This Oil & Gas Bluechip Stock Likely To Surge 26% In 12 Months, Sharekhan Suggests Buy

Sharekhan has recently published a report on Reliance Industries Limited where it has given the stock of the company a buy rating target price of Rs 3,050 apiece. The report came, post the Q1FY23 results declared by the company. Considering the estimated target price, if you buy the stock of the company at the current market price, you can expect potential gains of around 26% in the 12 months or 1 year.

Stock Outlook

Today, the stock of RIL was opened at Rs 2,467.45 apiece, currently trading at Rs 2,424.75 apiece. Last week, on Friday, it was closed at Rs 2,503.10 apiece. Last week its share price has fallen 0.55%.

In the last 1 month, its share price declined further by around 3.65% and 10.62% in 3 months, respectively. However, over the last 1 year, it has given a positive return of 14.4% and 95.6% in 3 years, respectively. In the last 5 years, it has given a multibagger return of 200.7%.

RIL is a large cap bluechip stock with a market capitalisation of Rs 16,32,262 crore. The stock's PE ratio is 24.55 and the P/B ratio is 1.91, respectively. TTM EPS is Rs 98.13. Its ROE is 7.78%. Its dividend yield is 0.33% and the face value is Rs 10.

Business Updates

Sharekhan in the report has stated:

Reliance Industries Limited (RIL) reported Q1FY2023 consolidated EBITDA of Rs. 37,997 crore (up 62.6% y-o-y; up 21.1% q-o-q), 13%/10% below our/consensus estimate of Rs. 43,444 crore/Rs. 42,182 crore due to miss in standalone EBITDA, while Jio/Retail EBITDA was broadly in-line. Standalone EBITDA of Rs. 22,008 crore (up 51% q-o-q) lagged our estimate by 20%, which can be attributed to impact of elevated logistics/energy cost, high crude OSP, and fuel retailing loss in O2C business. "

Jio Platforms posted 5% q-o-q rise in EBITDA to Rs. 11,424 crore (steady EBITDA margin of 48.7% versus 49% in Q4FY2022), given benefit of marginally higher-than-expected growth of 4.8% q-o-q in ARPU to Rs. 175.7 and recovery in net subscriber addition by 9.7 mn q-o-q to 420 mn, given reduced SIM consolidation.

Retail revenue growth of 1.4% q-o-q to Rs. 51,582 crore (below estimate) was muted despite improvement in footfalls (119% of pre-COVID level), while EBITDA margin improved by 50 bps q-o-q to 7.6% (above our estimate of 7.2%), led by improved contribution from fashion & lifestyle/consumer electronics and benefit of operating leverage. Thus, retail EBITDA (excluding investment income) grew by 9% q-o-q to Rs. 3,897 crore.

Although standalone EBITDA was below our estimates, but posted strong growth of 92% y-o-y/51% q-o-q, primarily led by 63%/35% y-o-y/q-o-q growth in O2C EBITDA to Rs. 19,410 crore, given high refining margins (record high gasoil/gasoline/ATF crack spreads of $52/$30/$39 per bbl, up 2.4x/2x/2.4x q-o-q due to supply constraints on geopolitical tensions), while petchem margin was mixed with y-o-y strength in PX, PTA, and PET deltas and weak polymers and polyester deltas.

Oil and gas EBITDA also increased by 314% y-o-y/79% q-o-q, reflecting benefit of upward revision in domestic gas price to $9.9/mmbtu for deep water blocks. Consolidated PAT at Rs. 17,955 crore (up 46% y-o-y; up 10.8% q-o-q) was 25%/26% below our/street estimate due to sharp miss in standalone EBITDA, higher depreciation, and tax rate of 28.5% (normalised tax rate as earlier quarters had benefit of transfer of gasification undertaking).

According to the brokerage the Key positives & negatives & Key risks of the stock

Key Positives - Jio reported 4.8% q-o-q rise in ARPU to Rs. 175.7, led by tariff hike and better subscriber mix. Recovery in wireless subscriber additions by 9.7 million q-o-q to 420 million in Q1FY2023. Retail EBITDA margin improved by 50bps q-o-q, led by rise in share of lifestyle/electronics and operating leverage.

Key negatives - Sharp 20% miss in standalone EBITDA due to elevated energy cost, high crude OSP, and fuel retail loss. Retail revenue growth was muted at only 1.4% q-o-q despite improvement in footfalls (at 119% of pre-COVID level).

Key Risks - 1) Lower-than-expected refining and petrochemical margins in case global capacity additions surpass incremental demand; 2) Slower-than-expected subscriber additions and ramp-up of broadband services; and 3) slowdown in retail business amid high inflation.

Management Commentary

Jio: AGR/Mobile broadband subscriber market share of 44.5%/53% is much higher than peers (Operator 1 share at 34.5%/28%). FTTH seen acceleration in home connection with 80% market share in new wireline customer addition. Jio 5G RAN testing conducted in eight states and done successful external validation of Jio's 5G Stack.

Retail business: All stores fully operational in Q1FY2023 for the first time since the onset of the pandemic with footfalls at 119% of per-COVID level and 175 million walk-ins. However, customers seem cautious in spending, given high inflation. Added 792 new stores and 3.3 million sq. ft. of warehousing area in Q1FY2023. Digital + New Commerce grew 2x y-o-y with 19% share in retail revenue (similar to Q4FY22 level).

O2C/E&P: Limited spare refining capacity and lower exports by China bodes well for refining margin, but fear of recession and export duty remain a concern for margin. KG D-6 is on track to ramp-up gas production to 1 BCF/day in FY2024.

Other updates - 1) Net debt increased to Rs. 57,655 crore (versus Rs. 34,815 crore as of March 2022) due to rise in working capital requirement, given elevated energy/product prices, 2) Q1FY2023 capex at Rs. 31,442crore ($4 billion) funded through internal accruals, 3) Q1FY2023 had normalised income tax rate, and 4) rise in depreciation reflects increased upstream production and higher capacity utilisation at Jio.

Revision in estimates - We have lowered our FY2023 earnings estimate to factor in higher energy cost for downstream business and have broadly maintained our FY2024 earnings estimate.

Brokerage Maintain Buy on RIL with an unchanged SoTP-based PT of Rs. 3,050

Sharekhan in the report stated, "RIL is our top pick and we expect continued strong earnings traction in its consumer-centric business - Jio (likely further telecom tariff hike and ramp-up of home broadband) and retail (high growth in retail, led by market share gain and new commerce)."

They added, "Further, value unlocking in digital and retail (with a likely IPO for consumer business) would add value to shareholders' return over the coming years. Hence, we maintain Buy on RIL with an unchanged SoTP-based price target of Rs. 3,050. At the CMP, the stock trades at 21.5x/17.1 its FY2023E/FY2024E EPS and 10.4x/8.6x its FY2023E/FY2024E EV/EBITDA."

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.