This triggered a downgrade in the earnings estimates for the conglomerate and also affected the stock performance.
Morgan Stanley believes that improvement in the energy business is key to raising investor confidence in the conglomerate’s earnings.
Over the past 6 months, volatility in energy markets, investments in 5G telecom services, absence of tariff hikes, and higher global rates have driven a 6% cut in consensus estimates for RIL, reversing the trend of upgrades seen in the first half of 2022.
“We believe we are at the end of the downgrade cycle as both chemicals and telecom expectations have troughed,” the global investment bank said in its report.
On the energy business front, the investment bank expects gasoline prices in Asia to inch higher, diesel margins to normalise from multi-decade highs, and demand for petrochemicals to pick up the pace.
The key catalysts to earnings upgrade for RIL will be the demand recovery in China, upcycle in the refining business, unwinding of windfall gains tax, and higher domestic gas production, according to Morgan Stanley.When it comes to RIL’s deleveraging exercise, MS pointed out that earnings performance during the major investment cycles has been better than its peers.
Over the past 30 years, RIL has gone through five investment cycles with earnings outperforming peers in three of them, it said.
According to Morgan Stanley, the current phase of investment, including telecom and new energy, will more likely be similar to the 2003 cycle, with an upcycle in all of RIL’s businesses, especially energy.
“In our view, the upcycle in refining, improving domestic gas production and higher chemical margins should more than support $16 billion in annual investments with minimal rise in debt ratios,” it said.
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