Brokerages turn bullish as Reliance Industries shares plunge 20%

Pressure on margins of petrochemicals segment from lower crude oil prices would be offset by a likely improvement in refining margin, suggest some brokerages.
The stock of Reliance Industries (RIL) has plunged by over 20 per cent in the past month. Besides the overall bearish market trend, concerns over the impact of coronavirus (COVID-19) on demand for refining and petrochemical products, downstream margin, and deleveraging plans amid crude oil crash have hurt investor sentiments.

 

However, many analysts believe that the sharp correction in the stock now prices in the possible negatives and there are enough supporting factors, which the Street is ignoring.

 

Pressure on margins of petrochemicals segment from lower crude oil prices would be offset by a likely improvement in refining margin, suggest some brokerages. Morgan Stanley, for instance, believes that with supply-side-driven oil price decline, RIL should benefit from rising crude discounts (between heavy and light crude oil) and lower operating costs, which would negate the impact from lower petrochemical prices, which are steadily recovering from cycle troughs. Further, a decline in ethane feedstock prices should support petrochemical prices.

On the deleveraging front, UBS says: “Because of the already announced sharp cut in planned capex, RIL would remain on a positive free cash flow trajectory. We believe that RIL could easily deleverage through organic cash flows by end-FY23 (financial year 2022-23), without any stake sales.”

 

In fact, if a 25 per cent hike in telecom tariff is pursued, it could not only help RIL offset the entire energy earnings impact, but would also improve its cash flow position, estimate UBS’s analysts.

 

Regarding the Saudi Aramco deal for 20 per cent investment in RIL’s oil-to-chemicals business, analysts at Kotak Institutional Equities say the strategic access to downstream capacity has become more crucial for Saudi Aramco after the recent developments in oil markets, wherein it has increased discounts on its crude to gain market share.

 

In fact, the above quoted analysts also expect RIL to consider stake sale in telecom and retail businesses, if required.

 

Overall, many brokerages believe that the recent sharp correction in RIL’s stock offers good buying opportunity with up to 60 per cent potential upside from current levels. Even on Wednesday, despite overall choppy market, the stock gained 3.6 per cent to close at Rs 1,153.25 on the BSE.

 



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