Mukesh Ambani’s Reliance Industries Ltd share price rally could continue if current petrochemical spreads hold, global research and brokerage firm Jefferies said in a note. Sustained petrochemical spreads could pave the way for RIL’s sale of oil-chemical stake this fiscal year, reassess multiples and raise inventory 45% from current levels. The memo pointed out that polymer spreads are reaching ten-year highs due to strong downstream demand and that polyester spreads are recovering. Currently, the RIL share price is trading at Rs 2,170 per share – a 10% increase in three trading sessions.
Polymer spreads at decadal highs
Jefferies said polymer spreads are reaching ten-year highs, helped by demand from downstream industries such as automobiles, consumer durables, medical supplies and packaging. “Sustained demand for tax support in major economies, delays in commissioning new projects and vaccination penetration are expected to support polymer margins in FY 22,” the report said. The displays of polyester chains, after shrinking pre-covid, gradually recover. At this point, it is believed that China’s self-sufficiency decision is weighing on polyester spreads.
Backed by polymers which make up 45% of its petrochemical portfolio, RIL’s portfolio level spread is approaching its highest level in a decade and is 30% ahead of Jefferies’ estimates for the current year. “RIL’s Petchem segment, Ebitda, could be 50% ahead of Jefferies’ estimate of operating leverage earnings if current spreads were to hold on FY22E. This could lead to a 14% increase in our consol Ebitda estimate, ”the note added.
Sale of O2C stake to reverse underperformance
The Reliance Industries share price has underperformed the benchmark Nifty 50 since the start of this year. While the Nifty index rose 10.8%, Reliance Industries added 8%, the majority of which came in recent trading sessions. The stock has underperformed the benchmark even in the last one-year period. “In our view, a strong, sustained petrochemicals performance improves the likelihood of O2C divestment in FY22. This could lead to a reversal of Nifty’s 40% underperformance,” Jefferies said.
At current market prices, valuing RIL’s energy activity at long-term average multiples, Jefferies said he had Rs 1,150 per share left as the imputed value of RIL’s stake in Jio and Retail. Jefferies has a base target price of Rs 2,580 per share. However, a more optimistic upside scenario sets the target price at Rs 3,150 each. Here Jefferies expects strategic sale of stake in O2C business to re-value multiples, faster consolidation in telecoms leads to price hike at Jio and possible public listing of Jio valuation multiple. .