JP Morgan says it sees RIL as relative outperformer in CY23

MUMBAI : JP Morgan on Thursday said it sees Reliance Industries (RIL) as a relative outperformer in the calendar year 2023 (CY23) in what could be a sluggish earnings environment overall, but see multiple potential catalysts over CY24-25 to help drive absolute outperformance.

The financial services company said it sees continued strength in the refining business, a likely rebound in petrochemicals (petrochem) spreads from decadal low levels from China re-opening, and volume growth in exploration and production (E and P) - driving earnings growth.

According to JP Morgan, RIL continues to offer multiple growth options across businesses (petrochem, E and P, telecom, retail, financial services, new energy) and ongoing investments should drive the next leg of growth.

"RIL's ongoing capex/investments should allow it to scale up its (already industry-leading) petrochem, telecom and retail segments. New energy is likely a multi-year opportunity, but we do not see it as material to the investment case for next 12-18 months," JP Morgan said in a note, adding, "We expect this year's AGM to focus on Jio Financial Services (JFS)."

It said Jio's 5G should drive the next leg of growth; while non-telecom been slow so far, should pick up. "Jio should have a relatively soft FY24 as we do not expect telecom tariff hikes," it added.

According to the note, JP Morgan said it continues to see subscriber growth, and the company's mega 5G (capital expenditure) capex positions it well. "Jio's 5G launch (currently available across 134 cities and a pan-India rollout by December 23) and the company's plans to connect 100 million homes via Jio Fiber and Jio Air Fiber should allow for material ARPU increase (blended basis) over the coming years," it said.

JPM's Telecom Analyst Ankur Rudra said that Jio was changing focus from low-end subscribers to the higher end and will be attacking high-end subs. "We assume no telecom tariff hike from FY24; energy and E and P to aid the performance."

In JP Morgan's view, RIL is among the best positioned refiners globally in the current environment of strong product cracks. "RIL's refining strength comes from the diesel-heavy production slate, export-focused refineries, and the ability to purchase and process 'arbitrage barrels' which have a discount vs benchmark oil," the note said, adding, "Although we build in a conservative earnings estimates, with a sharp decline in refining margins (vs CY22 average), overall we expect RIL's refining business should deliver strong."

In terms of Ebitda as compared to the previous years, JP Morgan said, "RIL's MJ field development is on track and production should start by the end of FY23. Overall, with the new fields entering production, volumes should pick up materially in the India E and P segment." It said realisations should also remain supported as the ceiling formula reset translates into higher prices.

"The overall E and P segment, while small in the overall Ebitda mix (FY22 E&P Ebitda was 5 per cent of consolidated Ebitda), should report strong Ebitda growth in FY23-25, on our estimates, driven by volumes and elevated prices, and the Ebitda (Earnings before interest, taxes, depreciation, and amortisation) contribution should increase to more than 10 per cent of consolidated Ebitda.