Morgan Stanley on Reliance Industries share price - overweight rating, price target Rs 2252

Reliance Industries demerger plan for Oil to Chemicals (O2C) business is a step towards monetisation and acceleration of its new energy and material plans into batteries, hydrogen, renewable and carbon capture - all of which point to the next leg of multiple expansion and clarity on the next investment cycle. Morgan Stanley maintains an overweight rating on Reliance Industries with a price target of Rs 2252.

The reorganization will lead to Reliance Industries carving out the O2C business as a separate subsidiary and supporting strategic partnerships and new investors in the business. In the presentation, Reliance Industries for the first time highlighted more details on key pillars to achieve this target. While most plans were inline with Morgan Stanley’s expectations of investments in renewables,hydrogen, batteries,niche chemicals/materials and focus on recycling/circular economy, the focus to use/ capture CO2 stood out and implies carbon capture investments ahead.

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With this reorganization, Reliance Industries will have four growth engines- digital, retail,new materials and new energy. While the market appreciates the value for the first two businesses we see significant upside risk to earnings and multiples for O2C as Reliance Industries invests in new energy/technology.

The reorganization:

The refining, petrochemicals, fuel retail JV with BP and trading operations will be in the O2C business and it will be a 100% subsidiary of Reliance Industries. They will provide a loan of US $25 bn to O2C subsidiary at floating interest rate with the subsidiary having US$42bn of assets, i.e 28% of consolidated assets. Morgan Stanley does not see the reorganization impacting consolidated financials and Reliance Industries had US $5 bn of net debt and US $11 bn in non-current liabilities including spectrum, creditors amongst others as of Jan-21.

Is Reliance Industries back in an investment cycle?

Reliance Industries is embarking on its journey to address the US $800 bn TAM in organised retail and e-commerce, > US $300 bn in chemicals, and US $50 bn+ in new energy (renewables) as demand shifts from oil to alternative fuels. Reliance Industries's net debt in the next investment cycle will be a lot more measured (vs. the past cycle, where it doubled its asset base in 7 years) as it takes the partnership/JV route. How Reliance Industries allocates the US $125 bn growth capital it generates this coming decade will be key for investors looking beyond the near term, in Morgan Stanley’s view. If a third of the investment comes via partnerships, Reliance Industries would be FCF-positive despite the capital outlay.