Reliance Industries Ltd (RIL) has witnessed a huge transformation from an energy giant to becoming a market leader in digital and retail space. Research and brokerage firm Motilal Oswal Financial Services believes that with the changing global energy landscape and various developments in the post COVID-19 world, RIL’s standalone business is in the spotlight owing to its oil-to-chemical (O2C) business. The brokerage firm has recommended to ‘buy’ RIL shares and given a target price of Rs 2,240, implying an upside of nearly 15 per cent from the previous close.
Petchem at play
RIL shares were trading 2.45 per cent higher at Rs 2,006 apiece on Tuesday morning, as compared to a 0.59 per cent rise in S&P BSE Sensex in the morning deals. The petrochemicals sector will account for 60 per cent of global oil demand over the next decade (replacing the share enjoyed by the transportation sector at 60 per cent in the last decade) owing to plateauing of oil demand expected from 2030, according to the International Energy Agency’s outlook. The report highlighted that refining margin continues to face recovery delays owing to further lockdowns in certain parts of the world, petchem margin is at multi-year highs.
RIL stock price has witnessed a correction of 15 per cent from its peak. Brokerage firm Motilal Oswal says that this could be a good investment candidate on the back of a revival in commodities. Moreover, as RIL has attained a dominant position in both digital services and organized retailing, it believes that further integration of its O2C business would unlock the huge potential upside from the standalone business as well.
For RIL, the ‘oil-to-chemicals’ conversion stands at 24 per cent. “Increase in O2C conversion would wean it away from an already flooded global refining industry,” Motilal Oswal Financial Services said. It further added that O2C is a tool for the company to offset poor refining margin in a way that OMCs use marketing margin to compensate for poor GRMs.
After the company reorganised Reliance Jio’s balance sheet at the start of the calendar year 2020, RIL has raised Rs 2.5 lakh crore by selling 34 per cent stake in Reliance Jio for Rs 1.52 lakh crore, 8 per cent stake in Reliance Retail for Rs 37,700 crore), and JV rights to BP for Rs 7,600 crore, along with a rights issue of Rs 53,100 crore.
Motilal Oswal noted that RIL further plans to streamline its O2C integration business and focus on expanding its fuel marketing business. The brokerage firm has valued the refining and petrochemical segment of the company at 7.5x to arrive at a valuation of Rs 713 per share for the standalone business. “We ascribe an equity valuation of Rs 900 per share to RJio and Rs 627 per share to Reliance Retail,” it said.