 |
|
The recent volatility in Reliance Industries Ltd. (RIL) shares has prompted a reassessment from global brokerage house Goldman Sachs. Despite a significant 17 percent decline in the past year, Goldman Sachs believes the current sell-off is overdone and that the stock price has reached a level approaching its 'bear case' valuation. This assessment is reflected in their decision to maintain a 'buy' rating on RIL shares while simultaneously adjusting their price target downward to ₹1,595. This revised target, while lower than their previous estimate of ₹1,630, still suggests a substantial potential upside of 26 percent based on Thursday's closing prices. This positive outlook from Goldman Sachs is particularly noteworthy given its timing – it's the fourth positive brokerage note on RIL issued within a single week, following similar affirmations from Bernstein and Jefferies. These firms similarly highlight RIL's attractive valuation as a key driver for their optimistic forecasts.
Goldman Sachs' bullish outlook hinges on several key expectations regarding RIL's various business segments. Crucially, they anticipate a significant recovery in refining margins, a factor that has played a substantial role in the company's recent performance fluctuations. The brokerage further projects another round of telecom tariff hikes in fiscal year 26 (FY26) for Jio, the company's telecom arm, to boost revenue. A return to growth in the retail segment, driven by increased same-store sales growth (SSSG), also features prominently in Goldman Sachs' projections. Finally, the successful launch and operation of the new energy giga complex is considered a critical element in their positive outlook. While acknowledging that the anticipated return expansion has taken longer than originally predicted, Goldman Sachs maintains confidence in its long-term projections.
The brokerage's revised financial projections reflect a nuanced understanding of the challenges facing RIL. While maintaining a positive overall outlook, Goldman Sachs has adjusted its EBITDA estimates for FY25, FY26, and FY27 downward by 2.8 percent, 4.1 percent, and 3.9 percent respectively. These adjustments are attributed to a variety of factors. Updated expectations for refining margins account for a portion of this downward revision. A delay in the full commissioning of the petrochemical capacity expansion to FY27 represents another significant adjustment. Lower-than-expected telecom subscriber additions for Jio, and reduced growth in retail EBITDA due to management's strategic recalibration of the retail business, also contributed to the revised projections. Despite these downward adjustments, Goldman Sachs remains confident in RIL's overall growth trajectory, forecasting a 24 percent year-on-year increase in EBITDA for FY26, driven by factors such as large permanent capacity closures in the refining sector in calendar year 25 (CY25), broader macroeconomic improvements supporting retail sales, and progress in the new energy sector.
Goldman Sachs' Q3 FY25 earnings forecast provides a more granular view of their predictions for the near future. They anticipate a 5 percent sequential increase in RIL's core EBITDA, although this growth will be offset by a year-on-year stagnation. The energy segment's EBITDA is projected to remain flat quarter-on-quarter, with gains from improved refining margins balanced by weaker performance in the petrochemical segment. The brokerage specifically predicts a sequential increase in net GRM (Gross Refining Margin) to $8.7 per barrel, representing a 6 percent improvement, primarily driven by stronger supply-demand dynamics outside of China. In the telecommunications business, Jio Infocomm is expected to show robust growth, with a 6 percent quarter-on-quarter revenue increase and a significant 24 percent year-on-year EBITDA increase. Margin improvement is also predicted, rising to 54.7 percent from 53.1 percent in Q2 FY25. Jio is expected to reverse its subscriber decline, adding approximately 3.5 million subscribers during Q3 FY25. Goldman Sachs projects full-year FY25 revenue growth of 18 percent and EBITDA growth of 21 percent for Jio Platforms, with even faster growth of 44 percent in non-connectivity revenues.
The retail segment presents a more complex picture. While Goldman Sachs anticipates a 5 percent year-on-year sales growth, representing a rebound from the first half of FY25, same-store sales growth remains muted due to macroeconomic headwinds such as high food inflation and reduced urban spending. The restructuring and streamlining of retail operations, as announced by RIL's management, is expected to continue weighing on earnings through the fourth quarter. Despite these challenges, Goldman Sachs maintains its positive assessment, driven by their belief in the long-term potential of RIL's retail division. In terms of valuation, Goldman Sachs employs a sum-of-the-parts (SOTP) approach, valuing the refining and petrochemical business at 8.0x FY26 EBITDA, the offline retail segment at 33.0x FY26 EBITDA, and the high-growth technology, media, and telecom (TMT) business using a discounted cash flow (DCF) model with assumptions of a 10.5 percent weighted average cost of capital (WACC) and a 4 percent terminal growth rate.
Despite the optimistic outlook, Goldman Sachs acknowledges several key downside risks that could impact RIL's performance. These risks include lower-than-expected refining and chemical margins, weaker-than-expected ARPU (Average Revenue Per User) in the telecom segment, slower-than-anticipated market share gains and profitability in the retail business, potential delays in project execution, and the possibility of higher future capital expenditures. The management's strategic decisions and their impact on the retail business remain a key area of uncertainty. The success of the new energy initiatives and their contribution to overall revenue and profitability is another key risk factor. Despite these potential challenges, Goldman Sachs emphasizes RIL's diversified business model and highlights the significant growth potential across its various segments. Their belief that the current stock price represents an attractive entry point underscores their overall confidence in RIL's long-term prospects and potential for a strong recovery in the coming fiscal years.
Source: Reliance Industries: Goldman Sachs sees selling as ‘Overdone’, cuts target price