While the Nifty has touched a fresh record high, billionaire Mukesh Ambani-led Reliance Industries shares has beaten the 50-share index by a whopping 122%, noted a recent report. According to Motilal Oswal, RIL’s stock price has almost tripled over the last five years, outperforming the Nifty by 122% on a cumulative basis. “This has been driven by the strengthening refining/petrochem businesses and the significant build-up in its retail and telecom segments,” the brokerage firm said in a report.
Earlier this week, RIL shares surged to a fresh record high of Rs 1,406.50 and Reliance Industries was just kissing distance away from hitting the landmark Rs 9 lakh core market capitalisation. India’s most valued firm by mcap, RIL currently commands a market value of whopping Rs 8.63 lakh crore. However, going forward, Motilal Oswal notes that the firm may see headwinds.
“Since our upgrade in October-17, RIL has rallied by 59%, outperforming the Nifty by 44%. The stock now trades closer to our fair value. Moreover, we expect the core business to face headwinds in 2019. While telecom and retail remain in a significant build-up mode, we have already factored this in our estimates. As there is limited upside from here,” Motilal Oswal said in its reporting, downgrading the stock from buy to neutral. The firm has a target share price of Rs 1,457 on the shares. The stock price target implies an upside of about 6.5% from the current market price.
Motilal Oswal expects the refining margins to remain under stress in 2019. “We expect refining capacity addition of 2.6mbopd in 2019, much ahead of demand growth of 1.1mbopd. This, combined with high product inventories, is likely to result in subdued GRMs in FY20. Arab Lt-Hv has also contracted to USD1.4/bbl in 4QFY19 due to production cuts in OPEC+ and lower exports from Iran/Venezuela,” Motilal Oswal noted.
Further, the petrochemical margins are expected to soften, in light of RIL’s expansion in US as well as China. Further, the research firm noted that while retail segement is growing, the margins remains low. “While revenues have been growing at a staggering pace (~2x in 9MFY19), the contribution from petro/connectivity keeps margins for the retail low at 4.6%,” said the firm.
Reliance Jio s active subscriber addition has slowed from 11 million in Aug 18 to 6.3 million in Jan 19. Motilal Oswal estimates RJio s FY20 monthly subscriber addition to reduce to 6 million from 11 million in FY19, reaching a 33.4% market share, the highest in the industry. “With no ARPU increase expected, PAT growth may remain flat in FY20 due to higher depreciation/interest cost which was earlier capitalized,” said the report.
“We value RIL using SOTP. We use 7.5x EV/EBITDA for refining/petrochem, DCF for E&P, 2.5x EV/sales for Reliance Retail and DCF for RJio. We roll over our valuation to FY21. With a revised target price of Rs 1,457, we downgrade our rating to Neutral due to limited upside in the stock,” said Motilal Oswal.