RIL -- Target raised to 1506 (MS)
Rajesh Desai
Why OW? RIL stock has underperformed peers by 60ppt in the past four years as its returns
lagged peers'. This is set to change as earnings start from energy projects and telecom monetization
gathers pace. We raise our price target to factor in higher energy earnings and increased
clarity on telecom investments.
Energy upside: After nearly doubling its energy business investments in the past four years,
we 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%.
RIL's growth in returns and FCF ranks among the top five globally. RIL’s vertical integration
in the energy value chain has deepened, increasing its flexibility to capitalize on changing
energy prices while lowering earnings volatility – a key differentiator versus global peers, in
our view. Inflection in energy earnings makes RIL's 26% FCF growth and 500bps return
improvement stand out.
What's in the price? 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, we believe, are being de-risked as they are close to
commissioning.
Will higher FCF drive outperformance, if payout remains low? In the past 23 years, despite
low dividend payout, RIL has outperformed in times of FCF growth. Although RIL has one of
the lowest payouts (vs. energy peers), the chairman's comments on rewarding shareholders
indicate a focus on capital efficiency. A higher dividend over time should trigger outperformance.
Monetizing the telecom investment: Telecom uncertainty has decreased with disclosure on
tariff plans, but not subsided completely. We believe energy ROCE growth buffers the impact
from lower telecom returns in the near term. Disclosures on telecom KPIs should be a stock
trigger.