Why have brokers upgraded Reliance and what is changing about the stock?

In the last few days, a slew of brokers like JP Morgan, Morgan Stanley and Jefferies have upgraded the target price of Reliance Industries. JP Morgan went to the extent of upgrading Reliance rating from “neutral” to “Overweight” with a price target of Rs3,170 crore. Since the current stock price of 2,498, that translates into potential upside returns of 27% on the stock. Not to forget, RIL has already outperformed the Nifty index by 21% since the start of calendar year 2022. Reliance has benefited from robust gross refining margins (GRMs).

There is also an EPS upgrade of Reliance Industries by JP Morgan. For instance, the FY23 EPS estimates of Reliance have been raised by JP Morgan by 19% for FY23 and 17% for FY24. This is based on the premise that there would be a sharp pullback in diesel and gasoline cracks. However, RIL was best positioned to buy and process arbitrage barrels. With crude at multi-year highs, Reliance upstream business was an automatic beneficiary and that could result in premium valuations for the company in the coming quarters.

That is how the story is adding up gradually for Reliance Industries. Firstly, oil extraction will substantially benefit from higher crude prices. That is already a global trend. Additionally, the oil refining business will also gain from improved gross refining margins per barrel. RIL is also rapidly ramping up its oil retail business . While retail is contributing to valuations and top line, the real driver is the Jio Platforms business on the back of a sharp spike in the average revenue per user (ARPU). Of course, the green hydrogen project will also add value.

For now, all eyes are on the Reliance Industries AGM and there are several expectations that the markets have from Reliance at this juncture. They expect a big announcement on the future of its O2C business, focus on green hydrogen, consolidation of its string of inorganic acquisitions in the last few months etc. One thing that will play in the back of the minds of the Reliance group during the AGM would be that the Adani Group has been moving very aggressively and are targeting almost similar lines of high growth businesses.