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RIL fixes May 14 as record date for rights issue. Should you subscribe?

RIL Chairman Mukesh Ambani
Mukesh Ambani-controlled Reliance Industries Limited (RIL) has fixed May 14 as the record date for the Rs 53,100 crore 1:15 rights issue, which is priced at Rs 1,257 per share.

Simply put if you own the stock as on May 14, you will be eligible to particpate in the rights issue. For every 15 shares held, the company will offer 1 share.

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"Promoters would subscribe their full entitlement of rights issue and also all the unsubscribed portion. This highlights a sense of confidence on the part of promoters to deploy (at least 49%) their own capital into the company," said analysts at Motilal Oswal Securities.

Most brokerages expect the company to do well over the coming quarters and have pegged the target price for the stock higher than its current market price. In this backdrop, they feel subscribing to the rights issue does make sense.

Here's what leading brokerages said about the company's latest results and the company's action plan to become debt free over the next few quarters.

Nomura

As per RIL, the Facebook (FB) deal was only 50% of its Jio value unlocking target, and it has received investor interest for similar-sized investment. A $15 billion deal for a 20% stake sale in the oil-to-chemical (O2C) business to Saudi Aramco is on track (due diligence ongoing, RIL approaching NCLT for approval).RIL has surprised the Street with its monetisation / deleveraging efforts, and the stock has strongly rebounded recently. Yet, we think that RIL’s outperformance may sustain.

In our sum-of-the-parts (SOTP) valuation, we raise our EV/EBITDA multiple for Jio to 9x (earlier 8x) and retail 22x (earlier 20x), as the outlook has materially improved after the tie-up with Facebook. We raise our target price to Rs 1,900 (implies 30% upside). The stock trades at 13.3x FY22F P/E. Reiterate Buy.

JM Financial

We continue to remain positive on RIL on back of net-debt reduction and an improvement in telecom competitive scenario. We maintain BUY with target price of Rs 1750.


Edelweiss Research

Reliance Industries (RIL) approved the biggest-ever rights issue of over Rs 53,000 crore at Rs 1,257/share. This puts the company on track to pare net debt to zero by FY21. Tariff hikes at Jio would continue to drive a 25% consolidated PAT CAGR over FY20–23. We are, however, cutting FY21/22E net profit by 3-15% to factor in muted refining margins. Building in lower capex intensity at Jio boosts its valuation by 20% to $50 billion, lifting target price for RIL to Rs 1,678/share.

Centrum Broking

Despite the downstream weakness, focus of the management is clearly on building up the digital ecosystem (including leveraging the same to further expand retail). The Facebook (FB) deal is likely to be a precursor to further strategic deals in JIO and management is confident of closing Tower/Fibre InVit in FY21E. With the rights issue to bring over Rs 53,000 crore and the Aramco investment also still at the due diligence stage, we see little hurdles in achieving objective of negligible Net Debt levels by March 2021. BUY.

Motilal Oswal Securities

We value RIL at Rs 1,618/share, based on SOTP with equity values of Rs 358/share for the core business, Rs 500/share for Retail and Rs 760/share for Jio. The stock trades at 22x FY21E EPS of Rs 66.4 and 13.2x FY21E EV/EBIDTA. We reiterate our Buy rating with a revised target price of Rs 1,618.


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