Reliance's refining margins recover but retail remains uncertain: JPMorgan

One of the two drivers of Reliance Industries Ltd's recent underperformance - weak refining margin - has reversed but the other, poor-retail top-line growth, is difficult to anticipate, brokerage JP Morgan said in a report.

Reliance stock is down 22 per cent from its peak on July 8 (NIFTY down 3.3 per cent), sharply reversing outperformance from earlier in the year.

In a market where most stocks are trading well above historical valuations, Reliance's fair relative valuations are an attraction.

The company helmed by billionaire Mukesh Ambani has three main business verticals - oil refining and petrochemical business housed in oil-to-chemical (O2C) unit, telecom arm Jio and retail. It also has a media unit and a new energy business.

 

Reliance Retail plus Telecom now account for about 50 per cent of total 2023-24 (FY24) consolidated EBITDA. These, JP Morgan estimates, will account for almost all of net EBITDA growth over the next three years. With an EBITDA run-rate of $20 billion a year, Reliance is expected to deliver positive free cash flow for the next three years (despite elevated capex plans at new energy complex and in the retail business, and towards petchem capacity expansions).

"We see two headwinds hurting: 1) refining margins fell sharply starting June, and 2) revenue / EBITDA growth at its consumer retail subsidiary (Reliance Retail) continued to disappoint," it said.

According to JP Morgan, refining margins have rebounded recently, improving third-quarter run rates. The reduction of Chinese export tax rebates could help support cracks (the difference between raw material crude oil and finished product prices).

"Is retail growth bottoming as well? This is difficult to anticipate near term as Reliance Retail has been affected by a general retail slowdown and specific company restructuring. Investor concerns around the impact of Quick Commerce remain," it said.

Reliance retail implied valuations are low.

JP Morgan said some of the initial solar (module / cell) capacities that Reliance is working on should be commissioned by March.

"While RIL did not plan to sell output to third parties, and potential profitability is limited, the current strength of local demand might force a rethink. Reliance stock might benefit from an announcement of commissioning given high valuations of recently listed solar companies in India," it said.

According to the brokerage, the anticipated listing of Jio / Retail could take time due to the recent market weakness and potential large size of these issuances.

"We review our retail forecasts, cutting FY25-26 EBITDA 10-15 per cent. As retail is a small portion of total earnings, RIL consolidated (post minority) PAT forecasts change only 4-6 per cent," it added.