After Morgan Stanley and JP Morgan, now Jefferies turns bullish on RIL

RIL is a key beneficiary of energy inflation, with every $1 per barrel improvement in annualised refining margins adding an estimated $400-450 million to RIL's consolidated Ebitda, Jefferies said

Foreign brokerages are slowly turning bullish on Reliance Industries' (RIL) stock. After Morgan Stanley (in May) and JP Morgan (June) maintained a bullish view on the counter, analysts at Jefferies have also turned bullish and maintain a price target of Rs 3,400 – an upside of 34 per cent from the current levels.

The positive stance for these brokerages stems from firm crude oil prices, which they feel will benefit the company. Those at Jefferies, for instance, believe RIL's refining margins will benefit from multi-year-low diesel inventories, declining Russian exports, muted Chinese exports, lower diesel production in Europe and delays in commissioning of Middle East refineries in calendar year 2022 (CY22).

 

Diesel inventories across Europe, Singapore and the US are at multi-year lows, creating a supply crunch benefiting cracks. Russia's diesel exports to Europe have declined 0.25 million barrel per day (mbpd) since the conflict started and are struggling to find new markets. China and India, who have ramped up Russian oil imports by 1.8mbpd y-o-y in May are largely compensating for lower European demand.

That apart, RIL, Jefferies said, is a key beneficiary of energy inflation, with every $1 per barrel improvement in annualised refining margins adding an estimated $400-450 million to RIL's consolidated earnings before interest, taxes, depreciation and amortisation (Ebitda).

"Our initial estimates suggest RIL's oil-to-chemicals (O2C) Ebitda could rise 60 per cent quarter-on-quarter in the June 2022 quarter (Q1-FY23) and account for around 35 per cent of our FY23 estimate. Continued strength in refining should result in consensus FY23 earnings upgrades," wrote Bhaskar Chakraborty and Pratik Chaudhuri of Jefferies in the recent note.

Those at Morgan Stanley expect RIL to clock an Ebitda of $20 billion by 2022-end. The uptick in Ebitda, Morgan Stanley said, could help the Mukesh Ambani-controlled company improve its market capitalisation (market-cap) by $50 billion in the period. RIL's Ebitda came in at $16.6 billion up 29 per cent year-on-year (y-o-y) in fiscal 2021-22 (FY22), while net profit surged 26 per cent YoY to $8.8 billion, led by oil-to-chemicals (O2C), telecom and retail.

Thus far in CY22, RIL stock has been an outperformer, rallying 9 per cent during this period as compared to 0.4 per cent rise in the BSE Oil & Gas index. The S&P BSE Sensex, on the other hand, has lost around 10 per cent thus far in CY22, ACE Equity data show.

JP Morgan had also upgraded its stance on RIL earlier in June to overweight from neutral and expects the stock to surge to Rs 3,170 in a year's time – up 25 per cent from the current level. The brokerage has increased its FY23-24 earnings per share (EPS) estimates by 19 per cent (to 125.68) and 17 per cent (to 132.76), respectively.

"Our earnings estimates imply a sharp pullback in diesel and gasoline cracks from current record level, but RIL remains among the best positioned refiners globally, given: a) ability to buy and process arbitrage barrels; b) diesel heavy slate; and, c) export focus. While RIL's product hedging means there is unlikely to be a complete pass-through of spot cracks, overall we see the oil-to-chemical (O2C) business reporting improving profits for the next few quarters. While polyethylene (PE) spreads remain weak, strong paraxylene (PX) should result in steady petrochem profits," analysts at JP Morgan said.

Another key reason for the upgrade, the research and broking house said, is the resilience shown by RIL's consumer and technology business (Jio, Retail), which it had expected to come under pressure amid the global tech sell-off and negate the near-term earnings upside.