InvestorQ : Why has Morgan Stanley upgraded Reliance to a top buy in its India portfolio?
Arusha Ray made post

Why has Morgan Stanley upgraded Reliance to a top buy in its India portfolio?

4 weeks ago

Morgan Stanley has identified Reliance Industries as its top pick in the Indian equity space. It has also raised its price target for Reliance Industries from Rs3,015 to Rs3,085, an upside of almost 20% from current price levels. The major bet of Morgan Stanley is on the fourth phase of the investment cycle of Reliance Industries. Morgan believes, this phase will be less aggressive in terms of investment intensity and also expects gradual reduction in the cost of equity. Now, the digital business and retail business are more predictable and less risky.

Morgan Stanley also feels that this time around the capital cycle is better funded. Hence, this phase of the investment cycle will entail lower balance sheet leverage. Among other reasons why Morgan Stanley is positive on Reliance include rising ARPUs in the telecom and digital business, scaling up of the grocery and the FMCG business as well as much quicker monetisation of new energy. The refining, telecom and chemicals business are likely to drive 18% CAGR in EPS for the fiscal year FY24 and generate free cash flows of $16 billion.

Morgan Stanley also sees other advantages for Reliance Industries like the higher diesel margins and much better tariff realizations for Jio from the 5G business. In addition, factors like the higher domestic gas production and higher chemical demand from China could put the oil to chemicals or O2C business in a sweet spot. Control over the green energy cycle will give Reliance greater control over the supply chains and the demand chains of O2C. ARPUs are likely to be elevated at around Rs194 per month on an average in FY24.