Reliance Industries Share Price Analysis: Future Outlook and Key Challenges

Introduction

The speculation around Reliance Industries (RIL) share value reaching a staggering 50,000 rupees per share by the end of 2020 turned out to be a mere mirage. By the end of 2020, the share price was around 1,950 rupees per share, far below the unrealistic target.

Current Situation and Future Projections

As crude prices ease and are expected to remain in a range of 55 to 70 rupees per barrel in the coming quarter, Reliance's Gross Refining Margin (GRM) is anticipated to improve, leading to potential revenue enhancement. Given the conservative target of achieving a 15% return from the current cost of the market price (CMP), it is expected that the RIL stock could be around 1,400 rupees by early 2021.

Moreover, there are optimistic projections stating that the RIL share price could rise to around 2,200 rupees, contingent upon the restarting of oil demand and the economic conditions experienced pre-lockdown. The first quarter (Q1) of 2020 will be crucial, as it may yield a loss due to the ongoing oil crisis.

Historical Performance and Current Debt Scenario

Reliance Industries has historically delivered decent returns, with 35% in 2019, and currently trades around the 1,510 rupee level. The scrip has experienced a downturn as many perceive it to be overpriced. Long-term investors could consider purchasing it at the 1,450 rupee level and holding onto it for the long term.

Debt Reduction Plan and Recent Developments

Mukesh Ambani, the chairman of Reliance Industries, has unveiled an ambitious plan to transition RIL to a zero net debt company within 18 months. This strategy includes a strategic investment from Saudi Aramco, who will acquire a 20% stake in the oil-chemicals division, valued at 15 billion rupees. Additionally, a 49% stake in the fuel-retailing entity will be sold to BP for Rs 7,000 crore, netting the company a significant Rs 1.1 lakh crore.

The transaction with Saudi Aramco is expected to solidify RIL's position, offering a range of growth initiatives. These include investments in IoT, a new commerce platform, and strategic investments by global institutional investors. However, the company has been free-cash-flow negative for six years, with liabilities estimated at 65 billion rupees and high interest costs accounting for 44% of EBIT. Thus, the plan to clear all debt first before other financial strategies is crucial.

Critical Outlook and Financial Goals

Analysts highlight the challenges RIL faces, such as the need to clear its massive debt, the declining margins in refining and chemicals, and the transition to zero net debt. The company plans to grow its operating profits at a 15% annual rate over the next five years, with the consumer business contributing significantly to EBITDA.

Despite the excitement surrounding the upcoming transaction with Saudi Aramco, it is essential to recognize that financial transparency and strategic planning are critical. The company must first address its debt before considering other financial strategies to ensure the company's sustainable growth.

Key Takeaways:

The current RIL share price is around 1,950 rupees per share. The projected share price could be around 1,400 rupees in early 2021. The company is aiming to reach a zero net debt position in 18 months. Strategic investments and debt reduction plans are crucial for future growth.

Conclusion:

Reliance Industries is a complex entity with a diverse portfolio, facing challenges such as debt and margin declines. However, with strategic initiatives like the Aramco investment, RIL aims to achieve zero net debt and steady growth. Investors should stay informed and evaluate the company's progress carefully.