RIL share price: ICICI Securities sees upside capped, sets stock target at Rs 2,650

ICICI Securities has tweaked its earnings estimates for Reliance Industries Ltd (RIL) marginally to factor in higher depreciation, lower other income and higher tax partly set off by an increase in earnings in digital services (ex-Jio).

The domestic brokerage has cut its earnings per share estimates by 2 per cent each for FY24 and FY25 each and suggested a revised target of Rs 2,650 from Rs 2,670 earlier for RIL. The target suggests limited upside potential for the stock.

"At our revised estimates, we still see consolidated EPS CAGR at a material 18.6 per cent over FY23-FY25E, with a lower 15.1 per cent CAGR in Ebitda. With these revisions, our SoTP-based target price of Rs 2,650 per share implies a limited 5 per cent upside, underpinning our ADD rating," the brokerage said.   

ICICI Securities said despite a near 18 per cent CAGR in operating earnings over FY20-23, free cash flow (FCF) that RIL earned during the period remained muted – aggregate FCF earned during FY20-23 was negative Rs 76,000 crore, with small positive FCF earned in FY20 and FY22 offset by a sharply negative FCF of Rs 1,00,000 crore seen cumulatively in FY21 and FY23, it said.

With capex run-rate outweighing revenue/profitability growth, net debt has steadily grown over FY21-23 post reaching a 6-year low of Rs 1 lakh crore in FY21, driven by the influx of investor money in JIO/retail.  ICICI Securities said RIL's net debt had steadily expanded to Rs 3.2 lakh crore in FY23. It included deferred payment liabilities (primarily related to spectrum liabilities) and creditors for capex in borrowings whereas the management tends to exclude these.

ICICI Securities said due to a sharp uptick in capital employed, which keeps running well ahead of earnings growth, RoCE (return on capital employed) has remained at moderate levels over the last 4-5 years.

"Due to largely a sharp uptick in inventory levels over FY23, net working capital (NWC) has seen a steady uptick over the last three years. From levels of Rs 15,400 crore in FY21, NWC has expanded to Rs 38,500 crore by the end of FY23, this is largely due to Rs 58,300 crore expansion in inventories held by RIL. We believe larger scale of operations at retail and lacklustre demand offtake from the OTC segment would have driven a greater inventory build-up from these two segments over FY23," ICICI Securities said.

Also read: Jio Financial shares in focus as exclusion from Sensex, Nifty, other stock indices deferred by 3 days

Also read: Brightcom Group shares in focus after Sebi order on CMD, CFO, Shankar Sharma