Goldman Sachs raises Reliance Industries stock target price with ‘buy’ rating, sees 54% upside

Goldman Sachs has reiterated a ‘buy’ rating on Reliance Industries Ltd, with as much as a 54 percent upside by FY26 in its bull case, citing favourable risk-reward dynamics, value unlocking from its Disney joint venture, and enhanced return on capital investments.

With the capex cycle in two capital-intensive businesses, retail and Jio Telecom, reaching its peak, RIL will now start seeing improvements in its overall performance, said Goldman Sachs analysts.

The brokerage raised the target price on the RIL stock to Rs 4,495 in the bull case and Rs 3,400 in the base case, implying a 17 percent return from the previous closing price.

Reliance Industries shares tend to outperform the Indian market under two conditions: expanding returns and valuation discovery through stake sales in newer businesses, the brokerage said.

“Over the last two years, both these drivers were largely absent, potentially driving the shares’ underperformance. We expect rising returns ahead, which could compound with further potential value unlock through potential listings of consumer businesses,” the note said.

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RIL returns at inflection point

Analysts at Goldman Sachs believe that RIL’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 percent in FY27, which will be the highest since 2011.

The brokerage noted that RIL is coming out of a series of long and intensive capex cycles. Reliance Industries has invested over $125 billion in capex over the last decade, mostly in hydrocarbon and telecom, which are more capex-intensive and have a longer gestation period of over five years.

The businesses RIL is investing more in over the next three years are relatively less capex heavy, higher in returns, and have a shorter gestation period, it said.

RIL earnings profile to grow stronger

Goldman Sachs expects Reliance Retail’s earnings before interest, tax, depreciation and amortisation (EBITDA) to nearly double during FY24-27, with the share of consolidated EBITDA increasing to 14.3 percent in FY27 from 12.4 percent in FY23. For the new energy vertical, the brokerage expects positive EBITDA contribution to begin from FY25 and reach $2.3 billion by FY30.

On a consolidated basis, analysts at Goldman Sachs expect RIL’s free cash flow, which has largely remained negative due to the elevated capex, to turn positive in FY25 with capex likely peaking out, while EBITDA may expand by 20 percent on-year, led by a telecom tariff hike, higher retail same-store sales growth and a recovery in chemical margins.

A 17 percent annual increase in EBITDA between FY24 and FY27 is expected, driven by Retail EBITDA nearly doubling during this period, and a 22 percent annual EBITDA growth in the telecom business, driven by higher telecom ARPU.

The continued shift of consumers to smartphones, robust growth in fixed broadband, recovery in petrochemical margins, driven by global demand and lower feedstock prices, along with sustained strength in diesel cracks due to limited global spare capacity, coupled with operational expenditure reduction, will also support high double-digit EBITDA growth, the analysts said.

So far this year, RIL shares have rallied 11.5 percent, outperforming the benchmark Nifty 50, which has risen a little over 1 percent during this period.

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