Investor pushback sees JP Morgan defend Reliance Industries upgrade

Brokerage JP Morgan on Monday explained its bullish stance on Reliance Industries (RIL) after an investor ‘pushback’. In a rare note, the brokerage house listed concerns of investors and offered detailed reasons for its decision to upgrade the RIL stock from ‘neutral’ to ‘overweight’.

On June 16, the firm had set a target price of Rs 3,170 per share, saying RIL was amongst the few large companies in India with a positive earnings revision cycle, given the strong refining and gas environment that prevailed globally.

“RIL remains among the best-positioned refiners globally, given its ability to buy and process arbitrage barrels, a diesel-heavy slate, and an export focus,” said JP Morgan.

On Monday, the brokerage house said while most investors saw RIL as a relative outperformer, given the strong near-term earnings outlook, some struggled to justify valuations for its non-energy businesses, including retail and telecommunications (telecom).

“We continue to see RIL’s consumer business valuations hold up, given the company’s ability to invest and grow businesses even in a potential economic downturn. And RIL’s consumer businesses continue to expand into multiple categories,” it said.

Most analysts expect RIL to spell out its future plans for the retail and telecom businesses, including whether it will list the two companies and by when it would do so.

JP Morgan said while any concrete announcement on potential initial public offers of the consumer businesses (retail and telecom) would be a positive, it was not its base case. “We see eventual monetisation of the non-energy businesses, but we do not see them in the near term,” it said.

The brokerage house also said there were multiple questions from investors on regulatory risks to RIL’s refining business in India, and whether there was a potential for a diesel export ban or export tax.

“In our view, the problem in India is that of sharply lower diesel pump prices, and not that of availability of diesel, and hence an export ban would not help. The key issue is the large losses for oil-marketing companies. In our view, it is part of the government’s overall fiscal issues and an export tax on one or two products (steel, diesel) is unlikely to ease the fiscal issues in a material way,” it said.

RIL’s oil-to-chemicals (O2C) business remains amongst its key segments, contributing close to 60 per cent of its revenue and nearly 50 per cent of its earnings before interest, tax, depreciation, and amortisation (Ebitda). O2C includes refining, petrochemicals, and fuel retail.

Retail and telecom, on the other hand, account for 34 per cent of revenue and nearly 45 per cent of Ebitda, according to its financial results for the financial year ended March 31, 2022 (2021-22, or FY22).

FY22 also saw RIL surpass gross revenue of $100 billion (Rs 7.9 trillion) on the back of its performance in the O2C, telecom, and retail segments. New energy presents a further upside for growth, said sector analysts.

"While RIL’s renewables business is still very nascent, we believe the company remains well positioned to grow the renewables business,” JP Morgan said on Monday.

Last year, RIL, among the largest fossil-fuel companies in the world, had set out to transition into a green energy company by announcing it would invest Rs 75,000 crore ($9.62 billion) in the sector.

Shares of RIL fell as much as 2.9 per cent intraday on the BSE, before closing 1.8 per cent lower on Monday to Rs 2,542.8 apiece, compared with a 0.46 per cent rise in the BSE Sensex. In the past one week, the stock has fallen 4.7 per cent on the BSE.