Reliance Industries' net debt may peak in FY24 and that concerns are it are largely overdone, says brokerage JM Financial as it suggests a target price of Rs 2,900 for the oil-to-telecom major. Shares of Reliance Industries have fallen 3 per cent year-to-date and 11 per cent in the past one year. This is against a 3 per cent rise for Sensex in 2023 and 14 per cent jump in the last one year.
Reliance Industries share price, JM Financial said, was very close to its worst-case value when it came out with its last update in March and that the key debates with investors since then have been on potential triggers that could actually drive a decisive rerating in the stock.
The key arguments against a re-rating were that there are limited earnings-upgrade triggers for now, low visibility on event-based triggers in the near term (listing of digital and retail businesses or strategic stake sale in clean energy or O2C businesses) and concerns over high capex and resultant rising net debt.
Besides, there are concerns of a likely delay in telecom tariff hike to mid-2024 (post the national elections) and uncertain macros globally, which could cap O2C margins.
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RIL's net debt in FY23 rose to Rs 1,10,200 crore or 0.8 times reported net debt-to-Ebitda. Adjusted net debt (including spectrum and other liabilities) had gone up to Rs 2,73,200 crore or 1.9 times adjusted net-debt to Ebitda.
This is due to the company’s aggressive capex, with FY23 capex soaring to Rs 2,29,900 crore (or Rs 1,41,800 crore excluding Rs 88,000 towards 5G spectrum).
"The concerns on debt are overdone, in our view. We expect RIL’s net debt to peak in FY24 and then decline gradually as capex will not only moderate (Rs 1.2-1.4 lakh crore per annum against Rs 2.3 lakh crore in FY23) but, importantly, also be fully funded by a gradual increase in internal cash generation," it said.
JM Financial said Reliance Industries guidance on keeping reported net debt to Ebitda below 1 times also gives it comfort.
"Be that as it may, we believe RIL could still drive a robust 14-15 per cent EPS CAGR over the next 3-5 years with Jio’s ARPU expected to rise at 10 per cent CAGR over FY23-28, and continued strong momentum in Retail including scale-up of new initiatives (FMCG foray, inorganic growth, etc.)," it said.