Jio Financial Services Will Drive Up Reliance's Share Price Next Year, Says J P Morgan

Multinational investment bank J P Morgan expects the country’s most valuable firm Reliance Industries Limited's (RIL's) earnings to improve starting next calendar year. It has an 'Overweight' stance on the stock for target price of Rs 3,065 by the end of 2023, indicating an upside of 16 per cent from Thursday's closing price.

In a report authored by J P Morgan analysts Pinakin Parekh and Sarfraz Bhimani, the investment bank expects that its petrochemicals, exploration & production (E&P) and retail businesses will pick up further, while refining business will remain stable and Jio will benefit from tariff hikes.  

J P Morgan expects that the next year for the billionaire Mukesh Ambani-backed oil-to-telecom conglomerate will most likely be about Jio Financial Services (JFS) and its consumer businesses - Jio and Reliance Retail.

“After three years of large outperformance in CY17-20 (driven partially by the global tech rally), RIL underperformed the Nifty in CY21 and has modestly out performed year to date (YTD) in CY22. Going into CY23, we expect another year of relative outperformance especially if the markets remain choppy and RIL’s underlying earnings improvement comes through,” J P Morgan said.

“RIL is currently in another mini capex cycle across Petrochem, Telecom (Jio), New Energy even as the ramp-up of non-telecom initiatives in Jio and continued ramp-up of new initiatives in Retail (Digital, FMCG launch) continue. The full impact of all these spending initiatives should be seen from CY24 onwards. In our view, how JFS is rolled out would be a key driver for the stock price in CY23, as current expectations remain low,” the global investment bank said.

Parekh and Bhimani added, “Our conversation with investors indicates that investors are unwilling to ascribe a material value to JFS at this point given that most of the businesses still need to be built out. The official demerger should take up to a year in our view, and over the next 12 months we would expect RIL to build out the overall JFS business via both organic and acquisition steps. We currently value JFS at the RIL treasury stock value (1x), and the next 12 months, depending on how RIL builds out and scales up JFS (organic/acquisition), should determine how markets value JFS. Every 1x turn higher on the RIL treasury stock adds Rs 190 to our fair value.”

J P Morgan views JFS demerger as a major positive for the company as it would allow RIL shareholders a direct play on India’s fast growing digital fintech market, via an entity which would be able to leverage RIL’s vast footprint across telecom and retail.

“For example in the Retail business, RIL currently has 16,617 stores across formats and categories in its Retail business. RIL’s Retail business is the industry leader across Retail categories. This large footprint gives JFS a material advantage. RIL’s telecom footprint (Jio) and Retail footprint should allow for faster rollout of JFS,” J P Morgan explained.