Brokerage firm Morgan Stanley expects the earnings growth of the Mukesh Ambani-led Reliance Industries to halve in FY20, after delivering a steady 17% CAGR (compound annual growth rate) between FY17 and FY19.

Morgan Stanley said that earnings upswing of the last two fiscal is likely to reverse and the upside appears limited, as the core business of the company drags.

"We expect RIL's two-year earnings upswing to reverse, yet investors are dismissing refining headwinds amid tighter crude markets. A rising glut in the gas and polyester markets could also slow growth into 2020. Upside appears limited amid core business drags, with no material capacity adds," said Morgan Stanley in an 8 May report.

At 11.10 am, RIL was trading at 1269.95, down 2.25% on the BSE. The brokerage has downgraded RIL to equal-weight, with a target at 1,349 per share.

"Downside earnings surprises in the energy business should unfold and attract increasing investor attention – a complete reversal in the narrative after the positive triggers that played out since 2017. While the potential upside from digital investments could, however, offer structural upside as RIL rolls out new businesses, the cyclical headwinds in energy lead us to downgrade RIL to EW (equal weight)," Morgan Stanley report added.

During the January-March quarter of last fiscal, RIL's refining margin narrowed to a 17-quarter low at $8.2 a barrel.

RIL's rising debt and weak gross refining margin is also a concern for the investors. Since the launch of Jio, RIL's debt has been increasing continuously due to higher capex. Its debt outstanding as on 31 March rose to 2.87 trillion, from 2.18 trillion at the end of the previous year.

Morgan Stanley estimates that RIL's refining margins will average $11 per barrel in F20 and $12.75 per barrel in F21, i.e., a 19% CAGR over F19, albeit far below consensus expectations, as the positive impact of International Maritime Organisation regulation (for RIL) gets partially negated by lower discounts in crude and naphtha margins.

Also, the significant fall in liquefied natural gas prices (40% year-to-date and 23% in the past two months), as a result of rising oversupply, limits upside earnings potential from RIL's petcoke gasifier project, which contributes about half to the refining margin increase that we forecast until F21. Overall, refining will still account for 60% of RIL's earnings growth and 40% of the earnings before interest, depreciation, tax and amortisation (EBIDTA) growth until F21, per our assessment, said Morgan Stanley.

The brokerage firm, however, added that commercial launch of broadband services, asset monetization, newsflow on energy and telecom business above our base case valuations, and clarity on next leg of investments could act as positive triggers and drive upside risks to current rich valuations.