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