Reliance Industries Share Price Target 2022: Why Did Jefferies Raise It?

Reliance Industries On A Rally

Reliance Industries has jumped by over 9% in the last 1-month, even as stock market indices rallied following positive sentiments from the Asian indices as well as a considerable inflow of investments from foreign investors. (Foreign investors have been buyers of domestic stocks for the month of November). When we take a closer look, Reliance Industries joined the likes of ICICI Bank, ITC, Adani Enterprises, Axis Bank and State Bank of India in contributing to most of Nifty’s gains in the last 1-year. Reliance was up in the last six trading sessions, rising by over 7.74% during the period.

Jefferies raised the target price of Reliance to Rs 3,100 today (1st December) and shared its viewpoints on the stock. Let’s try and understand what its analysts said in this blog.

Reliance Share Price Movement

Reliance Industries Revenue Breakup (Segment-wise) (FY22)

(Source: Reliance Industries Annual Report 2021-22) (Percentages are rounded up to the nearest whole digit)

It’s a no-brainer that Reliance Industries gains most of its revenues from the oil-to-chemical segment (O2C). And hence, any drift in the earnings growth rate in this segment can impact the conglomerate’s overall earnings margins. A look at the investor presentation shared by the company post the release of its second-quarter earnings this year further emphasizes the above fact. In the second quarter, the O2C segment reported weak EBITDA margins and the introduction of SAED (Special Additional Excise Duty) in July had a hand in it. Of course, the collapse in gasoline cracks (gasoline price, to put it simply) by approx 90% compared to the earlier quarter was another reason, the weak earnings margins in the O2C segment had spooked investors because of which the share price had taken a hit by over 1.22% on the day of the quarterly earnings announcement.

How Did the Export Duty Hike On Petroleum Products Impact Reliance?

In the month of July this year, the government decided to levy tax on the windfall gains made by oil refining companies by increasing the export duty on petroleum products. This was done in an attempt to cater to domestic demand at a time when crude oil prices were nearly at their peak. On the day the government made its decision public, several analysts shared their opinions on the possible impact that various oil refining companies would have to brace themselves for. Views of Morgan Stanley on Reliance Industries deserve a mention here. This will help us understand what Jefferies' rationale was when it raised its target price on RIL stock.

According to Morgan Stanley, in case Reliance wants to dodge the ill effects of this export duty hike on its margins, it will have to sell at least 30% of the diesel locally. Reliance Industries sells about 40-50% of its products through its petrochemical business and retail outlets domestically.

The financial services firm further said that Reliance’s gross refining margin would dip by $6-8 per barrel. Also, every $1 per barrel dip could affect Reliance’s earnings by 2.5-3%.

Hence, to summarize, a hike in the export duty will have a negative impact on Reliance's earnings margin. Now whether the impact could be less compared to other state-owned refinery businesses is a different thought altogether. We all know that the O2C segment's revenue contribution is more than half and hence it is quite significant. The reverse is also true: in case the government withdraws the export duty, it could help the conglomerate in saving several crores and hence will impact even its earnings margin. Look at what the company had to say about SAED's impact on its second-quarter earnings.

Impact of SAED on Reliance’s O2C Earnings Margins

(Source: Reliance Industries Investor Presentation)

The introduction of the special additional excise duty (SAED) on transportation fuels impacted the O2C segment’s earnings by Rs 4,039 crore.

What Made Jefferies Raise the Target Price?

Jefferies has raised the target price of Reliance Industries' stock price to Rs 3,100. These were some of the reasons that they had given:

• Global diesel inventories across various regions, including Europe, US and Singapore (the latter is regarded as a significant benchmark) remain at multi-year low levels. This basically means that oil producers will have to increase their production levels to fill in the inventories and a surge in supply would decrease the prices of crude oil.
• Also, since the export duty hike in July, the refining margins have been down by about 60%, eliminating a significant portion of the windfall gains which was the core reason why the government had hiked it in the first place.
• The export duty was revised only once previously which resulted in a drop in the same by just 20% compared to the 60% drop in refining margins concurred by the analysts at Jefferies.
• Realized diesel spread (margins) has come down from $22-25 per barrel to about $17-18 per barrel.
• Oil prices are down to $83 per barrel currently compared to the $115 per barrel level at the end of June which could be a good reason for the government to withdraw the export duty on petroleum products.
• According to the analysts, the removal of the export duty could boost Reliance Industries’ FY24 EBITDA by $1 billion.

All of the above factors especially the last point, made Jefferies raise the target price to Rs 3,100. 

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