RIL's value is greater than the combined value of Bharti’s India business, Avenue Supermarts, Flipkart and key players such as Zee, Sun TV and DishTV in the media sector (content ecosystem). At current levels, should you buy or sell shares?
Billionaire Mukesh Ambani-led Reliance Industries commands a whopping Rs 8.07 lakh crore in market capitalization at today’s closing prices. At such an amount, the firm’s value is greater than the combined value of Bharti’s India business (telecom, including towers and DTH), Avenue Supermarts (retail), Flipkart (e-commerce) and key players such as Zee, Sun TV and DishTV in the media sector (content ecosystem), according to a report by Kotak Institutional Equities. RIL shares have been on a rising spree in the year so far, and have returned about 46% in the year so far. Reliance Industries shares have contributed to about 27% of the Nifty’s gain.
According to Kotak Institutional Equities, RIL shares are overvalued at current levels. “Our reverse valuation exercise for RIL assuming 7X EV/EBITDA to its energy business implies that the stock is already ascribing `5.5 tn or US$79 bn to the company’s consumer/technology platform business,” the research report said.
RIL shares closed at Rs 1,277 on NSE this afternoon, down by more than 1.33%. The firm has a ‘sell’ call on the shares with a target price of Rs 985. According to Kotak, RIL shares are expensive on several conventional metrics such as P/E, EV/EBITDA or P/B, as well as unconventional metrics such as EV per subscriber. “RIL’s headline valuation multiples are more than reasonable at 16.5X FY2020E EPS, 10.5X FY2020E EBITDA and 2.3X March 2019E book value in the context of moderate earnings growth and low RoEs of ~12%,” the firm noted.
Kotak noted that RIL’s success in telecom so far, in terms of subscribers/revenues market share, has been fueled by an onslaught of capex to build capacity advantage and extended period of attractive offers for acquisition as well as retention of customers. “Jio’s strategy has deteriorated the return potential of the business at least in the medium term, in our view, even as it led to accelerated consolidation in the industry.” said the note.
Further, RIL’s imminent foray in e-commerce business will face tougher competition from the deep pockets of (1) Amazon, (2) Walmart-backed Flipkart and (3) Alibababacked PayTM Mall, and if it chooses to adopt a strategy similar to telecom. Therefore, RIL’s investors should get ready for a significant cash outlay for an extended period of time, said the Kotak report.