FIIs have been dumping India’s most widely held stock on Iran war fears
Reliance Industries is up 3% in trade today, but do not mistake the bounce for a full recovery. The stock dropped 4% this week and 8% over the past month as it was caught in the broad wave of selling that has swept Indian markets since US and Israeli strikes on Iran shut the Strait of Hormuz. On the surface, the logic seems sound — India’s largest company has a massive oil refining business, crude prices have spiked above USD80 a barrel, and a supply disruption of this scale should hurt a refiner. Except it doesn’t.
What is the market is ignoring? Diesel cracks — the margin a refiner earns on processing crude into diesel — have jumped to USD35-42 per barrel in the last two days, up from around USD20 per barrel earlier. Reliance’s Jamnagar refinery has a diesel yield of 40-50%, one of the highest among global peers.
Says JM Financial: “We believe the recent correction in RIL’s share price is overdone as it won’t be negatively impacted by the recent spike in crude and LNG prices. Instead, RIL could see near-term benefits due to a jump in diesel crack on account of supply disruption risk.”
Every USD1 per barrel rise in GRM adds roughly Rs45 billion to annual EBITDA and Rs29 per share to valuation. The war, in other words, is padding Reliance’s refining earnings.
Beyond refining, RIL’s petrochemicals margins are also set to improve. Petchem product prices typically rise alongside crude, but RIL’s feedstock costs are insulated because only 25% of its petchem inputs are crude-linked naphtha. The remaining 75% comprises ethane and off-gases, which are not tied to crude price movements.
Notes JM Financial: “Petchem product prices are likely to rise along with crude price while its petchem feedstock cost is unlikely to rise much as it has limited dependency on crude-linked naphtha — RIL’s petchem feedstock breakdown is approximately 25% ethane, 50% off-gases and only 25% crude-linked naphtha.”
RIL captures the upside of higher product prices without a proportionate increase in input costs, which is a hedge most retail investors overlook entirely.
The Story Is Jio, Too
JM Financial expects 14-16% EPS CAGR over the next three to five years, driven primarily by the Digital business. Says JM Financial: “The share price is not discounting the 15-16% EBITDA-compounding story in the Digital business over the next 2-3 years driven by 10-11% ARPU CAGR; hence we expect 14-16% EPS CAGR for RIL over the next 3-5 years. Key triggers are Jio’s IPO in the next few months and likely telecom tariff hike post that.”
Net debt is expected to decline steadily as capex moderates to Rs1.2-1.4 trillion per year from Rs2.3 trillion in FY23, fully funded by rising internal cash generation. RIL’s net debt to EBITDA stands at a comfortable 0.6x, with the company’s own guidance to keep that ratio below 1x.
The Valuation Case
At current prices, RIL trades at 16.8x FY28 earnings against a three-year average of 23.9x, and 8.2x FY28 EV/EBITDA against a three-year average of 11.9x. The stock is, by JM Financial’s own admission, trading near its bear-case valuation of Rs1,275 per share — a floor that already prices in retail weakness, subdued O2C margins, a haircut on new energy, and a 10% cut in refinery EBITDA.
Notes JM Financial: “Any significant impact on its refinery utilisation is only likely to play out if the Strait of Hormuz is blocked for a long period, which has not happened even during past wars.” The unchanged target price of Rs1,730 implies 35% upside from current levels.
