Brokerage firm JP Morgan India upgraded its rating on Reliance Industries (RIL) shares to ‘overweight’ from ‘neutral’ on Thursday and set a price target of Rs 3,170 — an upside of more than 22 percent over the next 12 months.
RIL, according to the brokerage, is among the few large companies in India with a positive earnings revision cycle ahead, given the strong refining and gas environment.
According to the brokerage, the upgrade to overweight is driven by:
Global view of a strong refining environment.
RIL's non-energy business valuations continue to hold up.
JP Morgan believes RIL’s outperformance to the Nifty 50 will continue in 2022, given that there is a good chance of upgrades to the Street’s earnings expectations for the company.
The brokerage has raised its earnings per share estimate for RIL by 19 percent for 2022-23 and 17 percent for 2023-24.
“Our earnings estimates imply a sharp pullback in diesel and gasoline cracks from current record level, but RIL remains among the best-positioned refiners globally, given: the ability to buy and process arbitrage barrels, diesel heavy slate and, export focus,” JP Morgan India said in a note on Thursday.
On Thursday, shares of Reliance Industries gained as much as 2.4 percent at Rs 2,658.60. However, in the afternoon trading, the stock was down 0.85 percent at Rs 2,574.15 on the BSE.
Probal Sen, an energy analyst at ICICI Securities, said that Reliance is one of the few large companies with the potential for earnings growth in the high teens.
“I think, with RIL, the earnings growth trajectory has not really been in doubt, even before the kind of momentum we are seeing in the refining segment. This is sort of the icing on the cake in many ways that, if RIL actually starts delivering more than $18-20 gross refining margins (GRMs) in the near term, it's very much doable given what Singapore benchmarks have done," said Sen.
He also added that O2C earnings would probably once again start to have a much more dominant position in the earnings mix, at least over FY23, given the trends. "I think RIL is one of the few large-cap companies, which has the potential for high teens or even mid-20 percent kind of earnings growth over the next couple of years,” said Sen.
Another key reason for the upgrade, JP Morgan said, was the resilience shown by RIL's consumer and technology business (Jio, Retail).
“We had earlier expected the global tech sell-off to impact RIL’s consumer valuations negatively and cancel out the near-term earnings upside,” the brokerage house said.
JP Morgan said that likely higher average revenue per user (ARPU) for the telecom business and ramp-up in the footprint of the organised retail operations combined with renewables business optionality, non-energy business valuations should hold up going ahead.
Disclosure: Reliance Industries Ltd, which owns Jio, is the sole beneficiary of Independent Media Trust that controls Network18, the parent company of CNBCTV18.com.