Reliance Industries rating – Overweight: M-cap could rise by $50 billion in 2022


We think RIL is on a path toward a $20 bn+ Ebitda run rate inflection, with five-pronged support: (i) Refinery margins could nearly double and be sustained at high levels for the next half decade, with global fuel markets seeing sustained lower supply due to a lack of investments. (ii) We see telecom ARPUs rising, quality of subscribers improving, and churn falling; RIL guided for normalisation ahead as one recharge cycle is behind. (iii) The global gas market could tighten further as producer discipline remains and rising domestic gas production and an uplift in ASPs in Q3FY22 inflects Ebitda. (iv) Rising traction on digital commerce with 193 mn subscribers and consistent 20% revenue contribution should expand margins. (v) Superior petrochemical spreads in olefin and PVC as global cost curves are uplifted, and supply should add to unwinding.

Investors appear highly skeptical, especially on sustainability of the energy upcycle and potential demand destruction, but we see enough buffers on demand/global inventories along with supply discipline to drive multi-year outperformance. The new energy business, along with the five-pronged tailwind, could add $50 bn in market cap in 2022, in our view.

Chairman comments on new energy: “…particularly happy with the progress our company is making in the New Energy and New Materials business. We are forging ahead with the development of our New Energy Giga Factories complex across 5,000 acres in Jamnagar.” We believe this highlights what we view as a value creation opportunity as big as its digital business. Also, the merger with new energy business points to synergies between the two.

RIL reported earnings slightly higher than our and consensus estimates. We have seen 5% consensus earnings upgrades for RIL YTD, and expect another further 10-12%.

Refining Golden Age+ chemical upcycle: Product cracks for key fuels have more than doubled and imply ~$19/bbl GRMs for RIL, despite higher crude OSPs and crude oil loss. We estimate that the global refining industry could fall short by one refinery annually in the years ahead as the threat of “peak oil demand” has led to an extended period of underinvestment. With new project slippages and demand growth, margins should remain elevated.