Petchem To Boost RIL’s Operating Income In FY22, Says Jefferies

Rising polymer spreads amid demand from automobiles, durables, consumer goods, medical supplies, and packaging industries will provide significant upside to Reliance Industries Ltd.’s petrochemicals operating income in the ongoing fiscal, according to Jefferies.

The portfolio spread for polymers, accounting for 45% of RILs petrochemicals business is nearing a decade high and is 30% ahead of Jefferies estimates for FY22, the brokerage said in a May 28 report. The polymer spreads—difference between the price of a barrel of polymers and benchmark crude—have hit record highs due to strong consumer spending in the U.S. and China, it said.

High spreads are likely to sustain in FY22, aided by sustained demand on fiscal support in major economies, commissioning delays in new projects, and vaccine penetration.

According to Jefferies:

  • RIL’s petrochemicals segment Ebitda could be 50% higher than estimates on operating leverage benefits if the current spreads sustain over FY22.

  • This could drive a 14% upside on consolidated Ebitda estimate.

  • The sustained strong petrochemical performance improves the likelihood of RIL’s oil-to-chemicals stake sale in FY22.

China’s self-sufficiency moves in polyester intermediates could, however, result in significant capacity additions over 2020-23, according to Jefferies. This could create pressure on the polyester spreads in the future.

The current polyester spreads are well below decade highs on supply overhang. They shrunk close to 40% over pre-Covid levels and have been slow to recover because of overcapacity, Jefferies said.

Shares of RIL closed 6% higher on Friday compared with a 0.6% rise in the BSE Sensex.

Current valuations are attractive despite the recent stock’s underperformance, Jefferies said. It has a 12-month price target of Rs 2,580, implying a 30% upside from the current level.

Of the 37 analysts tracking the company, 25 recommend a ‘buy’, eight suggest a ‘hold’ and 4 rate it ‘sell’, according to Bloomberg data. The average of the 12-month price targets is Rs 2,201 apiece, implying an upside of 5.1%.

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