RIL's market value to double to $100 billion: Morgan Stanley

Completion of capex activity in FY17 to pave way for multi-year free cash flow, which will help the stock outperform, says Morgan Stanley

Reliance Industries is nearing the completion of its largest ever capital expenditure program of $46 billion by FY17, paving the way for a multi-year cycle of strong free cash flow generation averaging US$5 billion, which will double its market capitalisation to $100 billion (Rs 6.8 trillion), Morgan Stanley has said. The free cash flow implies an over 11% yield and is the highest among large cap global oil & gas peers under its coverage, it said.

Morgan Stanley said its analysis of the stock price's history over the last 15 years suggests that RIL has typically outperformed once it starts generating free cash flow after its capex mode and a similar cycle is now likely to play out. “We chalk out a potential roadmap for the stock to double to reach market cap of US$100 billion (Rs 6.8 trillion),” said the report dated March 1.

 

As of Wednesday, the company’s market capitalisation was Rs 3.24 trillion at Rs 1,001 a share.

The global financial powerhouse said the company’s telecom turnaround is the key for the company’s fortunes.  “Jio has ingredients which can make its telecom venture to be a profitable, hence surprise positively. Its spectrum portfolio and fiber reach is formidable compared to existing incumbents.  Its infra sharing deals with RCOM , coupled with lower network costs ,can help it deliver better margins of over 40%,” said the report.

In addition, LTE is a superior technology and its consumer adoption could be much faster as both availability and affordability of 4G handset/device is improving rapidly. This is key to watch for, as India is at an inflection point of growth in data usage and RIL with a pan-India sub 1GHz spectrum for 4G coverage, it is better placed than incumbents to take advantage of that. Jio is set for a launch by next quarter.

It also said RIL will benefit from its exposure to oil through downstream expansion projects. After the commissioning of projects, its profitability would also be linked to crude oil prices, with every US$10 a barrel change leading to 8% change in EPS.