RIL shares fall 6% in one week; Macquarie analysts maintain ‘underperform’ rating, see 35% downside

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June 28, 2021 12:07 PM

With the stock lagging on the bourses, global brokerage firm Macquarie Group has reiterated its ‘underperform’ rating on the stock with a 12-month target price of Rs 1,350 apiece.

Reliance industries, Mukesh ambaniMukesh Ambani’s Reliance Industries Ltd’s (RIL) share price continues to trade in red, now down more than 6% since last Monday. (Image: REUTERS)

Mukesh Ambani’s Reliance Industries Ltd’s (RIL) share price continues to trade in red, now down more than 6% since last Monday. The largest private company in the country, by market capitalisation, failed to impress investors with a massive Rs 75,000 crore capital expenditure for the new energy business. With the stock lagging on the bourses, global brokerage firm Macquarie Group has reiterated its ‘underperform’ rating on the stock with a 12-month target price of Rs 1,350 apiece, translating to 35% downside potential from the current market price. So far this year, the RIL share price has gained 5.8%, while the Nifty 50 has zoomed 13%.

Takeaways from Annual General Meeting

JIO/Digital Services: Analysts at Macquarie believe the JioPhone Next launch was in line with expectations. “We assume JIO prioritizes subscriber share over ARPU / customer quality and scales to 500 million users by end-FY23,” they said. JioPhone Next subscribers come in at an implied Rs 83/month ARPU. The customer increase will dilute the current reported ARPU of Rs 138/month by ~10%, according to the report. 

Retail: With the expanding Indian retail market, Macquarie analysts believe that Reliance Retail net revenue will rise from $11 billion to $18-25-50 billion in FY23-25-30, and EBITDA will increase 3x in 5 years. On completion of the Future Retail deal, Macquarie sees segment revenue increasing 27%.

Oil to chemical: Although Mukesh Ambani said that deal with Saudi Aramco is progressing, Macquarie highlights that the stake sale was at a valuation of $75 billion in a bullish downstream margin environment. This could come down owing to changes post-2019. 

FCF concerns

Reliance Industries has not managed to sustain its free cash flow generation over the last 15 year, the report said. “We have increased our capex outlook by 20% to ~$12bn/pa, ~50% above current consensus. On our forecasts, RIL remains FCF negative for the foreseeable future,” they added. Reliance Industries plans to invest a massive amount of Rs 75,000 crore ($10 billion) on capital expenditure.

Analysts also highlighted that Reliance Industries’ incremental capital employed tilts back towards energy (albeit green) versus positioning for a new-age consumer-facing digital business in Jio and retail.

Outlook

Near term outlook for Reliance Industries is positive, helped by cyclical improvement in refining and chemical margins. Macquaries remains 25% below consensus estimates on earnings owing to a lower recovery in Reliance’s refining and chemical margins, slower pace of ARPU hikes, among other concerns. 

“With our estimates ~25% below consensus and RIL’s share price near our fundamental bull case, we maintain an Underperform recommendation,” the report said. Macquarie Group has an ‘Underperform’ rating on RIL since May last year.

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