RIL's growth clarity has improved: Morgan Stanley report

Last Updated: Wed, Sep 25, 2019 12:07 hrs
Mukesh Ambani

Mumbai: Conglomerate Reliance Industries' earnings growth clarity has improved with better refining margins, lower tax rate and cheaper gas feedstock costs along with a steady rise in telecom subscriber, a Morgan Stanley Research report said.

According to the research note, rise in refining margins with improved demand and slower capacity growth as well as cheaper gas costs among other factors will function as key tailwinds for growth in 2020.

"We turn more bullish on Reliance Industries as earnings growth clarity improves with better refining margins, lower tax rate and cheaper gas feedstock costs. This, combined with a reduction of balance sheet leverage, should de-risk earnings growth and increase investor confidence on the 17 per cent earnings CAGR seen for F2019-22e, which is among the top quartile vs. its regional energy and telecom peers," the research note said.

"As we approach IMO implementation on January 1,2020, diesel margins have risen 9 per cent YTD since end-2018 and gasoline margins have improved as refineries try to maximise diesel output by lowering gasoline output. As well, cheaper gas prices should keep RIL's operating cost inflation low."

On the impact of corporate tax rate reduction, the report said: "We estimate a 400bp reduction in the consolidated tax rate RIL's businesses paid in F2019 of 29-35 per cent, much higher than the new corporate tax rate of 25.2 per cent".

"RIL also has deferred tax liabilities of US$6.5bn as of F2019, which could reduce with a lower tax rate."

Overall, the firm has raised its earning estimates by 7 per cent for F2020 and 12 per cent for F2021.

Additionally, the report said that as shippers prepare for IMO, Asian refining margins have risen and diesel, which forms nearly half of RIL's refined product output, has seen near-record high margins.

It estimated RIL's refining margins to increase by $1.8 per bbl over the next 12 months and drive nearly half of the earnings growth "we expect over F2019-21".

Additionally, Morgan Stanley Reasearch gave a bullish price target of Rs 2,000 per equity share for RIL based on the assumption that refining capacity additions slow, leading to 30 per cent higher margins than in base case where share target price has been kept at Rs 1,469.

Other assumptions for bullish price include 10 per cent higher chemical division margins, as paraxylene supply surprises on the downside; 6-8 per cent CAGR in telecom ARPU; progress on asset monetization.

Higher price target may be good news for Saudi oil giant Aramco that is negotiating 15 per cent stake in RIL's oil to chemical operations. Rising valuations and share will help improve return on investment for the investing company.

RIL shares closed 3.22 per cent higher at Rs 1,278.55 a share on BSE.