Jefferies India raises Reliance Industries stock price target on O2C business strength

The brokerage raised RIL’s EBITDA estimates for FY24 and FY25 by 2% and 1%, respectively.

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Jefferies India raised Reliance Industries Ltd‘s (RIL) stock price target by 7 percent to Rs 3,140, highlighting its undervaluation relative to the benchmark Nifty index.

The brokerage retained its buy rating on the stock. Jefferies India also raised RIL’s EBITDA (earnings before interest, taxes, depreciation, and amortization) estimates for FY24 and FY25 by 2 percent and 1 percent, respectively, citing the near-term strength in its oil-to-chemical operations.

“Robust global middle distillates demand, 5-year-low diesel inventories and Red Sea disturbances have firmed up diesel spreads by 40 percent since December,” the brokerage said in its latest note.

Recent steep price declines in US ethane (Jan-Feb) due to the warmest winter on record have also boosted petrochemical profitability, particularly as naphtha cracking margins are at a decade-low. RIL uses 1.5 mmtpa of US ethane for petrochemicals.

Transit through the Red Sea route, which accounts for 14 percent of global refined product supplies, has plunged by more than 50 percent since December because of attacks on ships by Houthi rebels. Longer shipping times and delayed supplies have elevated diesel spreads by 40 percent since December.

RIL is also in talks with PDVSA, Venezuela’s state-controlled oil company, for oil following the removal of US sanctions. RIL, which has been the largest buyer of Venezuelan oil,  stands to benefit from an estimated $8 per barrel discount to Brent on a landed basis, the Jefferies report added.

Jefferies also anticipates a 20 percent reduction in RIL’s estimated overall capex for the six months to March 31 following the completion of the pan-India 5G network rollout and a significant decrease in retail capital spending.

“We expect O2C (oil-to-chemicals) Ebitda to rise 22 percent q/q in 4QFY24E. We expect the refined product market to remain tight into 1QFY25E and have raised FY24/25E O2C Ebitda 5 percent/3 percent, respectively. We have raised RIL’s FY24/25E consol Ebitda +2 percent/1 percent on near-term O2C strength,” Jefferies said.

Jefferies estimated a 16 percent increase in RIL’s target price to Rs 3,400 in a potential upside scenario. RIL could exceed expectations on petrochemicals margin recovery, benefits accruing from accelerated telecom consolidation, potential Jio public listing for valuation re-rating, and faster-than-anticipated market share gains in Reliance Retail.

Disclosure: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.

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