Reliance: 3 key reasons why Morgan Stanley is overweight on conglomerate

Morgan Stanley Research has maintained outperform ratings for Reliance Industries with target price of ₹3046 indicating more upside for the stock.

As per Morgan Stanley “ Its all about re-rating in this part of the value creation journey”

For Reliance Industries as per Morgan Stanley, it all comes down to re-rating as net debt decreases, The investments slow down, the demand for fuel rises globally and long-term worries around demand fade. Besides  telecom rate hikes are approaching close and the revenues from the new energy revenues are likely to start soon. 

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Reliance Industries has re-rated well during recent past

As per Morgan Stanley, Reliance Industries has re-rated 10% Year to date and around 35% in the last one year.  Reliance Industries now trades at 24 times price to equity ratio and 10 times Enterprise Value (EV)/EBIDTA on FY2026 estimates as per estimates of Morgan Stanley.

Further Potential for Rerating for Reliance Industries across verticals

Morgan Stanley sees a potential for rerating of Reliance Industries stock around various verticals, namely new Energy, Refining , Chemicals and Telecom.  

As consensus over the past decade started factoring a faster fall in global fuel demand, Reliance Industries Energy vertical started seeing de ratings.  However given that the world’s fuel consumption is expected to increase by 2024 and that EV sales are declining in several nations, refining vertical multiples could rebound.

Future earnings will largely depend on the profitability of fuel refining. Morgan Stanley projects a 6% quarterly increase in Reliance Industries net profit. 

Morgan Stanley also anticipates that despite still weak chemical margins, the oil to chemicals (O2C) Ebitda will peak  to highest level since the June 22 quarter. The gross margins will increase to over $12 per barrel despite lower oil discounts.

Ebitda stands for Earnings before interest, tax, depreciation and amortisation.

In the Chemicals Segment concerns  still persist following an 18-month destocking of olefins and estimates of more capacity additions over the next five years. However similar to previous downcycles, Morgan Stanley thinks that the outlook for earnings and multiples is at its lowest point now. A return to typical demand should help producers get closer to mid-cycle by increasing multiples and worldwide utilisation. Morgan Stanley predicts Ebitda per ton will increase 3-4% sequentially this quarter due to increased olefin margins and rising ethane prices.

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For New energy segment investments should be monetised from end-2024, expects Morgan Stanley.

In Telecom the revenue growth of Reliance Industries telecom subsidiary has been somewhat underperforming in the telecom sector.

Loer debt and slower Capex intensity to support Valuations

Morgan Stanley said that the net debt and slower capex intensity will be supportive of valuations for Reliance Industries in FY25

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions

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Published: 09 Apr 2024, 05:53 PM IST