Shares of Reliance Industries (RIL) surged nearly 4% in intraday trade on Wednesday after global brokerage Goldman Sachs reiterated a ‘buy’ rating on the oil-to-telecom conglomerate and raised the target price, citing that despite the recent rally, “risk-reward is still favorable”. The brokerage house has raised its 12-month target price to ₹3,400 from ₹2,925 estimated earlier in a base-case scenario, indicating a potential upside of 18% from RIL's last closing level of ₹2,884. In a bull-case scenario, the country’s most valued stock is seen surging to ₹4,495 by FY26, suggesting a 56% upside from the current market price.

Boosted by the development, RIL shares gained as much as 3.8% to ₹2,995, while the market capitalisation rose to ₹20.17 lakh crore. Early today, Reliance shares opened higher at ₹2,899.65, up 0.5% against the previous closing price of ₹2,884.15 on the BSE. On the volume front, more than 2.2 lakh shares changed hands over the counter compared to the two-week average of 2.96 lakh crore.

Earlier this month, RIL shares hit its 52-week high of ₹3,024.80 on March 4, 2024, rebounding 48% from its 52-week low of ₹2,040.98 touched on March 29, 2023. The counter has gained 33.5% in the past one year; 26% in six months; and over 15% in the calendar year 2024. In the last one month, RIL shares have seen some consolidation after it scaled a new peak.

In a note released on March 26, Goldman Sachs said that RIL shares tend to outperform the Indian market during two scenarios - expanding returns (2017-19) and valuation discovery through stake sales in newer businesses (Jio and retail stake sales in 2020-21). “Over the last two years, both these drivers were largely absent, potentially driving the shares’ underperformance. We expect rising returns ahead (101/75/92 bps CROCI (Cash Return on Cash Invested) expansion in FY25E/26E/27E) which could compound with further potential value unlock through potential listing of consumer business (Reliance Jio Infocomm),” it noted.

As per the foreign brokerage, RIL consolidated returns are at an inflection point in FY24, estimating CROCI to expand by 270 basis points (bps) to 12% in FY27 (highest since 2011). The agency expects capital expenditure to fall sequentially, alongside a change in the mix of capex (rising share of higher returns and faster capex gestation cycle businesses) and 17% EBITDA CAGR over FY24-27E (6-10% above Bloomberg consensus in FY25/26 driven mainly by energy business due to tight diesel and gas feedstock tailwinds for the petchem business), the report highlighted.

RIL has invested over $125 billion in capex in the last 10 years, mostly in hydrocarbon and telecom, which are more capex intensive and have a longer gestation period (> 5 years). “While the capex cycle for hydrocarbons and telecom 4G completed during FY17-19, we saw an accelerated telecom capex cycle in 5G, which is now completing in FY24 (telecom capex to sales ratio to decline from 26% in FY24E to 15% by FY27E).”

The agency believes the businesses RIL is investing more in the next 3 years (retail and upstream new energy) are relatively less capex heavy, higher in returns and have a shorter gestation period. “We expect capex intensity to peak at $17.6 billion in FY23, easing sequentially to $11.2 billion by FY26E.”

Going ahead, Goldman Sachs sees a stronger pipeline of catalysts ahead such as a potential telecom tariff hike in the second half of the calendar year 2024; stronger same-store sales growth in retail as new stores fully ramp up; start of a new energy giga complex in H2 CY24; and value unlock through a listing of consumer (Jio / Retail) businesses. With the completion of the telecom capex cycle, the agency expects the market to be focused on leverage which it expects to continue trending down.

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