Reliance Industries Positioned For Multiple Reratings Across Oil-To-Telecom Portfolio: Morgan Stanley

Reliance Industries Ltd. is well positioned for multiple rerating across verticals such as new energy, refining, chemicals and telecom, given that the earnings upgrade cycle has already been priced-in by the 13% year-to-day stock movement, according to Morgan Stanley. It said net debt and slower capex intensity in the oil-to-telecom firm will support valuation in FY25.

The research firm has maintained an 'overweight' rating with a target price of Rs 3,046 apiece, implying an upside of 2.52%.

Reliance Industries' energy vertical was derated as the prospect of faster global fuel consumption declined over the past decade, Morgan Stanley said.

However, with global fuel demand getting upgraded for 2024 and there seems to be a slowdown in EVs in specific countries, refining vertical multiples should reflect, in part similar to that seen at US refiners year-to-date ( +1x one-year forward EV/Ebitda expansion).

Thus, fuel refining profitability remains the key to the upcoming earnings, wherein Morgan Stanley expects Reliance Industries' net profit to rise 6% sequentially.

The research expects the oil-to-chemicals, or O2C, Ebitda to reach a peak despite still-sluggish margins in chemicals, as it estimates GRMs to rise to $12+ per barrel despite reduced discounts on oil.

Chemicals is another area where concerns remain high after 18 months of destocking in olefins and projections of new capacity over the next five years.

"Like with all downcycles, we believe we are at peak bearishness on earnings outlook and multiples, but a path to normalised demand should help raise multiples and global utilisation for producers closer to mid-cycle,"  it said.

Morgan Stanley estimates this quarter should see Ebitda per tonne rise by 3-4% sequentially as olefin margins improved and ethane prices fell.

New energy investments should be monetised by the end of 2024, and while competition with the China supply chain is on most investors' minds, demand creation by the government on solar panels from rooftop solar subsidies and tariffs should also be supportive of lower operating costs for RIL's integrated energy vertical, Morgan Stanley added.

Telecom has seen a relative underperformance in revenue growth for RIL's telecom arm compared to Bharti's India operations. Vodafone Idea raising capital increases the probability of an industry tariff hike, and RIL's telecom vertical multiple should play catchup with Bharti Airtel, Morgan Stanley added.

"We estimate 11% YoY Ebitda growth in the telecom vertical, driven by net subscriber adds of 11.5 million, slightly higher than last quarter."

• Tightening global refining and chemical markets as the global cost curve inflects.

• Rising market share and reduced competitive intensity in the telecom industry.

• Partnerships in the new energy business.

• Ban on single-use plastic that could hurt margins in the medium term.

• Delay in the monetisation of its energy and telecom assets.

• New energy investments are seeing execution hiccups.