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This week, the leading petrochemical producer in India saw increased traction, accompanied by a 3 percent rise in its stock price, following a buy recommendation from Goldman Sachs on the stock, projecting an upside potential of 51 percent by FY26. 

Reliance Industries Ltd. is in the business of energy, petrochemicals, natural gas, retail, telecommunications, mass media, and textiles. Reliance Industries Ltd. is a Fortune 500 company and the largest private sector corporation in India. 

On Friday, Reliance Industries Ltd. shares closed at ₹ 2,977, down 0.30 percent from the previous close on the National Stock Exchange. The company has a market capitalization of ₹20,14,010crore. 

Reliance Industries Ltd. revenues increased by 4 percent year on year from ₹2,16,737 crore in Q3FY23 to ₹2,25,086 crore in Q3FY24, while net profit increased by 10 percent from ₹17,806 crore to ₹19,641 crore. 

Reliance Industries Ltd. shares have gained 26 percent in the last six months and 33 percent in the last 12 months. 

Reliance Industries received a buy recommendation from Goldman Sachs with a target price of ₹ 3,400 in the base case, implying a 14 percent increase from friday’s close price of ₹2,977 per share. 

Furthermore, in a bullish scenario, the brokerage has reaffirmed a ‘buy’ rating on Reliance Industries Ltd, setting a target price of ₹4,495 for FY26, reflecting a potential upside of 51%. This recommendation is based on favourable risk-reward dynamics, anticipated value realisation from its Disney joint venture, and improved return on capital investments. 

The brokerage highlighted that with Reliance Industries Limited’s (RIL) capital expenditure cycle in two capital-intensive sectors—retail and Jio Telecom—reaching its peak, the company is poised to observe enhancements in its overall performance. 

According to the brokerage, RIL is now focusing more on businesses with relatively lower capital expenditure requirements, higher returns, and shorter gestation periods

over the next three years. 

The brokerage also noted that Reliance Industries shares tend to outperform the Indian market under two circumstances: when returns expand and when there is valuation discovery through stake sales in newer businesses. However, these drivers have been largely absent over the past two years, potentially contributing to the shares’ underperformance. 

The brokerage anticipates an increase in returns ahead, which could be further augmented by potential value unlocking through potential listings of consumer businesses. 

Goldman Sachs analysts suggest that in FY24, Reliance Industries Limited (RIL) is poised for a significant turning point in its consolidated returns. They anticipate a notable enhancement in its Cash Return on Cash Invested (CROCI), projecting an expansion of nearly 270 basis points to reach 12 percent by FY27, marking its highest level since 2011. 

The brokerage observed that RIL is coming out of a series of long and intensive capex cycles. Reliance Industries has invested over $125 billion in capex over the last decade, mostly in hydrocarbon and telecom, which are more capex-intensive and have a longer gestation period of over five years. 

Analysts predict that on a consolidated basis, RIL’s free cash flow, which has predominantly been negative due to high capital expenditure, is poised to turn positive in FY25 as capital expenditure is anticipated to plateau. 

Additionally, analyst project a 20 percent year-on-year expansion in EBITDA, driven by a telecom tariff increase, higher retail same-store sales growth, and a rebound in chemical margins. 

Goldman Sachs foresees a nearly doubled earnings before interest, tax, depreciation, and amortization (EBITDA) for Reliance Retail from FY24 to FY27, with the consolidated EBITDA share rising to 14.3 percent by FY27 from 12.4 percent in FY23. They also anticipate a positive EBITDA contribution for the new energy vertical, expected to commence in FY25 and reach $2.3 billion by FY30. 

Analysts anticipate a robust 17 percent annual rise in EBITDA from FY24 to FY27. This growth will be primarily propelled by retail EBITDA nearly doubling within this timeframe and a 22 percent annual increase in EBITDA within the telecom sector, attributed to elevated telecom ARPU. 

Additionally, the analysts highlight several factors contributing to sustained high double-digit EBITDA growth, including the ongoing transition of consumers to smartphones, strong growth in fixed broadband, recovery in petrochemical margins due to global demand and lower feedstock prices, as well as persistent strength in diesel cracks owing to limited global spare capacity. Moreover, operational expenditure reductions are expected to further support this growth trajectory. 

Written by Omkar Chitnis

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