RIL’s Tax Liability To Reduce By 400 Basis Points Due To Corporate Tax Cut: Morgan Stanley

Reliance Industries Ltd.’s earnings growth is starting to get de-risked, amid improving clarity on earnings growth, better refining margins, lower tax rates and cheaper gas feedstock costs, Morgan Stanley said Tuesday.

RIL’s tax liability will reduce by four percentage points following the corporate tax cut, the global brokerage said, adding that the company's target to become debt-free by March 2021 will help lower investor concerns that had risen steadily over the past seven years.

"RIL's earnings growth is starting to be de-risked as headwinds of 1H19 turn and become key tailwinds in 2020," Morgan Stanley said. "There is increasing evidence of these factors playing out, which should raise investor confidence on the 17 percent EPS growth we expect over FY2019-21.”

As one of the most complex refiners, RIL is seen as one of the biggest beneficiaries of new shipping fuel regulations that come into effect in January 2020.

The new norms, as set by the International Maritime Organization, bar use of fuel with more than 0.5 percent sulphur content. This will lead to a rise in diesel demand.

On impact of corporate tax cuts on RIL, Morgan Stanley said, “We estimate a 400 basis point reduction in the consolidated tax rate RIL's businesses paid in FY19 of 29-35 percent, much higher than the new corporate tax rate of 25.2 percent. RIL also has deferred tax liabilities of $6.5 billion as of FY19, which could reduce with a lower tax rate."

At present, RIL’s retail and telecom businesses—Reliance Retail Pvt. Ltd. and Reliance Jio Infocomm Ltd.—pay corporate tax at an effective rate of 34.9 percent while the consolidated effective tax rate stands at 27.9 percent.

"We turn more bullish on RIL as earnings growth clarity improves with better refining margins, lower tax rate, and cheaper gas feedstock costs.

“This, combined with a reduction of balance sheet leverage, should de-risk earnings growth and increase investor confidence on the 17 percent earnings CAGR seen for 2019-22, which is among the top quartile vs its regional energy and telecom peers,” Morgan Stanley said.

On Tuesday, RIL shares rose as much as 4.81 percent while the benchmark Sensex gained 0.51 percent intraday.