Stock To Buy: Prabhudas Lilladher Suggest 'Buy' On RIL For Potential 35% Upside

Prabhdas Lilladher renowned brokerage house is bullish on the counter of RIL even after the imposition of export duty of fuel and windfall tax gains on oil refiners. The company is said to the preferred play on the back of its dominant position across businesses.

The brokerage has iterated a 'Buy' on the stock for a revised higher price target of Rs. 3277 as against the earlier Rs. 3000. This at the current price level of around Rs. 2442 offers an upside of over 34%.

For the company, the brokerage states that we increase increase our FY23/24E earnings estimate by 23%/13% as we increase our
refining margin assumptions to USD18/13/bbl (+USD6.5/1.5/bbl), while we increase our input price assumptions for petchem. Low product inventory (US diesel inventory lowest since CY08), reduced Chinese exports (May 22 diesel exports down 75% vs CY18-21 avg) and low exports from Russia have pushed Q1 diesel margins to USD42/bbl (Q4: USD18) and gasoline margins to USD 34/bbl (Q4: 16).

Other rationales cited for earnings growth at the firm

Brokerage foresees blockbuster quarter for the oil to telecom conglomerate:

The Q1fy23 earnings season is going kick off soon. There are seen record levels for RIL for Q1fy23 with EBITDA or PAT seen at Rs. 263/205 billion. In the wake of high refining complexity, RIL that has got access to cheaper Russian crude down by around $30 per bbl in comparison to brent as well as product exports to European nations is well positioned to gain benefit from tight refining segment.

The brokerage is of the view that going forward the company's refining margins will continue to increase and further increase FY23/24E GRMs to
USD18/13/bbl (+USD6.5/1.5/bbl) on the back of the following:

Reduced diesel exports from Russia

Lower China product exports

Low US diesel inventory

Petchem profitability to be impacted by high input prices

"For Q1, we expect a drop in petchem profitability as PE, PP, PVC margins have come down to USD114/163/520/ton (down 15-40% QoQ). However, PX margins have expanded to USD360/ton from USD190 in Q4 and will make up for drop in profits", adds the brokerage

Global market disruption to push gas realisations higher

Domestic gas production for RIL has been revised up to USD9.9/mmbtu from Apr 22vis-à-vis USD6.1/mmbtu
in H2FY22. Spot LNG prices continue to remain strong at over USD35/mmbtu, as Russian gas exports to EU decrease along with disruption in Freeport LNG export terminal (~20% of US gas exports). Amidst geopolitical tensions, gas prices will likely remain at elevated levels.

Strong telecom growth seen as India predominantly becoming 2-player market in the space

In the Q4 period of Fy22, the active subscriber count at the telecom stood impressive at 15 million with VLR share increasing to 93.8%. "With Indian telecom market increasingly becoming a two player race, we expect Jiovto take regular tariff hikes; we factor FY23/24E ARPU of Rs180/214/mn vis-à-vis Rs150 for FY22. We have also factored in FY23/24E subscribers at 427/448mn vsv425mn for FY22.