The March mayhem, that saw benchmark stock indices slump, was no different for Mukesh Ambani’s Reliance Industries Limited. Goldman Sachs believes that the current market price has factored in the slumping refining margins and drop in oil prices.
The March mayhem, that saw benchmark stock indices slump, was no different for Mukesh Ambani’s Reliance Industries Limited (RIL). While S&P BSE Sensex hit its 52-week low on March 24, Reliance Industries did it a day prior to the benchmark, falling 41% year-to-date. However, in the surge since then, RIL has detached itself from the index and jumped 34%. With this, Goldman Sachs has reiterated its ‘buy’ call on the scrip with a target price of Rs 1,550, claiming that the market does not appreciate the unique hedges in hydrocarbons business, which can benefit even during a recession with limited risks.
Goldman Sachs believes that the current market price has factored in the slumping refining margins and drop in oil prices. Anticipating how RIL will fare in a recession, the brokerage and research firms said, “In our view, despite challenges to refining demand in the near term, we expect Reliance to continue to outperform regional peers/benchmark margins due to a combination of having the highest refining complexity globally, operational excellence and favorable crude sourcing.” Gross refining margins in the next fiscal are being expected to jump to $8.5 per barrel and further ahead in FY22 to $11.2 per barrel. Outperforming the benchmark, RIL’s refining margins are expected to give the company a cushion, making it attractive despite a recession.
FMCG and Telecom contribution to jump
Goldman Sachs, in the research note said that it is expecting a rapid recovery in earnings post the lockdown, fueled by higher contribution from the fast moving consumer goods segment and telecom venture — Reliance Jio. “We expect a rapid earnings recovery and a significant step up in FCF (free cash flow) even under the current challenging macro environment as capex intensity will continue to decline.” EBITDA contribution from the FMCG sector, including telecom will soon contribute 50%, according to the estimates. Reliance Jio, is already inching up with a surge in average revenue per user in the January-March quarter and a growing consumer base. Along with that the retail segment is being estimated to grow rapidly post the lockdown and might take over the customer base of other peers.
Base and Bear case analysis
In the Base Case scenario, a relative muted downside for the grocery segment is being eyed. Retail business is pegged to grow at 43% in FY21, while consumer electronics and fashion segments will report a decline in earnings in the Base case. In the Bear Case scenario, the consumer electronics and fashion segments are going to be the worst hit, according to Goldman Sachs. “In our base case we expect FY22E EBITDA to be up 23% from FY20E, versus in our bear case FY22E is flattish versus FY20E and growth only resumes by FY23E (up 45% over FY20E).”
Strong balance sheet
RIL’s balance sheet, even in the worst case scenario envisioned by Goldman Sachs is expected to stay healthy with leverage coming down even if gross refining margins stay around $7 per barrel. RIL will deleverage further by low cash cost and complex hydrocarbon asset base driving cash positive margins along with the hope that telecom and retail segment cash flow remains resilient.
In the soon to be out January-March quarter earnings of the previous fiscal, EBITDA is expected to decline 8% to Rs 20,500 crore. “ Petchem earnings will be flattish as margins already reached the trough in 3QFY20. We expect a steeper decline in refining due to inventory loss which will be partly offset by growth in telecom earnings,” the report said. However, the EBITDA growth from FY21 to FY23 is being pegged at 6%/39%/18%, hinting at a strong revival.