Reliance jumps 4% as Goldman Sachs sees up to 56% upside in stock by FY26

The brokerage has raised its target price to Rs 3,400 from Rs 2,925 in a base-case scenario, reflecting a potential upside of 18 per cent from RIL's last close

Shares of oil-to-telecom major Reliance Industries (RIL) jumped 3.6 per cent intra-day to Rs 2,988 on BSE on Wednesday after Goldman Sachs (GS) raised its target price on the stock, citing peaking capital expenditure (capex) in its old businesses, favourable risk-reward and value accretion from the recent media joint venture with Disney.  

In a note, the brokerage raised its 1-year target price on RIL to Rs 3,400 from Rs 2,925 in a base-case scenario, reflecting a potential upside of 14 per cent over Wednesday's close. In a bull-case scenario, the stock can leap to Rs 4,495 by FY26, implying a 50 per cent increase.  

 

In Wednesday's trade, the stock almost touched Rs 3,000 after a gap of 12 trading sessions before it pared gains. It had made a fresh high of Rs 3,025 early this month on March 4. So far in calendar year 2024, RIL's stock has rallied nearly 16 per cent against a 1 per cent rise in benchmark Sensex index.

The company's consolidated returns are at an inflection point in FY24, according to GS, and its cash return on cash invested (CROCI) will expand by 270 basis points to 12 per cent by FY27, the highest since 2011, as capex steadily declines over FY24-27 led by telecom and retail, partly offset by higher new energy capex.

Holding its 'buy' rating on RIL intact, GS noted the conglomerate's capex has largely peaked in long gestation businesses such as hydrocarbon and telecom and it is likely getting higher returns from less capex-heavy newer businesses (retail, upstream new energy), which have shorter gestation periods.

It, thus, expects RIL's free cash flow (consolidated basis), which has largely remained negative due to the elevated capex, to turn positive in FY25.

RIL's EBITDA is estimated to expand 20 per cent year-on-year and at a compounded annual growth rate (CAGR) of 17 per cent between FY24-27 driven mainly by energy business due to tight diesel and gas feedstock tailwinds for the petchem segment.

This will also be led by doubling of retail segment EBITDA, a 22 per cent CAGR in telecom EBITDA driven by higher ARPU as a result of tariff hike in the second half of 2024, the brokerage said.

"With pan-India 5G rollout now likely completed and potential telecom tariff hikes ahead, we expect the telecom business to become a strong free cash flow generation business alongside current cash cow-oil to chemical (O2C)," the note said.  

Reliance Retail's share in overall consolidated EBITDA could increase to 14.3 per cent in FY27 from 12.4 per cent in FY23, it estimates.

For the new energy vertical, GS expects positive EBITDA contribution to begin from FY25 and reach $2.3 billion by FY30.

The brokerage further noted that Reliance's shares tend to outperform under two conditions: expanding returns and valuation discovery through stake sales in newer businesses.

While both these factors were missing in the last two years leading to the stock's underperformance, the brokerage said it expects "rising returns ahead that could compound with potential value unlocking through possible listings of its consumer businesses".