Shares of oil-to-telecom major Reliance Industries (RIL) jumped 2.4 per cent on BSE in early deals on Wednesday after global brokerage Goldman Sachs (GS) raised its target price on the stock, citing favourable risk-reward, value accretion from the recent media joint venture with Disney and peaked capital expenditure (capex) in old businesses.
The company’s consolidated returns are at an inflection point in FY24 and its Cash Return on Cash Invested (CROCI) will expand by nearly 270 basis points to 12 per cent in FY27, which will be the highest since 2011, it said.
Holding its ‘buy’ rating on RIL intact, GS added the conglomerate’s capex has peaked in long gestation businesses such as hydrocarbon and telecom and it is getting higher returns from less capex heavy newer businesses (retail, new energy), which have shorter gestation period.
It thus expects RIL’s free cash flow (consolidated basis), which has largely remained negative due to the elevated capex, to turn positive in FY25.
Its EBITDA is expected to expand by 20 per cent year-on-year and at a CAGR of 17 per cent between FY24-27.
This is expected to be driven by doubling of retail segment EBITDA, a 22 per cent CAGR in telecom EBITDA, higher ARPU and recovery in petchem margins.
Reliance Retail’s share in overall consolidated EBITDA could increase to 14.3 per cent in FY27 from 12.4 per cent in FY23.
For the New Energy vertical, GS expects positive EBITDA contribution to begin from FY25 and reach $2.3 billion by FY30.
The brokerage further noted that Reliance’s shares tend to outperform under two conditions: expanding returns and valuation discovery through stake sales in newer businesses.
While both these factors were missing in the last two years leading to the stock’s underperformance, the brokerage said it expects “rising returns ahead that could compound with potential value unlocking through possible listings of its consumer businesses”.
First Published: Mar 27 2024 | 11:00 AM IST