Goldman Sachs raises target price for RIL to Rs 3,400; reiterates buy

Reliance Industries (RIL) shares rose as much as 4 per cent to hit an intraday high of Rs 2,999.90 on the BSE, marking best single-day gain in over 10 months, after international brokerage house Goldman Sachs raised target price of the stock to Rs 3,400, indicating an upside of 18 per cent from its Tuesday’s closing price.

The adjustment reflects Goldman Sachs' analysis of RIL's consolidated returns, which are expected to reach an inflection point in FY24.

The investment bank predicted that RIL's cash return on cash invested (CROCI) will expand by approximately 270 basis points to 12 per cent by FY27, marking the highest level since 2011. This improvement is expected to be driven by a shift in the composition of capital expenditure (capex) towards businesses with higher returns and shorter gestation periods.

RIL has historically invested heavily in capital-intensive sectors such as hydrocarbons and telecommunications. However, the completion of major capex cycles in these areas, particularly in the telecom sector, is expected to lead to a decline in overall capex intensity. Instead, RIL is focusing on investing in businesses with higher returns and shorter gestation periods, such as retail and upstream new energy ventures, Goldman Sachs said.

Goldman Sachs stressed on the potential for major returns from RIL's retail segment, estimating that its earnings before interest, taxes, depreciation, and amortisation (EBITDA) could nearly double between FY24 and FY27. The investment bank also anticipates positive contributions from RIL's new energy initiatives, with the potential for growth in earnings by FY40.

Furthermore, Goldman Sachs highlights the historical correlation between RIL's returns and its stock performance, indicating that rising returns have often led to share price outperformance. With the expectation of improving returns and potential value unlock through listings of consumer businesses, Goldman Sachs believes that the risk-reward profile for RIL remains favourable.

Goldman Sachs has identified several catalysts that could further drive RIL's stock performance, including a potential telecom tariff hike, stronger same-store sales growth in retail, and the beginning of new energy projects.