’s aim to be debt-free by March 2021. This would be supported by successful completion of RIL’s non-binding agreement with Aramco and a 49 per cent stake sale in the fuel retailing business to BP.

According to Jefferies (it has an ‘underperformance’ rating on the stock), RIL’s plan to cut headline net debt (now Rs 1.57 trillion) to zero by March 2021 implicitly acknowledges concerns on its balance sheet.

 

The Aramco deal is the fourth divestment announced by the company this year and the transaction enables value unlocking and is in-line with RIL’s stated objective of achieving zero net debt, according to Edelweiss Securities. Analysts at IIFL too expect RIL’s target of being free cash flow positive and net-debt free by FY20/21 to bode well for the stock.

The Street is positive on the company’s plan to improve operating profit growth by 15 per cent over the next five years. HSBC believes it’s a clear indication of capitalising on high operating leverage in Jio and hyper growth in retail. This is because the company targets to increase Ebitda contribution from Jio and retail businesses to 50 per cent in coming years, from around 30 per cent in the June quarter. Jio’s plan to launch enterprise and home broadband services have good growth potential, looking at the current size of broadband-using households (around 18 million). Analysts at Goldman Sachs forecast Jio to reach 8 million subscribers in this segment by FY2023, contributing to about 6 per cent of Jio’s revenue.

Analysts at HSBC believe steady earnings momentum in RIL’s energy business, the strong outlook for its telecom and retail businesses, and signs of concrete deleveraging plans will drive ‘buy’ rating, besides its inexpensive valuation.

Before Tuesday’s rally, the stock was down 12 per cent in the past two months, underperforming the broader market indices. The Nifty50 was down 6.4 per cent during the same period.

After the announcement, the focus will now be on execution, say analysts.