O2C resurgence, digital growth, lower debt positives for RIL stock

The better-than-expected performance in the oils-to-chemicals business in the March quarter, robust digital revenues and the reduction in debt has infused more steam in the Reliance Industries stock which continues on the ‘buy,’ ‘add’ and ‘overweight’ list of many analysts some of whom have raised its target price.

• Also read:RIL profit up 27% driven by growth in telecom, retail segments

The Mukesh Ambani-controlled conglomerate’s performance in the quarter was more or less along expected lines with the additional bonus of decent sales in O2C as well as Jio Platforms, though retail was soft as consumer demand is subdued.

Net debt and the intensity of investment declined to their lowest level in two years, making more room to manoeuvre on the balance sheet, with free cash flows at $1.3 billion.

Analysts are now waiting for a tariff hike in its telecom operations to give a further boost to the stock.

Jefferies, which has a ‘buy’ rating on the stock with a price target of ₹3,380 sees several growth engines such as digital in Jio, e-commerce in Reliance Retail, crude-oil-to-chemicals in O2C and the new energy business. These are long term growth drivers and the company has said that increasing traction on 5G and homes will be a key focus area in the current fiscal.

Re-rating of the stock will depend on a number of factors. “It’s all about re-rating for RIL in this part of the value-creation journey as net debt declines, investments slow, global fuel demand picks up, telecom tariff hikes get closer and new energy revenues start,” said Morgan Stanley Research.

A key takeaway in the earnings call was RIL sticking firm to its commitment to fund growth capex with internal cash accruals.

The tailwinds for the O2C segment is encouraging and this should drive performance of the company as this contributes around 60 per cent of revenue.

In the retail segment UBS said it expects near-term sales growth to be driven by higher sales per square feet from stores added in the last two years. Though revenue moderated, margins expanded sequentially. The management had said that it would expand omni-channel offerings, boost its logistic presence and focus on premiumisation.

“We like Reliance’s business and balance sheet and believe all three of its core businesses – O2C, retail and digital services – have become self-sustaining and cash-generating, with retail and digital growing strongly,” said HSBC Global Research. It has a ‘hold’ recommendation and has raised the target price to ₹2,770 from ₹2,600 earlier.

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In its analysis it said that O2C will likely remain lacklustre due to weak macros and new capacity commissioning. In digital, with its thrust on 5G, the focus is likely to be on customer growth over realisation growth. Retail will also continue subdued as consumer sentiment is depressed while new energy will be ramped up gradually as new technologies take time to mature.