The rally in Mukesh Ambani’s Reliance Industries Ltd share price may continue if current petrochemical spreads sustain, said global brokerage and research firm Jefferies in a note. Sustained petrochemical spreads could pave the way for oil-to-chemical stake sale by RIL this fiscal year, re-rating multiples and shooting the stock 45% higher from current levels. The note highlighted that polymer spreads are at decade-highs on strong downstream demand and polyester spreads are recovering. Currently, RIL share price is trading at Rs 2,170 per share — up 10% in three trading sessions.
Polymer spreads at decadal highs
Jefferies said that polymers spreads are at decadal highs, helped by demand from downstream industries such as automobiles, durables, consumer goods, medical supplies, and packaging. “Sustained demand strength on fiscal support in major economies, commissioning delays in new projects, and vaccination penetration should support polymer margins in FY22E,” the report said. Polyester chain spreads, after having shrunk pre-covid, are now recovering gradually. At this juncture, China’s self-sufficiency move is believed to be weighing on polyester spreads.
Buoyed by polymers that comprise 45% of its petrochemical portfolio, RIL’s portfolio level spread is nearing its decade high and is 30% ahead of Jefferies estimates for the current fiscal year. “RIL’s petchem segment Ebitda could be 50% ahead of Jefferies estimates on operating leverage benefits if the current spreads were to sustain over FY22E. This could drive 14% upside to our consol Ebitda estimate,” the note added.
O2C stake sale to reverse underperformance
Reliance Industries share price has underperformed the benchmark Nifty 50 since the beginning of this year. While the Nifty index zoomed 10.8%, Reliance Industries has added 8%, the majority of which came in the last few trading sessions. The stock has underperformed the benchmark index even over the last one-year time frame. “In our view, sustained strong petrochemical performance improves the likelihood of O2C stake sale in FY22. This could lead to a reversal of the 40% Nifty underperformance,” Jefferies said.
At the current market price, valuing RIL’s energy business at long-term average multiples, Jefferies said it is left with Rs 1,150 per share as the imputed value of RIL’s stake in Jio and Retail. Jefferies has a base-case target price of Rs 2,580 per share. However, a more optimistic upside scenario pegs the target price at Rs 3,150 apiece. Here, Jefferies expects strategic stake sale in O2C business to re-rates multiples, faster consolidation in telecom leads to tariff upside in Jio, and possible public listing of Jio re-rating valuation multiple.