Home Market Jefferies retains underperform rating on Reliance Industries

Jefferies retains underperform rating on Reliance Industries


Shares of oil-to-telecom behemoth Reliance Industries have been on a tear of late, but Jefferies is not so sanguine on the stocks prospects as its target price of Rs 880 implies a potential downside of 32% from current levels. The firm has an underperform rating on Reliance Industries.

The stock has added more than Rs 2 lakh crore to its market capitalization this year, with half of it in the last one month or so due to its strong June quarter result and renewed optimism in its consumer services businesses. The companys market capitalization surpassed Rs 8 lakh crore recently, making the most valued company in the country.

The stock snapped its eight-consecutive session gaining streak on Wednesday, ending down 1.8% at Rs 1,294.45 after hitting a record high of Rs 1,328.75 during the session. Reliance Industries shares have gained 40.5% so far in calendar year 2018, beating the benchmark Nifty index which has gained 11% in the same period.

“…telecom sub momentum is strong with RMS (revenue market share) also up 275bps (basis points) q/q (quarter on quarter) to 21.9% in 1QFY19 (April-June). This will reflect in rising EPS (earnings per share) too, even if they lag consensus, but capital spend trends should also be sobering too with net liab. (liability) trending higher than most expect,” said Jefferies.

The firm expects Reliance Industries refining margins to ease from highs of the 2017-18 financial year as refining demand supply becomes less benign.

Jefferies said the ramp-up of Reliance Industries telecom business may be bumpier than what the Street is acknowledging. Capital expenditure may halve from FY14-FY16 but could stay elevated, said Jefferies. Telecom capital expenditure will continue and exploration and production spend will pick up, added Jefferies.

“Even if all goes well, return ratios remain modest and net debt higher,” said Jefferies. The firm said Reliance Industries valuations are rich with 12.5 times FY19 estimated EV/EBITDA-which is 30-35% higher than its past and 30-70% more than its peers.

Bloomberg data shows the consensus target price of Rs 1,212.35 is about 6% lower than the current market price of Reliance Industries. On the ratings front, 31 of the 40 analysts tracking the stock have a buy rating on it, while four have a hold rating and 5 analysts have a sell recommendation.

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