Oil-to-telecom conglomerate Reliance Industries hit a fresh record high of Rs 1,647.85, advancing 2 per cent, on the BSE on Tuesday. So far in the financial year 2020-2021 (FY21), the stock has outperformed the frontline S&P BSE Sensex by surging 46.5 per cent till Monday, June 15, as against a 13 per cent rise in the benchmark index, ACE Equity data show. From its recent low in March 2020, the rally has been even sharper with the stock clocking in a gain of around 80 per cent.

The recent rally has been fuelled by the Mukesh Ambani-controlled firm’s ability to garner 10 back-to-back foreign investments in its subsidiary, Jio Platforms, for a whopping Rs 1.04 trillion. Till June 13, Jio Platforms has raised a total of Rs 104,326.95 crore in 10 deals with leading global investors – Facebook, Silver Lake, Vista Equity Partners, General Atlantic, KKR, Mubadala, ADIA, TPG and L Catterton.

But the rally in the stock price may not be over just yet. According to Morgan Stanley, multiple triggers – asset sales, pickup in energy cash flows, increased traction in omni-channel retail and rise in telecom average revenue per user (ARPUs) – could further drive the stock.

“One-year forward price-to-earnings (P/E) and price-to-book (P/B) are now near peak cycle levels, but return on equity (ROE) and earnings growth are significantly higher than history and peers,” wrote Mayank Maheshwari, equity analyst at the firm, along with Parag Gupta and Sulabh Govila in a June 16 report.

What will drive the stock?

Monetisation of the remaining assets, after the sale of nearly $14 billion of assets and Rs 53,000 crore rights issue, would cut the net debt to near zero, says Maheshwari.

“We see potential debt reduction of nearly $22 billion in the next nine months given the completion of sale of a 50% stake in retail fuel stations to BP; completion of stake sale in Jio Platforms and tower InViT stake sale; positive free cash flows (FCF) generation from steady energy utilisation and slowing investments. The on-track sale of a stake in the oil to chemicals business to Saudi Aramco and remaining rights issue proceeds should also further reduce liabilities,” he adds.

While the Street is discounting-in debt reduction on the digital side, analysts at the brokerage believe, it is not factoring-in a recovery in demand after Covid-19 in consumer retail domestically and refined products globally. This, they say, is the second trigger for the potential upmove, while expecting RIL to garner $2-2.5 billion in free cash flow in FY21 .

“Refined product demand in India and globally is picking up more quickly and petrochemical demand has been more resilient than we expected. RIL's refinery run rates had remained high in the last quarter as it shifted volumes to export markets. We believe the rise in domestic sales should normalise margins in coming quarters apart from improving utilisation rates,” they say.

The third trigger, according to the research house, is RIL’s focus on small and medium scale enterprises amid the Covid-19 pandemic, which may look at digitisation in near future. According to Morgan Stanley, the partnership with Microsoft, a memorandum of understanding (MoU) with Facebook, and its offline retail infrastructure will not only raise revenues for digital, but will also support retail business gain share of the consumer wallet.

Those at Goldman Sachs pegs the firm’s grocery retail gross merchandise value (GMV) at $83 billion by FY29, up from $5 billion in FY20 due to continued store expansion-driven market share in the offline grocery, and rapid expansion of the total available market (TAM) in online grocery. Moreover, they expect the retail business EBITDA growth of 5.6x between FY20-29.

CLSA, too, remains bullish on the stock and suggests success in ecommerce, the closure of the InvIT stake sale, more stake sales of Jio and progress in the Aramco deal are the triggers.

"Recent partnerships with Facebook-owned WhatsApp for JioMart will only help in increasing monetisation opportunities by increasing the convenience and reach of consumers," wrote Vikash Kumar Jain and Surajdev Yadav of CLSA in a May 26 co-authored note.

Morgan Stanley maintains an ‘overweight’ on the stock with a target price of Rs 1801, while Goldman Sachs has ‘buy’ call with a 12-month target price of Rs 1,755.

“Our price target reflects lower debt after the rights issue, stake sale in Jio Platforms, and higher operating cash flow. We also roll our valuation forward to F22 across business to look at post-Covid-19 normalised earnings and multiples,” says Morgan Stanley.

Word of caution

That said, Maheshwari says higher cash burn as RIL ramps up online retail sales, potential holding company discount affecting multiples, and slower recovery in refining margins may act as key risks to the potential upside.

“In F4Q20, while RIL showed 33 per cent sales growth in January/February 2020, it ended the quarter with only 4 per cent growth because of the decline in March 2020 caused by shutdowns. This highlights the challenges for the next few quarters in retail. However, we expect some of this impact to be offset by higher grocery revenues and potential rental adjustments with mall operators,” he says.