RIL shares fall 10% in two days, is it just the beginning of 30% downside target?

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The report said that RIL’s headline EPS growth in the October-December quarter was an impressive 9% on-year basis.

Reliance Industries Ltd’s (RIL) share price fell 2% on Wednesday morning once again to trade at a low of Rs 1,892 apiece. This is for the second consecutive trading session that Mukesh Ambani’s RIL is among the worst-performing stocks on Sensex. Going by analysts at multinational investment bank Macquarie, this may just be the beginning of the downfall for the oil-to-telecom conglomerate. In a recent report, Aditya Suresh and Abhinil Dahiwale of Macquarie cut their FY22-23 EPS estimates by 3% for RIL with a 12-month target price of Rs 1,350 per share.

The report said that RIL’s headline EPS growth in the October-December quarter was an impressive 9% on-year basis. This, according to Suresh and Dahiwale, was supported by 1% effective tax rate and $106 million investment gain booked in the retail division. “Adjusting for this and adding back an impairment in E&P, on our estimates underlying EPS was down 30% on-year,” they added. In the current fiscal year, it expects core EPS of RIL to fall 10% to nearly Rs 60. During the October-December quarter results, RIL consolidated the refining, chemicals, and fuel marketing businesses into a new ‘Oil-to-Chemicals’ (O2C) division. However, the firm refrained from reporting gross refining margins and the volume of petrochemical production. 

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Although Jio is now 411 million subscribers strong, Macquarie believes the number will inch up to 500 million by 2023 while raising flags over the slow subscriber addition in recent quarters. ARPU of Jio is now a Rs 151, but still below Bharti Airtel. “We believe Bharti Airtel’s ARPU will remain at a 10%-15% premium to JIO due to better quality customers. To the extent JIO decides to hold off on raising tariffs to grow market share, this would be a downside risk to earnings, with every Rs10 APRU making a ~2.5% impact on group EPS,” they added. 

On the retail side, the report said that RIL’s core retail revenue will increase to $50 billion by the financial year 2030. EBIT margins are expected to jump from 4.5% in Financial Year 2021 to 5.5-6% in financial year 2022-23. “A key downside risk to this assumption is the discounting and fulfillment options RIL offers for JioMart,” the report said. In the latest quarterly results, RIL did not provide any category-wise revenue and margin. 

For the refining segment, Macquarie expects an improvement from to $6.5/bbl in FY21E and $8-9/bbl in FY22-23. Meanwhile, for chemicals business, the report highlighted that earnings likely peaked in the fiscal year 2019 for the segemnt. “From a peak $5 billion chemicals EBITDA in FY19, we estimate $3.5 billion in FY22-23e driven by lower spreads across the board, the report added. The analysts see a slower recovery in Reliance’s refining and chemical margins, slower pace of ARPU hikes, lower retail margins as JioMart scales up, high competition in retail, higher working capital for retail, higher capex for JIO and retail, and higher minority interests among key reasons for their bearish views on RIL’s stock price. 

“RIL consolidated ROE remains <8% even in FY25 on our estimates; we consider this sub-par in view of the current lofty 30x FY22 PE,” the report said. In a ‘bull case’ scenario the brokerage expects the stock to reach a price of Rs 2,050 per share. In its ‘bear case’ scenario the stock is expected to slip to Rs 910 apiece. 



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