Reliance Industries: Morgan Stanley says earnings upgrade cycle getting more legs

Morgan Stanley on Friday said the earnings upgrade cycle for Reliance Industries is  getting more legs as both refining and chemicals margins expand in a well-supplied oil market. This should reverse a four-quarter earnings downgrade cycle for Reliance Industries and put returns on track to get above trough, the foreign brokerage said.

Morgan Stanley's view came days after Bernstein said the clean energy business of the Mukesh Ambani-led company is probably worth Rs 200 per share but it has plenty of scope for expansion overtime.

In a note this week, Bernstein said RIL can potentially achieve $10 billion in revenue from clean energy, which would represent 40 per cent of the total addressable market (TAM). By 2030, it estimates RIL to capture 60 per cent of solar, 30 per cent of battery and 20 per cent of hydrogen TAM. Net-net, Bernstein sees clean energy including solar, battery, electrolyzers and fuel cells as a new growth pillar for RIL with $2 trillion in investment in India through 2050. This brokerage suggested a target of Rs 3,020 on the stock.

On Thursday, shares of Reliance Industries closed at Rs 2,551.55 on BSE, down 0.04 per cent.

Morgan Stanley had in a April 21 noted said Reliance Industries' energy segment drove the Q4 Ebitda beat of 5 per cent above consensus as chemical margins recovered, gas costs declined and refining margins bounced back. "Store expansion was key to growth in retail and Ebitda was in-line. Profit beat of 18 per cent was also driven by lower tax rate and net debt was flat QoQ," it noted in a post Q4 results note.

Bernstein this week noted that RIL plans to have 100GW of installed solar power, which would be 35 per cent of India's targeted capacity of 280 GW but represents 50 per cent of incremental share. Bernstein expects EV penetration would reach 5 per cent for personal and commercial vehicles and 21 per cent for two-wheelers. "Clean energy could have a TAM of $30 billion in 2023 (currently $10 billion). By 2050, we believe the TAM could reach $200 billion and cumulative spending of $2 trillion," it said.

Bernstein said funding is not an issue for RIL, given the current balance sheet and free cash flow (FCF). It noted that Reliance is targeting to fund future capex from OCF and maintain net debt to Ebitda of less than 1 time (0.6 times in FY23). FCF will turn positive in FY24 and reach Rs 1 lakh crore by FY27, Bernstein said.

On O2C business, Bernstein said the company continues to benefit from cheaper Russian crude feedstock while product prices remain strong. Urals are trading at 20-25 per cent discount to Dubai oil price, yielding an additional $6-8 billion spread on refining margin. "We estimate O2C can achieve FY24 Ebitda of Rs 63,000 crore, which is in line with market estimates," it said.

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