RIL's current investment cycle less aggressive, says Morgan Stanley

Brokerage says this will reduce the cost of the company's equity, raises price target on stock to Rs 3,085

Global brokerage house Morgan Stanley has described Reliance Industries’ (RIL’s) current investment cycle as less aggressive, saying it will reduce the cost of the company’s equity.

In a report released on Monday, the brokerage has raised its price target on the stock to Rs 3,085, from the earlier target of Rs 3,015, saying the firm is its top pick.

The RIL stock closed trade at Rs 2,570.25 apiece on Monday, up 1.6 per cent over Friday’s close on the BSE. The stock was up 2 per cent in intraday trade, following release of the report. 

“Lower competition in telecommunications (telecom) makes earnings predictable and the retail business is witnessing steady growth. The firm believes that with integration into chemicals and access to cheaper West Asia gas feedstock should help reduce the cyclical nature of returns,” said Morgan Stanley.

It also noted that investment cycles have unwound, with 2-3x times value creation for shareholders over the past two decades, with every decade seeing an addition of $60 billion in market capitalisation.

“The investments in new energy and retail expansion to take market share from the unorganised sector, and repurposing of existing energy business gives RIL a long runway to deliver earnings growth consistently even beyond the next three years,” it said.

Morgan Stanley also said the current investment cycle would have the lowest balance sheet leverage ratios compared to any other cycle. This will be due to higher refining margins, gas production, rising telecom tariffs, scale-up in the grocery business, and quicker monetisation of new energy.

“In contrast to the last investment cycle, we are also seeing RIL’s investment cycles coincide with upcycles in its core businesses,” said Morgan Stanley.

Refining, telecom, and eventually chemicals are likely to drive 18 per cent earnings per share compound annual growth rate in 2022-23 through 2023-24 (FY24) estimates and generate an average of $16 billion in operating cash flow until 2025.

Morgan Stanley also believes that RIL’s future growth areas have lower competitive intensity and that it is partnering technology owners to accelerate the cash conversion cycle.

The cycle in itself has halved to three to four years, compared with earlier ones. In contrast to RIL’s earlier stance, where it looked at organic growth to expand, the company has now invested almost $4 billion in inorganic acquisitions and acquired capabilities across various verticals.

“In addition, RIL’s focus to serve global markets, along with India, will help it diversify its growth,” the note said.

The brokerage sees multiple triggers for RIL over the next few months across all businesses, adding that there is potential for multiple rerating of the retail and telecom businesses as these initial public offerings will unlock value.

It does expect some holding company discount to emerge as a result of the value unlocking in retail and telecom.

“However, the strength in the energy business and monetisation of new energy plans should cushion any of those challenges," it said.

Within new energy, RIL plans on establishing 20 gigawatt of solar energy generation capacity by 2025. The brokerage expects significant impact on the company’s earnings through the new energy business and expects it to contribute $1 billion in earnings before interest, tax, depreciation, and amortisation by 2027.

It also expects telecom average revenue per user at Rs 193 per month in FY24, implying a 15 per cent tariff hike. And, it says that Reliance Retail will leverage two years of store expansion.