Morgan Stanley classifies RIL as top pick, new capex to double earnings

Taking Reliance Industries Ltd (RIL) as its top pick, Morgan Stanley said the company’s $50 billion investment in chemicals, 5G, retail and new energy over the next three years will double its earnings and increase investor confidence.

In its latest report Morgan Stanley said RIL’s fourth investment cycle this century with capex in chemicals, 5G, retail and new energy totalling over $50 billion over the next three years will double its earnings.

Further RIL’s capex will increase investor confidence on the $70 billion value creation pivot in the energy business, Morgan Stanley said while moving RIL’s scrip to its top pick category.

According to Morgan Stanley, the RIL’s investment cycles have unwound about 2-3x value creation for shareholders in the last two decades with every decade seeing approximately $60 billion in market cap creation.

Key to this has been RIL’s market share gains, complete integration and most importantly, ability to execute above investor expectations every time the company has reimagined its business.

“The investments in new energy, retail expansion to take marketAshare from unorganised sector and repurposing of existingAenergy businesses gives it a long runway to deliver earnings growth consistently even beyond the next three years,” the report said.

“We estimate 19 per cent EPS CAGR over F22-F25 with multiple triggers near and medium term across businesses,” Morgan Stanley said.

As per the report, Morgan Stanley sees significant upside potential in RIL’s NAV with compressed timelines on new energy monetization and refining upcycle, while petrochemicals should eventually surprise on the upside, especially as integration rises over the next few years.

“RIL’s integrated approach on solar panels and mobility/storage batteries, and focus on providing an alternative to China does stand out and we see up to $60 billion value creation in the new energy business by 2025,” the report states.

“Refining upcycle is key to cashflows and with the repurposing of assets (needle coke/carbon fiber, etc) and chemical integration, we believe not just earnings but also asset life will be elongated and support multiples by 2025,a the report notes.

According to Morgan Stanley, the fourth investment cycle is not only less aggressive in terms of investments (vs. size of EBIDTA), but it also reduces cyclicality in RIL’s cashflows and this should lower the cost of equity.

“Lower competition in telecom makes earnings there more predictable and retail is seeing steady growth. The new energy business is significantly less cyclical than RIL’s existing energy business, but we would note that even with energy, integration into chemicals and access to cheaper Middle East gas feedstock should also help reduce the cyclicality of returns,” Morgan Stanley said.

As per the report, RIL faced challenges in each cycle with impairments in gasifier, telecom spectrum and upstream shale assets in the past, and technology shift risks on new energy as a key risk.




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