After outperforming the Indian market earlier this year, Reliance Industries (NS:) Limited (RIL) shares have recently stagnated despite peers in telecom, retail, oil-to-chemical, and new energy sectors experiencing rallies. Goldman Sachs (NYSE:)’ latest analysis shows RIL’s current 19% discount to its Net Asset Value (NAV) is the widest since January 2021. This widening gap may stem from declining Singapore refining margins and a slight earnings miss in the fourth quarter.
Goldman Sachs, however, sees several positive factors that could drive RIL’s shares higher in the near future.
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The investment bank is more optimistic than consensus on medium-term earnings from RIL’s oil-to-chemical segment. The recent dip in refining margins is expected to be short-lived, with global refining supply-demand projected to stay tight through 2027 due to slowing capacity additions and potential permanent closures. Additionally, peak oil demand is forecasted to be a decade away. Petchem margins are also expected to improve due to higher oil prices, the end of global demand destocking, and competitive feedstock costs from lower US gas prices.
RIL’s Consumer Return on Capital Invested (CROCI) is projected to grow by about 180 basis points to 12% by FY27, the highest since 2011. This growth will be driven by an anticipated telecom tariff hike in the second half of 2024, increased retail same-store sales growth, and declining capital expenditure intensity in both the telecom and retail sectors.
A potential new energy giga complex could start in the second half of 2024. This project is expected to begin with a 5GW HJT solar module line, expanding to a fully integrated 20GW capacity by FY27. Goldman Sachs highlights the limited investment alternatives in India’s upstream new energy sector, making this a significant growth opportunity for RIL.
Additional value could be realized through potential listings of RIL’s consumer businesses, adding another dimension of growth and investment appeal.
Goldman Sachs has adjusted its EBITDA forecasts for FY25, FY26, and FY27 by -2.2%, -0.4%, and -0.3% respectively, due to changes in refining margins. RIL is still valued on a Sum-of-the-Parts (SOTP) basis: 8.0x FY26 EV/EBITDA for refining and petrochemical, 33.0x FY26 EV/EBITDA for offline retail, and a Discounted Cash Flow (DCF) valuation for the high-growth TMT business. Consequently, the 12-month SOTP-based target prices are slightly reduced to INR 3,420 (US$82.62 per GDR) from INR 3,435 (US$82.98 per GDR).
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While Goldman Sachs is bullish on the counter, the fair value of the stock is INR 2,627 per share, depicting an overvaluation by 10.8%, from the current price of INR 2,947. Also, if you look at the highest intrinsic value coming from the DDM Multistage model is INR 3,091, making the stock almost fairly valued.
When there are such contradictory views, investors can take a more astute approach and wait for a dip before jumping the gun, so that at least the valuation gap narrows.
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