Mukesh Ambani’s Reliance Industries Ltd. (RIL) has been upgraded to a ‘Buy’ rating by international brokerage and investigation firm UBS, from their earlier ‘Neutral’ tag. In a report, analysts at UBS stated that soon after a period of low development due to macro headwinds and power cyclicality, RIL is now getting into a development phase in all 3 segments — power, customer retail, and Jio. So far this month, RIL’s share price tag has dropped 2.8% to now trade at Rs 2,050 per share. The stock has underperformed the benchmark Nifty 50 this month and even so far this year.
UBS believes enhancing demand for power, the ramp-up of digital/omnichannel platforms and new shops reopening, and JioPhone Next’s launch and competitive entry tariffs to be the possible drivers for RIL up ahead.
Turnaround in O2C organization
Reliance Industries is anticipated to witness a turnaround in oil-to-chemical compounds (O2C) earnings more than economic year 2021-2024 helped by regional refining margin recovery and close to-term help to petchem spreads. “We see limited downside to current O2C valuations given improving fundamentals and proposed stake sale to Saudi Aramco,” UBS stated. The lengthy-awaited strategic partnership with Saudi Aramco could be completed through the existing economic year. UBS added that even though valuations and terms, of the deal are awaited, it could fund RIL’s $10 billion investment in New Energy.
What could trigger Jio’s development?
Coming to Reliance Jio, UBS sees JioPhone Next’s launch, competitive spectrum footprint, and bundled plans with desirable entry tariffs as possible development drivers. “We believe ARPU (average revenue per user) could grow 8-10% on-year basis over financial years 2022-2025, driven by tweaks to existing plans and upcoming $50 smartphone,” they added.
Telecom operators are believed to be taking a cautious step when it comes to tariff hikes. “Owing to the weak macro environment, we think telcos have been cautious about pushing a sizeable “across-the-board” tariff hike equivalent to the December 2019 hike. We count on tariff hikes to be gradual and probably come more in the kind of minor tweaks to current plans, such as lowering information allowances in particular plans and driving selective upgrades,” UBS stated.
Reliance Retail revenues to treble
Although Reliance Retail’s earnings have been reduce as UBS postpones Future Retail’s integration, the brokerage firm nonetheless believes that Reliance Retail’s revenues could treble in the next 3-5 years. This development is anticipated to be driven by accelerated retailer openings across segments, a ramp-up of digital and omnichannel platforms, and organic and inorganic merchant onboarding to help New Commerce’s development.
UBS has pinned a base case target price tag of Rs 2,500 per share on RIL. The bull case target price tag has been set at Rs 3,150 per share and the bear case target is set at Rs 1,800 apiece.