Having overtaken the Indian market earlier this year, Reliance Industries (NS:) Shares of Limited (RIL) have been stagnating lately even as peers in the telecom, retail, petrochemicals and new energy sectors have been rallying. The latest analysis from Goldman Sachs (NYSE:) shows that RIL’s current discount of 19% to net asset value (NAV) is the widest since January 2021. This widening gap may be due to lower refining margins in Singapore and a slight decline in profit in the fourth quarter.
However, Goldman Sachs sees several positive factors that could lead to a rally in RIL shares in the near future.
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The investment bank is more optimistic than consensus on medium-term earnings from RIL’s petrochemicals segment. The recent decline in refining margins is expected to be short-lived, and global refining demand is forecast to remain subdued through 2027 due to slowing capacity additions and potential permanent plant closures. Additionally, oil demand is projected to peak within ten years. Petchem’s profitability is also expected to improve due to higher oil prices, an end to global inventory drawdowns and competitive feedstock costs due to lower U.S. gas prices.
RIL’s consumer return on capital employed (CROCI) is projected to rise around 180 basis points to 12% by FY27, the highest since 2011. This growth will be driven by the expected increase in telecommunications tariffs in the second half of 2024, as well as the growth of retail trade during the same period. -increased sales in stores and a decrease in the intensity of capital expenditures in both the telecommunications and retail sectors.
The potential new energy complex could begin operations in the second half of 2024. The project is expected to start with a 5 GW HJT solar module line and expand to a fully integrated capacity of 20 GW by FY27. Goldman Sachs highlights limited investment opportunities in India’s emerging energy sector, making it a significant growth opportunity for RIL.
Additional value could be generated through a potential listing of RIL’s consumer businesses, which would add another dimension to growth and investment appeal.
Goldman Sachs adjusted its FY25, FY26 and FY27 EBITDA forecasts by -2.2%, -0.4% and -0.3%, respectively, due to changes in refining margins. RIL continues to be valued on a sum-of-the-parts (SOTP) basis: 8.0x EV/EBITDA FY26 for refining and petrochemicals, 33.0x EV/EBITDA FY26 for offline retail and discounted cash flow (DCF) valuation ) for fast growing TMT business. Consequently, 12-month SOTP-based price targets are reduced slightly to INR 3,420 ($82.62 per GDR) from INR 3,435 ($82.98 per GDR).
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While Goldman Sachs is bullish, the fair value of the stock is INR 2,627 per share, indicating an overvaluation of 10.8% from the current price of INR 2,947. Also, if you look at the highest intrinsic value of the multi-stage DDM model, it is INR 3,091, which makes the stock almost fairly valued.
When such conflicting opinions exist, investors may want to take a more discerning approach and wait for the drop before rushing in to at least close the valuation gap.
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