RIL’s improving energy segment prospects lead to multiple upgrades

Goldman Sachs recently revised RIL’s earnings before interest, taxes, depreciation, and amortization (Ebitda) estimates upwards by 11% and 5% for FY23 and FY24, respectively, citing the positive outlook on old energy businesses such as petroleum refining and gas.

“RIL’s energy business is best-in-class, with the highest complexity globally and lowest cost structure driving stable and higher margin capture versus peers,” Goldman Sachs analysts said in a 10 April report.

Increase in gas production at the KG basin and a significant rise in domestic natural gas prices augur well for RIL’s earnings growth, they said. Natural gas prices for the first six months of FY23 have more than doubled from $2.9 per million British thermal units (mmBtu) to $6.1 per mmBtu, effective 1 April.

RIL’s refining margins are also improving with rising demand in Asia. Goldman Sachs analysts said refining tailwinds will sustain considering the improved supply-demand from closures and jet fuel demand recovery, besides lower exports from China, low inventory and supply disruptions amid the Russia-Ukraine crisis. Besides, with a higher market share in consumer businesses, such as telecom and retail, medium-term growth is intact. Goldman Sachs expects 35% compound annual growth rate in FY21-24, compared with the earlier estimates of 26% above consensus.

Morgan Stanley, too, maintained a bullish outlook for RIL. In an 8 April report, its analysts said consensus FY23 and FY24 estimates are up by 2-3% since January, and that they “still see potential for more than a 10% EPS raise on stronger conviction in energy markets”. The brokerage maintained a positive stance on the company’s refining business, and other business segments saying that the inflexion in refinery margins, and normalization in profitability of chemicals portfolio and doubling of average selling price of gas are multi-year shifts that have not yet been factored in the base case estimates. Also, the shifts more than offset challenges in digital business and cost inflation in the retail business, it added.

RIL’s aggressive expansion plans in the new energy space, including solar, green hydrogen and battery, are also garnering a lot of optimism. The new-age initiatives have the potential to replicate the success of Jio and Retail said analysts at Motilal Oswal Financial Services. Edelweiss Securities Ltd analysts said new energy verticals fortify its position in the Indian energy space, builds on its booming oil-to-chemicals portfolio and raises the zero-emission scale, decisively raising the value of the new energy business to $13 billion.

“For RIL, strong cash flow generation in the best-in-the-class old energy business can fund the capex of new energy business and in turn drive one of the fastest and most profitable net-zero transitions by 2035,” said Goldman Sachs.