Heavyweight Reliance Industries (RIL) was among the top underperformers on Wednesday. In fact, RIL has seen a downward slope in overall year-to-date performance. The recent drop in RIL shares is attributed to concerns over high CAPEX and resultant rising debt. However, with significant correction in RIL shares, there is more room for bulls. Despite the near-term worry, brokerage JM Financial gives “high-conviction BUY” on RIL due to the conglomerate’s industry-leading capabilities across businesses. Long-term growth prospects in RIL is robust!
On BSE, RIL stock closed at ₹2,235.25 apiece down by ₹12.70 or 0.6%. RIL is the largest company in India in terms of market share. Its market cap stood at over ₹15.12 lakh crore by end of March 29th.
Year-to-date, RIL stock has shed more than 13% on BSE. From its 52-week high of ₹2,855, the stock has tumbled by 21.7% on the exchange.
In its latest report, JM Financial said, the recent weakness in RIL’s share price, primarily due to concerns around high capex and resultant rising debt, has meant that its CMP is near its bear-case valuation of ₹2,000 per share.
JM’s bear case valuation of ₹2,000 on RIL is based on assumptions such as — valuing the O2C business at 6.5x FY25 EV/EBITDA (versus 7.5x in the base case) and assuming O2C EBITDA is 20% below its base case due to macro uncertainty; b) valuing the Telecom business at implied ~10x FY25 EV/EBITDA (versus 11.8x in the base case)and attributing NIL value to its Digital assets; and c) valuing the Retail business at 20x FY25 EV/EBITDA (versus 25x in the base case) and attributing NIL value to JioMart’s New commerce business.
Also, RIL’s CMP is also closer to JM Financial’s bear-case valuation of ₹1,990/share, which is based on valuation at which RIL had sold stake in its various businesses in 2020 —- a) valuation of ₹5,160 billion for JPL, at which RIL sold 32.95% stake in JPL during Apr-Jul’2020; b) valuation of ₹4,587 billion for the Retail business, at which RIL sold 10.09% stake in the Retail business during Sep-Nov’2020; c) implied 7.5x forward EV/EBITDA multiple for O2C business based on MoU to sell 20% stake to Saudi Aramco at an EV of $75 billion.
But JM Financial has still reiterated “high-conviction Buy” on RIL.
“Though continued high capex is a key near-term concern, we reiterate our high-conviction BUY given RIL’s industry-leading capabilities which is likely to drive robust 13-15% EPS CAGR over next 3-5 years,” JM Financial’s note said.
The brokerage expects Jio’s ARPU to rise at 10% CAGR over FY23-28 with ARPU being on a structural uptrend given the consolidated industry structure. Further, strong growth momentum continues in the company’s Retail business as RIL is driving omni-channel capabilities across segments.
Despite being contingent on global macros, JM Financial’s note said, “RIL’s O2C business earnings are also relatively well-placed. At CMP, the stock is trading at FY24E P/E of 21.4x (3 yr avg: 23.8x) and EV/EBITDA of 11.4x (3 yr avg: 13.2x).”
However, the brokerage has slightly revised its target price on RIL. It said, “we cut our FY24-25 EBITDA estimate by 3-4% accounting for slightly lower ARPU given delayed tariff hike and continued weakness in petchem margin; hence, our TP has been revised to ₹2,900 (from ₹2,950) despite having rolled forward our TP to Mar’24.”
Among near-term risks for RIL are — continued high capex across businesses resulting in rising net debt with limited earnings visibility from new projects; weak subscriber addition and limited ARPU hike; and weak downstream margins due to macro concerns.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
