InvestorQ : Why has UBS given an aggressive upgrade to Reliance Industries stock?
Arti Chavan made post

Why has UBS given an aggressive upgrade to Reliance Industries stock?

Rutuja Nigam answered.
3 weeks ago

There has been a big upgrade of Reliance Industries by UBS Securities and it goes up being neutral to buy call. This call was made after Reliance Industires declared its June quarter results for Q1FY23. UBS has done two action points. Firstly, it raised the call of UBS on the stock of of RIL from Neutral to “BUY”, which is a lot more affirmative positivity in action. Secondly, it has set a rather generous price target for Reliance Industries which is in the range of Rs2,900 on the lower side and at Rs3,150 on the higher side.

For a stock that is already trading at around Rs2,422 and has been one of the super performers of the last 3 years, that is an aggressive price target to set. If you look at the current target range provided by UBS Securities, then the conservative level upside target stands at an impressive 19.74% from the current market price. If you consider the more aggressive upside target, the returns could be closer to 30.05%. That implies substantial upside room for investors on Reliance Industries over the next 12 months.

There have bene several triggers for this upgrade by UBS Securities on Reliance Industries. The first trigger and also the most important trigger has been the new investment opportunities to deploy large cash flows profitably. Its O2C business is being positioned as the green energy business and the global opportunity in that space is closer to $20 trillion. That is a huge playground for RIL to bid for. Their opportunity matrix includes renewable energy, batteries and hydrogen. RIL is planning Net Zero emissions by the year 2070.

What has induced this upgrade by UBS Securities is that the New Energy business of Reliance Industries can invest around $36 billion in new energy related initiatives over the next 10 years. Due to the absence of granular details, this even is not factored into the price. Evenif the new energy opportunity adds a conservative $35 billion in market cap to Reliance Industries by FY30, it is huge. Discounting that back to FY24 estimates, it approximately translates into a value-add of Rs234 per share to the SOTP valuations, which raises target.

In value terms, new energy is just about one-third of the Reliance valuation franchise. There is retail and digital ventures of Reliance and both verticals are expected to grow much faster. UBS believes once the outcome of 5G auctions are known, the real value scaling of Reliance Digital business would start showing on valuations. In addition, the complete plan of the retail business is to create the end to end retail value chain ecosystem. This is extremely value accretive and is likely to get factored into valuations with more clarity.