JPMorgan Remains Overweight On RIL Banking Citing Jio Financial Services
JPMorgan remains overweight on RIL for the next calendar year with a price target of Rs 3,065 at the end of December 2023.
The demerger and listing of Jio Financial Services will support Reliance Industries Ltd.'s stock in 2023, as the IPOs of the conglomerate's consumer businesses—Reliance Jio and Reliance Retail—remain in the distant future, according to JPMorgan.
The brokerage remains overweight on the Mukesh Ambani-led behemoth for the next calendar year, with a price target of Rs 3,065 at the end of December 2023.
From a stock price perspective, Jio Financial Services is going to be the key driver, analysts Pinakin Parekh and Sarfraz Bhimani wrote. The incremental newsflow will be centered mostly around RIL’s financial services arm as the parent builds out the business, the note said.
“We currently value Jio Financial Services at the RIL treasury stock value (1x), and the next 12 months, depending on how RIL builds out and scales up JFS (organic or acquisition), will likely determine how markets value Jio Financial Services. Every 1x turn higher on the RIL treasury stock adds approximately Rs 190 to our FV,” the note said.
The ratings agency is among 29 analysts out of 36 who maintain a 'buy' rating on Reliance Industries stock, according to Bloomberg. Only three analysts suggest a 'sell' rating on the scrip, whereas four recommend a 'hold' rating.
After three years of massive outperformance from 2017 to 2020 and underperformance in 2021, the Reliance stock has outperformed the Nifty year-to-date in 2022.
In 2023, the JPMorgan analysts expect another year of relative outperformance, especially if the markets remain choppy and RIL’s underlying earnings improvement comes through.
The agency expects RIL’s earnings to improve in 2023 as petrochemicals, exploration, production, and retail pick up, while refining remains stable and Jio benefits from tariff hikes.
The new energy vertical remains the most interesting part of RIL’s longer-term earnings and valuation story, but JPMorgan does not see any immediate monetisation via stake sale similar to Reliance Jio and Reliance Retail, it said.
Reliance is currently executing a mini-capex cycle across petrochemicals, telecom, and new energy, simultaneously with the ramp-up of non-telecom initiatives in Jio and the continued ramp-up of new initiatives in retail.
“The full impact of all these spending initiatives should be seen from 2024 onward. In our view, how Jio Financial Services is rolled out or built out would be a key driver for the stock price in 2023, as current expectations remain low,” the analysts said.
The agency has cut its earnings per share expectations for the current fiscal by 8% against its previous projection, primarily due to the diesel export tax and a sharp collapse in petrochemical spreads.
In fiscal 2024, JPMorgan expects RIL to see a sharp decline in export taxes on the back of range-bound oil prices, as China's reopening infuses some recovery in petrochemical spreads.
“Increased India gas prices combined with higher volumes should drive India exploration and production higher. Retail should also benefit from increased floor space, and telecom tariffs should be positive. With the spectrum auction done, overall capex intensity should turn lower versus FY23,” it said.
Key risks to the outlook include a collapse in gross refining margins, large merger and acquisition deals, stagnant tariffs and continued windfall taxes on gas and a cap on prices.