CLSA believes ramp-up in broadband, rising telecom dominance, and a gas production pickup may not be immediate surprises but could boost RIL’s long-term promise
Indian share market benchmarks BSE Sensex and Nifty 50 were trading with minor cuts on Thursday, primarily dragged down by sell-off in IT stocks. Index heavyweight Reliance Industries Ltd (RIL) stock was trading over half a per cent higher, capping the losses in the index. While Bharti Airtel shares were trading flat in today’s weak session. Research and brokerage firm CLSA is bullish on RIL and Bharti Airtel stocks with outperform and buy rating, respectively. It believes ramp-up in broadband, rising telecom dominance, and a gas production pickup may not be immediate surprises but could boost RIL’s long-term promise. While the brokerage firm favors Bharti Airtel as its market share performance in 2020 was commendable.
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It will take RIL to jump 16 per cent from the previous close to hit the target price of Rs 2,250 apiece pegged by CLSA. In the new year 2021, the research firm expects important steps from RIL to improve its omnichannel offerings through JioMart, strengthening technology strategy by showcasing 5G readiness, and enhancing content apps. CLSA fears EPS downgrades for the oil-to-telecom major as about 70 per cent of 84 per cent two year EPS growth comes from the uncertain telecom tariff hikes and refining margin rebound. It retained its ‘outperform’ rating to RIL stock despite elevated expectations and earnings being an overhang.
Equity listings of its Jio Platforms and Reliance Retail Venture Ltd may not happen this year. CLSA noted that any progress on a stake sale in downstream business may not drive huge value accretion from current levels. Nifty consensus earnings estimates indicate that 40 per cent of Nifty’s incremental earnings is contributed by Reliance Industries Ltd despite its much smaller 11 per cent weight. “A look at FY22CL 47 per cent EPS growth for Reliance indicates that tariff hikes for Jio and gains in refining are the drivers of earnings growth for the company,” it noted. It believes that a steady subscriber addition should continue through the year for Reliance Jio.
Bharti Airtel has strong growth outlook, compelling valuation
A rally of 26.24 per cent will be needed for Bharti Airtel stock to reach the price target of Rs 730 predicted by the brokerage firm. In 2021, it sees Airtel to retain market share led by 35 per cent growth in data subscribers, but with winning execution it sees upside to its forecast. Even as Airtel stock disappointed in 2020 due to the adverse AGR verdict, its market share performance was commendable. In case, AGR relief is granted to Airtel, it would provide upside to its stock fair value. “We factor in a 25 per cent tariff hike over FY21-23CL which drives Bharti Airtel’s 16 per cent consolidated Ebitda Cagr and valuation at a 7x EV/Ebitda.