Reliance Industries Ltd., India's largest company by market value, is seen to benefit as oil spikes, according to Morgan Stanley.
“RIL is a net beneficiary of higher sustained oil prices, especially in an environment when oil demand is rising and supporting refinery margins and the U.S. and Asian gas prices, which are input for its chemicals and utility usage underperforming oil,” the financial services provider said in a March 7 report.
“While the current spike in oil is also driven by supply worries and does raise refinery opex and crude premiums negate some of the upside in product margins, overall it hurts its refinery peers, especially in Europe, more than RIL and raises global margins,” the report said. “Hence, overall RIL's gross refining margin rises as seen year-to-date, especially as global fuel refinery markets remain extremely tight.”
Another area where RIL benefits from higher oil, according to the report, is rise in petrochemical average selling prices. “While this normally happens with a lag of few months, it eventually helps RIL's profitability.” The current spike in oil YTD is now starting to translate in higher PE/PP prices.
Also, a demand-driven rise in oil benefits RIL as global air travel comes back, the report said. “A tightening chemicals market and higher domestic gas production help negate derating in technology multiples.”
Morgan Stanley is ‘overweight' on RIL with a price target of Rs 2,926 apiece, implying an upside potential of 25.8%.
Key Risks
Upside
Tightening global refining and chemical markets as global cost curve inflects.
Rising market share and reduced competitive intensity in telecom industry.
Partnerships in new energy business.
Downside
A key risk to its refining margins is the crude official selling prices and how RIL manages sourcing for its more than 150 different kinds of crude.
Ban on single-use plastic that could hurt margins in the medium term.
Delay in monetisation of its energy and telecom assets.
New energy investments see execution hiccups.
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