HSBC maintains ‘buy’ for RIL, raises target price to Rs 1,880

HSBC Global Research has maintained ‘buy’ for RIL shares and has increased the target price to Rs 1,880 on deleveraging initiatives, higher valuations of, primarily, retail and telecom.

The previous target price was Rs 1,590 per share. Currently, RIL shares are currently trading at Rs 1,722.15 on the BSE, lower by Re 1 or 0.06 per cent from its previous close.

In a report HSBC said: “A strong balance sheet built from the cash-generating refining and petrochem businesses allowed RIL to incubate businesses with long gestation periods, like telecom and retail.”

Over the last five years, the core business of refining and petrochemicals has generated $40 billion of operational free cash flow, of which it consumed $20 billion for its own capacity and efficiency enhancements. The balance of $20 billion, plus an additional $10 billion in the form of debt, has been used to incubate retail and telecom businesses, it said.

“Now, all these new businesses have become cash generating, with retail generating EBITDA>Capex and telecom likely to generate EBITDA>capex in FY21. RIL is now beginning to incubate a new financial services business,” it said.

With the recent deleveraging exercise, involving a rights issue and the sale of a stake in the Jio Platform to multiple investors, RIL has created a kitty of $22.5 billion, allowing it to become net debt free by FY21 per RIL calculations, and FY22 per HSBC calculations.

“This positions it strongly for increasing the penetration of the existing consumer businesses and new businesses like financial services,” the report said.

“We believe that, post the deleveraging exercise, RIL’s balance sheet has immensely strengthened. With each of its businesses now capable of generating cash flows for themselves, we believe RIL will once again become a cash generating machine, thus allowing it to chart its next phase of growth,” it added.

The report, however, noted sustained weakness in refining and petro chemical business as a downside risk.