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After a soft June quarter, RIL’s pricey valuations stand out more


The Reliance Industries Ltd’s (RIL) stock has risen 37% this year, at a time when the benchmark Nifty 50 index has shed 9%. In absolute terms, RIL has added Rs4 trillion to its market capitalisation.

No doubt, valuations have run ahead of themselves, especially with near-term earnings outlook remaining grim due to the covid-19 crisis impact. Currently, at Rs2067, the stock trades at about 21 times estimated earnings for financial year 2022, based on Bloomberg data. The average target price of 23 brokerage firms for the RIL stock stands at Rs2022 apiece. And these are target prices set for a year from now. Clearly, the shares have run ahead of themselves.

Some analysts are, in fact, saying there can be significant downside. Analysts at Macquarie, for instance, have a target price of only Rs1320 per share. Post the June quarter results, Macquarie analysts said, “We continue to highlight material earnings downside risk to consensus earnings, explained by lower refining and chemical margins, lower retail revenue, and higher minority interests.” The broking firm added, “Also, we think consensus capex estimates at about $5-6 billion/annum is too light (our estimates are about $9-10bn) as we believe spend in retail, JIO, maintenance capex in refining and chemicals, and RIL’s digital aspirations will overshoot.”

Unfortunately, RIL has not given any details on capital expenditure (capex) while announcing its June quarter results (Q1FY21). The company said it will update details on debt, capex and other balance sheet items in the half yearly cycle.

At the other end of the spectrum, JM Financial Institutional Securities Ltd’s analysts say, “RIL is entering a strong free cash flow generation phase with major capex completed and expectation of strong 17-18% earnings per share CAGR over the next 3-5 years led by digital and retail businesses.” CAGR is compound annual growth rate.

Note that Q1FY21 results are uninspiring with the covid-19 impact weighing across business segments except the telecom business, which benefitted from the price hikes taken in December. Overall, RIL’s consolidated Ebitda last quarter stood at Rs16875 crore, 6% lower than Bloomberg’s consensus estimates of ten analysts. Post results, quite a few analysts have cut earnings estimates.

RIL’s earnings are likely to stay depressed in the near-term given that recovery would be slow owing to the pandemic. But for investors, there is a joker in the pack – an expected stake sale in the retail business. Analysts at CLSA analysts say the reliance retail stake sale may need to happen at valuations of over $70 billion to justify a large immediate upside in RIL shares. Note that many analysts currently value the business much lower. But after the record fundraising in Reliance Jio, any surprises can’t be ruled out.

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