Correction makes RIL compelling buy, says Kotak Institutional Equities

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IANS | 27 Mar, 2023
RILs recent underperformance has been puzzling. Across key verticals, the outlook is sanguine. In energy, earnings would likely remain robust (high margins/lower export tax in refining, rising volumes/elevated prices in E&P, petchem spreads recovering), Kotak Institutional Equities said in a report.

In telecom, there is rising competitive intensity and likely delay in tariff hikes until the 2024 general elections. However, this would effectively lead to duopoly and result in accelerated market share gains for R-Jio.

In retail, recent acquisitions, store expansions and entry in new verticals prompt us to believe that Reliance will have market leadership across several verticals. Reiterate BUY with FV Rs 2,900 (earlier Rs 3,000), the report said.

In refining, though diesel cracks have moderated, the decline has been largely offset by higher cracks for other products. Overall, refining margins remain robust. Lower diesel cracks have also led to a lower impact of the export tax, the reports said.

In petchem, the margins have likely bottomed. In E&P, rising KG-basin production and elevated HPHT prices would further boost near-term earnings.

Tariff hike likely delayed, but market share gains to accelerate R-Jio's recent aggression in postpaid and unlimited 5G data offerings raising competitive intensity, and likely delays in tariff hike until the 2024 general elections, the report said.

"We now build in 20 pert cent smartphone tariff hike from June 2024 (earlier September 2023). However, we believe delays in the tariff hike would effectively lead to a duopoly and result in accelerated market share gains for R-Jio. We expect capex intensity to moderate after the 5G rollout," the report said.

"We expect RR to post 30 per cent+ core retail revenue CAGR over FY2023-25, driven by aggressive new store expansion (10 million sq ft annually) and expansion of online commerce (across digital, fashion, Jiomart and pharma). This expansion will require significant incremental capex over the next few years, but will ensure RR's leadership across several verticals. The FY2023 revenue run-rate is weaker than expected (significant decline in handset sales), but we believe growth should normalise from FY2024E," the report said.

"After the recent correction [RIL -20 per cent, NIFTY -10 per cent], we believe at CMP, the market is not ascribing any value to RIL's new commerce/FMCG forays, new energy or duopoly benefits in R-Jio. It also seems to factor in a much lower multiple for retail and Rs 500 billion higher net debt," it added.