India’s stock markets have “significantly and prematurely" driven up the valuation of Reliance Industries Ltd. to levels enjoyed by the so-called FAANG companies in the U.S., according to Edelweiss Securities Ltd.
While the global tech giants have large free cash flows, for Reliance it is its legacy oil-to-chemicals business that will continue to generate the bulk of the cash, analysts led by Jal Irani wrote in a note. Edelweiss downgraded the stock to ‘hold’ from ‘buy.’
“We believe that comparing Jio Platforms with the FAANG companies is the market’s newfangled makeover of the stock," the analysts wrote. “While Reliance Industries’ management has a tenable vision that promises long-term growth potential in that direction, we believe it shall be a long journey."
The shares of India’s most-valuable company have more than doubled from their lows in March as private-equity investors and some members of the FAANG quintet of Facebook, Apple, Amazon, Netflix and Google invested or partnered with Reliance’s Jio Platforms Ltd.
“The market is baking in a very high earnings CAGR of 35% for Jio Platforms and 31% for Reliance Retail sustaining over the next 10 years, which by any measure is a tall ask," Edelweiss analysts said.
Edelweiss said the factors that triggered the rally -- deleveraging, asset monetization, and digital momentum -- have played out. Although the prospect of a Reliance “super app" is compelling, India’s open architecture makes its success uncertain, the analysts said.
“The pendulum has swung entirely from extreme pessimism to exuberance, infallible expectations on execution and a peak analyst ‘buy’ ratio (80%)," Edelweiss said. “The proverbial excessive exuberance" is a recipe for disappointment, they wrote.
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