Why Reliance shares are rising amid US-Iran war
Why Reliance shares are rising amid US-Iran war
Reliance Industries Limited (RIL) witnessed a sharp surge in its share price on Thursday, gaining up to 3%.
The rise comes after brokerages deemed the recent decline in RIL's stock price as overdone.
They also suggested that the company could actually benefit from the ongoing conflict in Iran and disruptions around the Strait of Hormuz due to rising crude oil prices.
Broader market witnessed a selloff due to Middle East tensions
The broader market had witnessed a selloff amid rising tensions in the Middle East. Investors were worried that supply disruptions in the region could lead to an increase in crude oil prices, impacting global markets.
However, analysts believe that this situation could actually work in favor of Reliance's refining and petrochemicals business, one of the largest in the world.
Higher refining margins could significantly boost Reliance's earnings
Brokerages have suggested that disruptions in the Middle East could tighten the global supply of refined oil products, pushing refining margins higher.
This would directly benefit companies like Reliance that convert crude oil into fuels such as diesel and petrol.
Jefferies, a brokerage firm, noted that higher refining margins could significantly boost Reliance's earnings.
Potential global supply disruptions could raise refining margins
Jefferies also noted that a blockade of the Strait of Hormuz could disrupt 2-3 million barrels per day of refined product supply, accounting for 2-3% of global demand.
Such disruptions could push refining margins higher across the globe.
The brokerage also warned that damage to Saudi Arabia's Ras Tanura refinery could further disrupt supplies and support refining margins.
JM Financial expects excessive decline in RIL shares to reverse
JM Financial has said that the recent 8% decline in Reliance shares over the past month was excessive.
The brokerage expects the company to benefit from higher diesel cracks and a possible rise in petrochemical margins.
It also noted that every $1/bbl rise in RIL's gross refining margin (GRM) on an annualized basis results in an increase of ₹45 billion or 2.2% in its annual EBITDA and an increase of ₹29/share or 1.7% in valuation.
Reliance's refinery has high diesel yield
JM Financial highlighted that Reliance's refinery has a high diesel yield of around 40-50%.
This means a large share of the refinery's output is diesel, allowing the company to benefit more when diesel margins rise.
However, the brokerage also warned that these unusually high spreads may not last long with possible government intervention through windfall taxes if refining profits rise sharply.
Petrochemical business could also benefit; other triggers for RIL stock
Apart from refining, Reliance could also benefit in its petrochemicals business.
JM Financial said product prices in petrochemicals usually rise with crude oil prices while the cost of raw materials remains stable.
The brokerage has maintained its buy rating on the stock with an unchanged target price of ₹1,730/share.
Brokerages also noted that there are some key triggers that could move the stock in coming months including Jio's IPO and a potential telecom tariff hike post-listing.