Stock also comes under heavy selling pressure on lower refining margins
Credit Suisse has slashed the stock’s target price and has downgraded it to underperform
Shares of Reliance Industries Ltd (RIL) have fallen 17.9% since May, with the index heavyweight coming under heavy selling pressure. The stock fell 3.48% on Monday to close at ₹1,143.00 on the BSE.
In May, the RIL stock fell 4.46%, followed by a 5.85% decline in June, and a 6.87% drop in July. This, despite the stock featuring on the radar of buyers from the start of this year. Since January, RIL has risen 2% thanks to a 10.68% gain in March—its biggest monthly increase this year.
In a report released on Monday, Credit Suisse downgraded the stock to underperform from neutral and slashed its target price. The brokerage said given RIL has been free cash flow (FCF) negative for six years and given margin pressure in refining and petrochemical (high supply), FCF is likely to be negative for FY20-21.
RIL’s total liabilities have already climbed to $65 billion in FY19 from $19 billion in FY15, comprising 40% of its enterprise value. Total interest cost has risen to $4 billion in FY19 from $1.2 billion in FY15.
Credit Suisse analysts cut RIL’s FY21/22 earnings per share (EPS) target by 5% to factor in lower refining and petrochemical margins. “Our enterprise value of $141 billion values refining at six times FY21 EV/EBITDA, petrochemical at seven times FY21, retail at 22 times FY21, Jio on eight times FY25," Credit Suisse analysts Anubhav Aggarwal and Sayantan Maji said in the report.
RIL’s burgeoning debt is also an overhang. In the last fiscal year, the company’s finance cost more than doubled to ₹16,495 crore from ₹8,052 crore in the previous year.
“The increase was primarily on account of the commencement of digital services business, petrochemical projects at Jamnagar and higher loan balances," RIL said in its annual report. The company made a capital expenditure of more than ₹1.32 trillion in the last fiscal year. It ended the year with a gross debt of more than ₹2.87 trillion. In the June quarter, RIL posted gross refining margins of $8.1 per barrel while its petchem production declined 10% quarter-on-quarter.
“We have not seen this kind of weakness in both refining and petrochemical margins probably in the last three-four years. Also, the first-quarter earnings were muted. The petrochemicals margins are under pressure even though they remain flattish because of their efficient cost. The fact is that from here on, growth is very difficult in the near term," said an analyst from a domestic brokerage, who declined to be named.
After RIL posted its June quarter results, analysts at Jefferies said that Q1FY20 was noisy, as expected, while core performance was soft, with lower refining margins, petchem volumes, and telecom average revenue per user (Arpu). In June quarter, Arpu for its telecom business came in at ₹122. During the quarter, RIL’s revenue rose 22.1% from ₹1.41 trillion in the year-ago period to ₹1.72 trillion in the first quarter of fiscal 2019-20.
It had said that with FCF uncertain, EPS is at risk, and valuations rich, it has underperform rating with lower liabilities post the InvITs offset by lower EV in telecom and retail.
In July, Reliance closed a ₹25,215 crore deal with Canada’s Brookfield Asset Management to sell its 49% stake in telecom tower assets, and for Brookfield to also take over the Tower Infrastructure Trust.
Currently, RIL has 22 buy ratings, 9 hold ratings and 5 sell ratings on Bloomberg.
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