While retaining overweight rating on Reliance Industries , Morgan Stanley raised its target price on the stock to Rs 1,506 (from Rs 1,280) to factor in higher energy earnings and increased clarity on telecom investments.
RIL stock has underperformed peers by 60 percentage points in the past four years as its returns lagged peers. This is set to change as earnings start from energy projects and telecom monetisation gathers pace, it feels.
After nearly doubling its energy business investments in the past four years, the research firm believe RIL’s energy earnings are poised to inflect over the next two years, benefiting from slowing oil oversupply, a rising global gas glut, and the start of a polyester upcycle.
“We think the ability to leverage these trends sets RIL apart from its global peers and drives our conviction that energy earnings can beat consensus by 12-23 percent,” it says.
RIL’s vertical integration in the energy value chain has deepened, increasing its flexibility to capitalise on changing energy prices while lowering earnings volatility – a key differentiator versus global peers, according to Morgan Stanley.
It feels company’s energy return on capital employed is set to rise 500 basis points by FY20, to 15 percent, in the top five in returns and free cash flow growth globally.
The brokerage house says, “The market is discounting about half of our projected growth in energy earnings, assuming our base case telecom NAV .” This reflects concerns about RIL’s execution of energy investments – most of which, it believes, are being de-risked as they are close to commissioning.
The research firm says telecom uncertainty has decreased with disclosure on tariff plans, but not subsided completely. It believes energy return on capital employed growth buffers the impact from lower telecom returns in the near term. Disclosures on telecom key performance indicators (KPIs) should be a stock trigger, it says.
In the past 23 years, despite low dividend payout, RIL has outperformed in times of free cash flow growth. Although RIL has one of the lowest payouts (against energy peers), the chairman’s comments on rewarding shareholders indicate a focus on capital efficiency, Morgan Stanley says, adding a higher dividend over time should trigger outperformance.
The stock rallied 6 percent intraday today to hit neary 9-year high of Rs 1,256.50 on value buying, which helped it to cross Rs 4 lakh crore market capitalisation. In four consecutive sessions, it gained nearly 17 percent.
Disclosure: Reliance Industries, the parent company of Reliance Jio, owns Network 18 that publishes Chillicious.com.