Citi Research has raised its share price target on Reliance Industries Limited to Rs 3,170 from Rs 2,750 and further upgraded its rating on RIL to “buy” from “neutral” as it expects its refining margins to hit new highs. “Despite the recovery from the recent February-March lows, RIL has underperformed the broader market by more than 20 per cent since mid-2020. We downgrade in 2020 as key triggers have come into play, mainly concentrated B/S deleveraging and value release in Jio and retail when earnings momentum is weak due to the impact of the pandemic on O2C and retail,” Citi said in a research note published on April 26.

“With refining margins reaching new highs and likely to find support at higher levels, we expect consensus earnings to rise in FY23 (we lead 12 per cent) and likely spill over into FY24,” it said. While the upcoming Q4 results may not bring any material benefits to O2C due to weakness in petrochemicals, the first quarter of 2022-23 should take better advantage of the prevailing refining margins, the report said.

“As such, any stock correction should provide more buying opportunities. We raise FY23-24 EBITDA by 3-9 per cent, raise our target price from Rs 2,750 to Rs 3,170 (+15 per cent), and upgrade to Buy into,” it added. Additionally, a likely consensus earnings upgrade from solid refining margins, key catalysts cited by Citi in its report include telecom tariff hikes, announcements on new energy at the upcoming AGM, retail traction, especially at JioMart, and currency, i.e., the potential listing of Jio, the monetisation of retail and other assets such as gasification.

The transformation of RIL from an energy-focused company to a consumer-focused digital company is remarkable. Jio and retail contributed 49 per cent of consolidated EBITDA in FY21, up from 35 per cent in FY20. The sale of significant stakes in Jio Platforms and Reliance Retail to high-quality strategic and financial investors, together with the rights issue, helped the company achieve its zero net debt target ahead of schedule, which is impressive.
“We now expect RIL to benefit from a stronger refining outlook given refinery complexity and export market exposure,” Citi said.

While most of its earnings come from downstream refining and petrochemical (O2C) businesses, consumer businesses such as telecommunications and retail are now significant earnings and value drivers. “Jio should continue to benefit from consolidation and improved pricing in the Indian telecom market, while strength in retail and upstream gas adds to the positives.

New energy investments in the coming years, if supported by strong execution and a favourable domestic market, Could be a long-term value driver and open up further monetisation opportunities. However, the gains here may be more of a back-end,” it said.