Reliance Industries: What’s driving the stock rally?

Last updated: 02 Jun, 2021 | 01:17 pm

Reliance Industries: What’s driving the stock rally?

Reliance Industries shares have gained over 15% over the last one week, after global brokerage firm Jefferies increased the share price target price of the company to Rs 2,581. We take a look at the factors behind such an upgrade, and the outlook going forward. The image below shows Jefferies' latest SOTP (Sum of the Parts) valuation for RIL.

Factors behind the upgrade by Jefferies

Petchem business sees robust demand: Rising polymer spreads amid demand from automobiles, durables, consumer goods, medical supplies, and packaging industries will provide significant upside to Reliance Industries Ltd.’s petrochemicals operating income in FY22, according to Jefferies. Jefferies expects a 50% upside in the RIL’s Petrochemical business if the prevailing momentum sustains. The O2C business of Reliance Industries accounted for 44% of the company’s segment EBITDA (shown in the chart below).

Polymer Spread at 10-year high: The portfolio spread for polymers, (45% of RILs petrochemicals business) has hit a 10-year high and is currently 30% higher than Jefferies estimates for FY22. The polymer spread refers to the difference between the price of a barrel of polymers versus benchmark crude. This has increased due to heavy demand from the US and China. 

Attractive valuations: Jefferies noted that the stock is trading at attractive valuations at the current stock price. Valuing the Energy business at long-term average multiples, the implied value of Reliance Jio and Retail works out to Rs 1,150/share, in-line with the valuation offered by PE funds that bought stakes in Jio and Retail in 1QFY21. Last year, we had done a SOTP (Sum-of-the-parts) valuation for Reliance Industries.

INDmoney Analysis

  • In the latest quarter, the O2C segment rebounded with EBITDA growing 16.9% QoQ to Rs 11,407 crore. The increase in number was led by strong volume and margin growth. Read our analysis of Q4 results
  • As investors await news on the potential deal with Aramco, a sustained strong petrochemical performance improves the likelihood of O2C stake sale in FY22. This could be the next trigger for rally in Reliance Industries shares.
  • The consumer-facing businesses of telecom and retail now contribute to more than 50% of total EBITDA. As it stands today, the future growth and the roadmap of the company is oriented towards its consumer businesses (Reliance Retail, Jio and Jio Platforms). Hence, a potential stake sale will lead to value unlocking for the shareholders.

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