Reliance Industries May Add $100 Bln In Value, Morgan Stanley Says

Morgan Stanley said Reliance Industries Ltd. (RIL) is in its fourth monetization cycle this century and the Indian conglomerate may add as much as $100 billion (bull case) in value as business cycles inflect, new cash flow streams emerge, and valuation multiples catch up.

The brokerage raised its base case target price on Overweight-rated RIL to 3,540 rupees from 3,046 rupees per share. The stock provisionally ended at 3,123 rupees on the National Stock Exchange today.

The oil-to-telecom conglomerate’s monetization cycles have delivered about 2-3x value creation for shareholders in the past nearly three decades, with each decade seeing over $60 billion in market cap creation, Morgan Stanley said in an investor note.

The brokerage said key to this has been RIL's market share gains, complete integration, and most importantly, ability to execute above investor expectations each time the company has re-imagined its business. This monetization follows the $60 billion in investments in 2021-2023, which was the shortest investment cycles since 1990s for RIL, it added.

“Investments made in new energy, retail expansion to take market share from the unorganized sector, and repurposing of existing energy businesses provide a long runway to deliver earnings growth consistently even beyond the next three years should ROCE be sustained above 10%,” equity analysts Mayank Maheshwari and Gaurav Rateria said in the investor note.

The brokerage expects a 12% EPS CAGR over FY24-FY27 with multiple triggers across verticals.

Morgan Stanley said its key takeaways are:

• RIL's fourth monetization cycle (since 1997) should add up to $100 billion to $60 billion increase in market cap year-to-date.

• Monetization 4.0 is different as it is supported by the business upcycle, domestic demand, and lower competition.

• "Growth is Life" -- RIL's tag line remains in play, and cash flows from this monetization concurrently are being invested into new energy and new chemicals.

Morgan Stanley said multiples have behaved differently across each of the past three investment cycles.

The brokerage said it sees RIL’s ROE being higher than cost of capital going forward as the Mumbai-based company is transitioning to a more profitable, sustainable, and less cyclical growth model due to changes in business as well as capital structure.

Morgan Stanley said raised its multiples by 0.5-1.0x to reflect this monetization as RIL catches up with domestic and global peers that have seen the business upcycle and monetization re-rate multiples by around 30% in the past year.

The brokerage’s Overweight thesis is based on:

• An earnings upgrade cycle is taking hold with the new investment cycle raising quality of earnings and returns catching up with cost of capital steadily.

• Monetization cycles are getting shorter versus past cycles as well.

• Supply-side challenges should keep refining margins high, while chemicals margins are recovering from trough.

• Broadband subscribers are picking up; telecom tariffs hike in FY25.

• Consumer retail should see traction as a large part of the store expansion and acquisition of brands are completed.

• Capital intensity in the fourth investment cycle has peaked. Although annual investments may remain near $16 billion annually, net debt should slowly decline.

Morgan Stanley has a target price of 4,377 rupees on RIL, based on its bull case scenario assumptions.

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