Shares of Reliance Industries have fallen by about 20 percent in less than four months, taking the stock's valuation to just 5 percent above its conservative estimates, making it a ‘bargain buy’ at current levels, a report by global brokerage house CLSA stated.
The brokerage has retained its ‘buy’ call on the stock with a target price of ₹2,970, indicating a 32 percent upside in the stock from its current market price of ₹2,247.80, as on March 23, 2023.
Since hitting its 52-week high of ₹2,855 in April last year, the stock has lost over 21 percent till date. It also recently hit its 52-week low of ₹2,180 on March 20, 2023.
In the last 1 year, the stock has lost over 11 percent. Just in March 2023 so far, the stock has shed 4 percent, extending losses for the fourth straight month. It fell 1.3 percent in February 2023, 7.5 percent in January 2023 and 6.7 percent in December 2022. On a YTD basis, it has lost 12 percent whereas overall, in these 4 months, the stock has declined 18 percent.
"The stock is trading at just 5 percent above its conservative valuation based on a nearly 3-year-old deal value for Reliance Jio and Reliance Retail, a 15 percent discount to the announced Aramco deal value for its O2C business, and nil value for the new energy business," said the report.
Along with muted earnings growth, no information regarding the potential listing of its telecom and retail businesses has also impacted investor sentiment.
But, CLSA believes that with three years having passed since the stake sale to PE investors, it sees a good chance of a Jio and/or retail IPO in the next 12 months.
In the December quarter, RIL reported a 15 percent year-on-year (YoY) fall in consolidated net profit to ₹15,792 crore while its revenue increased 15.3 percent YoY to ₹2.20 lakh crore.
Also, a lack of launches and growth areas has kept the stock subdued over the past 18 months, added CLSA.
However, this could change in the second half of FY24, noted the brokerage, as it expects the company to start offering its portable 5G device (Jio Airfiber) to ramp up wireless broadband additions and launch its affordable 5G smartphone as it monetises its pan-India standalone 5G launch by end-2023.
Further, recent brand launches (Independence, Campa Cola) suggest that one could see visible strides in Reliance’s FMCG foray in 2023, it added.
"The ramp-up of its FMCG business, the launch of Airfiber to catapult wireless broadband penetration and a new affordable 5G smartphone to monetise its pan-India standalone 5G network by end-2023 along with an IPO of Jio and/or retail are all possible large triggers in the second half of FY24," CLSA said.
Meanwhile, cooling crude prices, pick-up in gasoline spreads and the near removal of the windfall taxes have resulted in higher refining margins. Also, key petchem product spreads have also bounced from lows on the back of the reopening of China. All these factors, CLSA said should drive oil and gas profits higher in the March and June quarters.
Another key positive, as per the brokerage, is that despite the rising 5G capex, consolidated leverage should remain under control and well below 2x EBITDA.
However, the main risks include delays in commissioning key downstream expansion or a slower-than-expected pace of subscriber additions for telecoms, cautioned the brokerage. Other risks include decreased refining and petchem margins, a lower crude price and continued increases in telecoms capex. Covid-19 presents unpredictable risks, it added.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.