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Mukesh Ambani-Led Reliance Industries Gets A Rare ‘Sell’ Rating

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The $60 billion Reliance Industries Ltd. spent expanding pet coke, gasification, petrochemicals and telecom businesses in five years will not start generating cash anytime soon to help it pare its debt.

That’s what UBS expects as it initiated coverage on the company led by India’s richest man Mukesh Ambani with a ‘Sell’ rating and a target of Rs 870 apiece. That’s about 8 percent below the Monday’s close.

RIL now has six analysts recommending a ‘Sell’ compared to 29 ‘Buys’ and seven ‘Holds’. Shares of the owner of world’s largest oil refinery have surged 76 percent in the last one year.

RIL’s expansion is expected to more than double its operating income to Rs 1 lakh crore in four years to March 2021, UBS estimates. Yet, the additional $29 billion capex on exploration and Reliance Jio Infocomm Ltd. and stabilisation of costs over four years to March 2022 will delay debt reduction.

The company’s cash pile stood at Rs 77,014 crore as its debt swelled to Rs 2.14 lakh crore as of September-end.

On Refinery-Petchem Integration

Petrochem and refining should drive feedstock integration and diversification, reducing sourcing risk and earnings volatility, UBS said. After expansion, RIL will be able to take advantage of a varied crude mix—ethane, LNG, naphtha and refinery off-gases—as refining and petchem complexes integrate.

On Rel Jio

Reliance Jio, which unleashed a tariff war in the world’s second-largest telecom market, will continue to gain market share. But UBS expects a below-consensus average revenue per user at Rs 180.

The brokerage forecast a subscriber base of 28.9 crore in the next four years, an addition of 18 crore. Jio's operating costs, depreciation, and interest expenses could rise sharply, and have an impact on consensus profitability estimates, it said.

Other Highlights

  • Estimated digital revenue of Rs 5,880 crore by March 2022.
  • Estimated fibre-to-home revenue of Rs 2,000 crore then.
  • Refining and petrochem operating income estimated at $3.3 billion.
  • Pet coke gasification will boost gross refining margins.

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