Home / Markets / Mark To Market /  Post fundraising, Reliance stock has lost some lustre

The year 2020 was turning out to be a glorious one for shares of Reliance Industries Ltd (RIL) till September. The stock climbed to a high of 2,324.55 in mid-September, surging more than 50% from its pre-covid highs. At the time, the Nifty 50 index was still 5% lower than its highs in mid-February.

RIL shares were flying high on the back of stake sales in its digital arm, Jio Platforms Ltd, followed by the retail arm, Reliance Retail Ventures Ltd. Together with the fundraising at Jio, this took RIL’s total fundraising to around 2 trillion.

But the stock has retraced some of its gains vis-a-vis the broader markets since September. It has fallen by about 17% from its highs in September, while the Nifty 50 has risen more than 24% in the same period.

Also Read | Churn in India’s internet economy

A couple of factors are to blame here. “There was a lot of exuberance built into the stock at the time when investments were taking place last year. But then people realized that digitization revenues haven’t picked up as much, or may take time," said an analyst at an institutional brokerage, seeking anonymity,

Analysts from BofA Securities said: “Currently, 99% of revenues of Jio are driven by telcos."

“However, in 12-24 months, we expect digital revenues from online advertising, shopping and subscription to pick up," the analysts wrote in a 13 January report.

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Also, as pointed out in these pages last year, the RIL stock had run ahead of the value of the sum of its various parts. “Using the valuation of recent deals in Jio Platforms (EV of about $65 billion), proposed deal with Saudi Aramco (EV of $75 billion) and this one in retail ($57 billion), gives us a $197 billion EV for Reliance’s three segments. Adjusting for minority interest (about $25 billion) in Jio and Retail as well as $4.6 billion of net debt likely to remain by March 2021 gives a value of $174 billion, net to Reliance", analysts at CLSA had said at the time. But RIL’s market cap had risen to around $200 billion in mid-September. Post the correction, the firm’s market cap is closer to the sum of its parts as estimated above.

Further, Jio’s slower performance vis-à-vis Bharti Airtel Ltd is also a cause of worry. In the September quarter, Jio’s subscriber base grew by 7.3 million, much lower than the 10.2 million subscribers added in the June quarter.

On the other hand, Airtel reported a huge 13.9 million jump in subscriber base in the September quarter. Airtel’s higher market share gains are reflected in the surge in its stock lately. The Airtel stock has appreciated as much as 52% from its lows in October.

What’s more, Airtel is on a strong footing for the December quarter as well. In a 24 December report, Kotak Institutional Equities said: “Trai’s subscriber data for October 2020 indicates—(1) Bharti sustained its lead on net additions for the third straight month, adding 3.7 million subs, (2) Jio disappointed again on the wireless front with net additions of 2.2 million and VLR (visitor location register) addition of just 1.1 million, albeit it gained some traction on fiber to the home (FTTH)."

VLR is a measure which reflects the number of active users on a mobile network.

Investors also need to watch the business impact of the ongoing farmer protests in Punjab and Haryana.

For RIL, the outlook on the refining business is muted with margins expected to remain subdued from a near-to-medium term perspective.

Analysts at CLSA say there could be a risk to earnings estimates as the Street has been assuming a high rebound in refining margins and a hike in telecom tariffs. “36% of RIL’s two-year earnings per share growth of 84% is contributed by our prediction of a 10% annual telecom tariff hike in April 2021 and again in April 2022. Another 32% comes from the assumption of a gross refining margin rebound from $6.8 per barrel in FY21 to $9 in FY22 and a further $11 in FY23. These are uncertain and could pose earnings downgrades risk for RIL and, thereby, Nifty through 2021," the analysts wrote in a 7 January report. This year, investors will keep a close eye on execution in JioMart and progress on RIL’s digital plans—positive news flow on which could act as a trigger for the stock. Of course, some of the expected results on higher digital revenue may play out only in the medium-term. Even so, investors will look for signs of an increase in digital revenue before any meaningful re-rating.

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