Share Market Live

NSE

Morgan Stanley has anointed Reliance Industries as its top pick as the brokerage firm bets on the company's fourth investment cycle this century. It has also raised its price target on the stock to Rs 3,085 from the earlier target of Rs 3,015.

At 10:45 am, shares of Reliance Industries are trading 1.1 percent higher at Rs 2,558.90 on the BSE.

Morgan Stanley observes that investment cycles have unwound with ~2-3x value creation for shareholders over the last two decades, with every decade seeing an addition of $60 billion in market capitalisation.

"The investments in new energy, retail expansion to take market share from unorganized sector, and repurposing of existing energy business gives it a long runway to deliver earnings growth consistently even beyond the next three years," the firm wrote in its note.

Here are some other factors behind Morgan Stanley's bullishness:

Less Aggressive Investment Cycle

The firm says that RIL's fourth investment cycle this century is not only less aggressive in terms of investments, but will also reduce the cost of the company's equity. Lower competition in telecom makes earnings predictable and the retail business is witnessing steady growth. The firm believes that with integration into chemicals and access to cheaper Middle East gas feedstock should help reduce the cyclical nature of returns.

Well Funded

The current investment cycle will have the lowest balance sheet leverage ratios compared to any other cycle, according to Morgan Stanley. This will be due to higher refining margin, gas production, rising telecom tariffs, scaling up in the grocery business, and quicker monetisation of new energy. "In contrast to the last investment cycle, we are also seeing RIL's investment cycles coincide with upcycles in its core businesses," the firm wrote.

Refining, telecom and eventually chemicals are likely to drive an 18 percent earnings per share (EPS) CAGR (compound annual growth rate) in FY23-24E and generate an average of $16 billion in operating cash flow until 2025.

Lower Competitive Intensity

Morgan Stanley believes that RIL's future growth areas have lower competitive intensity and that it is partnering with technology owners to accelerate the cash conversion cycle. The cycle in itself has halved to 3-4 years, compared to the earlier cycles. In contrast to RIL's earlier stance where it looked at organic growth to expand, the company has now invested almost $4 billion in inorganic acquisitions and acquired capabilities across various verticals. "In addition, RIL's focus to serve global markets along with India will help it diversify its growth," the note said.

The brokerage sees multiple triggers for RIL over the next few months across all businesses:

Tighter refining markets supporting diesel margins

Potential tariff increase in telecom with the launch of 5G customer plans for metro cities

Improving chemical demand in China

Higher domestic gas production and prices

Improved margin as it leverages its last two years of store expansion with higher footfalls

The company has highlighted that it will provide details on the potential listings of Reliance Jio and Reliance Retail by next year. Morgan Stanley believes that there could be potential for multiple rerating as these IPOs will unlock value. It expects some holding company discount to emerge. "However, the strength in the energy business and monetisation of new energy plans should cushion any of those challenges," the note said.

The New Energy Impact

Morgan Stanley has also highlighted the company's new energy push. Reliance Industries plans on establishing 20 GW of solar energy generation capacity by 2025. The brokerage expects significant impact on the company's earnings through the new energy business and expects it to contribute ~$1 billion in EBITDA by 2027.

Here are some of the other key takeaways from the Morgan Stanley report:

Expect overall EPS to rise 3 percent in FY24

Leave valuation of petrochemical and refining business unchanged to reflect the tightness in global energy markets

Growth prospects in retail remain strong as demand grows with store expansion

Expect wireless telecom Average Revenue Per User (ARPU) at Rs 193 per month in FY24, implying a 15 percent tariff hike

(Disclosure: Reliance Industries Ltd, which owns Jio, is the sole beneficiary of Independent Media Trust that controls Network18, the parent company of CNBCTV18.com.)

First Published:Sept 5, 2022 11:40 AM IST