Brokerage gives ‘buy’ for Reliance Industries, says concern on debt are overdone

The brokerage, JM Financial said that Reliance Industries share prices were very close to our worst-case value, the key debates with investors have been on potential triggers that could actually drive a decisive rerating in the stock. 

The key arguments against a re-rating were that there are limited earnings-upgrade triggers for now, low visibility on event-based triggers in the near term (viz., listing of Digital and Retail businesses or strategic stake sale in Clean Energy or O2C businesses), and concerns over high capex and resultant rising net debt.

RIL’s net debt in FY23 rose to ₹1,10,200 crore or 0.8 times reported net debt-to-Ebitda. Adjusted net debt (including spectrum and other liabilities) had gone up to ₹2,73,200 crore or 1.9 times adjusted net-debt to Ebitda.

This is due to the company’s aggressive capex, with FY23 capex soaring to ₹2,29,900 crore (or ₹1,41,800 crore excluding ₹88,000 towards 5G spectrum).

“The concerns on debt are overdone, in our view. We expect RIL’s net debt to peak in FY24 and then decline gradually as capex will not only moderate ( ₹1.2-1.4 lakh crore per annum against ₹2.3 lakh crore in FY23) but, importantly, also be fully funded by a gradual increase in internal cash generation,” it said.

JM Financial said Reliance Industries guidance on keeping reported net debt to Ebitda below 1 times also gives it comfort.

“Be that as it may, we believe RIL could still drive a robust 14-15 per cent EPS CAGR over the next 3-5 years with Jio’s ARPU expected to rise at 10 per cent CAGR over FY23-28, and continued strong momentum in Retail including scale-up of new initiatives (FMCG foray, inorganic growth, etc.),” it said.

JM Financial said Reliance Industries guidance on keeping reported net debt to Ebitda below 1 times also gives it comfort.

The brokerage said RIL’s net debt to peak in FY24 and decline gradually thereafter as capex is likely to be fully funded via a gradual rise in internal cash generation. 

“We expect RIL’s adjusted net debt to peak by end-FY24 at ₹2,768 billion or 1.8x adjusted net-debt to EBITDA before moderating to ₹2,315 billion, or 1.1x adjusted net debt to EBITDA, by end-FY26. Similarly, reported net debt is likely to peak at INR 1,249bn, or 0.8x reported net-debt to EBITDA, by end-FY24. We draw comfort from RIL’s guidance that reported net debt to EBITDA is likely to remain below 1x (vs. 0.8x at end-FY23),” said JM Financials

Updated: 10 Jun 2023, 09:44 PM IST