With the recent run up in RIL share price and valuation spiking, domestic brokerage firms look to be turning cautious after months, if not years, of optimism.
Mukesh Ambani’s Reliance Industries Ltd (RIL) is one of the stocks that have shunned pessimism for quite some time now. The share price of the oil-to-telecom conglomerate has surged over 148% since March lows, with investors rushing in to invest in a company with stable cash flows, profitable outlook and the ability to attract global investors. However, with the recent run up in RIL share price and valuation spiking, domestic brokerage firms look to be turning cautious after months, if not years, of optimism. RIL shares ended Tuesday’s trading session at Rs 2,177 per share .
Too much of optimism
The change in recommendation does not stem from any weakness in Mukesh Ambani’s business empire but on the contrary is fueled by the diminishing risk-reward. “In a span of four years, RIL’s stock price has quadrupled and valuation tripled as deleveraging, asset monetisation and digital-driven euphoria spiked interest in the stock,” wrote analysts at Edelweiss Securities in a note. Prior to the launch of Jio’s mobile telephony analysts were pessimistic about investments into Jio. In a complete revamp of that view, now market participants are excessively optimistic. Edelweiss Securities said that the excessive exuberance is a recipe for disappointment.
Although the potential value unlocking with Jio’s estimated growth and the retail business is not being ignored, Edelweiss noted that there are potential risks involved with both. “RIL’s FAANG-like valuation (particularly Jio’s) is misplaced as O2C and telecom make up 70% of value,” the note said. While Reliance Jio, with various mobile applications, has been able to enter a number of verticals from OTT to music and even healthcare, it is still not the market leader across segments. Edelweiss has downgraded RIL to HOLD from BUY.
Is the current price a good entry point?
Kotak Institutional Equities does believe that Reliance has the potential to monetize non-commerce opportunities in the digital ecosystem such as content, but cautions that it might take time to become meaningful. RIL’s stock is now ascribing 16X EV/EBITDA multiple to FY2022E EBITDA of digital/consumer business, which is reasonable compared to the valuations of global technology peers, Kotak Institutional Equities said in a note. Although India’s growth story in digital business could be different, “the economics may be constrained by its relatively lower per-capita income,” the note said. From current levels, the brokerage said that investors need to look for better entry options.
On the other hand…
Reliance has managed to outperform expectations and analysts at Nomura believe that might continue. Market vetran Sanjiv Bhasin is still bullish on the stock and is of the firm and believes that there is another 10% upside potential when it comes to RIL. “Now Reliance is doing what the FAANG stocks are doing and is now in uncharted territory and I think Rs 2,300 can be on the cards on the back of strong viability of capital infusion and transition from the energy company to a technology company,” Sanjiv Bhasin, Director, IIFL Securities, told Financial Express Online.
(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)