However, over the past few months, the unsung businesses of the conglomerate have been driving the stock price. In the past three months, shares of India’s largest conglomerate have risen over 21 per cent, partially led by the improving outlook for the company’s refining and petrochemical business, its organised retail operations and prospects of minority stake sale in the energy business.
Analysts said going ahead, it is the less-talked-about refining and petrochemical business that will do the heavy lifting for the company’s stock and earnings. RIL still generates close to two-thirds of its revenue from the oil-to-chemical business and over 50 per cent of its operating profit.
Amidst the glitz and glam of the telecom and retail businesses as well as the heavy impact of the Covid-19 pandemic, the refining and petrochemical businesses have been dubbed as a drag on the company’s earnings.
“Assuming no fresh setback from Covid-19, we see room for a consensus upgrade in RIL’s O2C segment,” brokerage firm Jefferies India said in a recent note.
The petrochemicals business, in particular, is witnessing sunnier days after the traumatic last two years caused by a global slowdown in petchem sector and the Covid-19 pandemic. With the domestic economy rapidly opening up and demand surging, prices of key polymers are showing a widening of premium over the import parity price.
In addition to the domestic demand, the supply shortage in the Chinese chemicals industry due to the ongoing power crisis is also boosting prices for domestic producers such as RIL. It, therefore, won’t be a stretch to suggest that the cash-generating petrochemical business will most likely steal the show in the company’s earnings for the September and December quarters.
Refining, the other half of the legacy business and by far the biggest revenue contributor, is also seeing an improvement in conditions, thanks to a surge in demand for transportation fuel caused by the reopening of the global economy.
Last year, RIL had sought refuge in the export market for its refining products, as domestic demand became lacklustre owing to Covid-19 restrictions. However, benchmark Singapore gross refining margin more than doubled since the end of the first quarter, whereas light and heavy crude differential is now at a two-year high.
“Our calculations suggest RIL’s current GRM has improved by $2.4 since end-1QFY22 based on the improvement in underlying product spreads,” Jefferies India said.
On the valuation front, RIL’s shares remained reasonably priced at 30 times 2022-23 earnings estimate. The stock has largely remained a minor participant in the Nifty50’s rally from 12,000 points to nearly 18,000 points currently.
The lacklustre show of the RIL stock between October 2020 and July 2021 was also reflected in the fact that out of the 31 analysts that cover the stock, only 13 had “buy” calls while seven had “hold” ratings, as more brokerages tempered their enthusiasm for the company.
“Considering that everything is expensive, Reliance is relatively more reasonably priced among the blue chips,” Gurmeet Chadha, co-founder and chief executive officer at Complete Circle Consultants, told ETNow in a recent interview.
