Analysts Call Tracker: Bets on RIL rise ahead of Jio demerger plan

According to Moneycontrol’s Analysts’ Call Tracker, the number of “buy” recommendations has increased to 33 from 27 a year ago, the number of “hold” ratings has fallen to three from 8 earlier, and “sell” recommendations are down to two from four earlier.

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Analysts are gradually turning bullish on Reliance Industries Ltd, as can be seen from the rising number of buy recommendations on the stock. According to Moneycontrol’s Analysts’ Call Tracker, the number of “buy” recommendations has increased to 33 from 27 a year ago, the number of “hold” ratings has fallen to three from 8 earlier,  and “sell” recommendations are down to two from four earlier.

Over the past two months, the stock of RIL gained more than 9%, compared to a 6-percent rise in benchmark indices, Sensex and Nifty, during the same two-month period.

Recently, the market capitalisation of RIL has exceeded the Rs 17 lakh crore mark. The stock last closed at an m-cap above Rs 17 lakh crore on January 11, 2023. Currently, the stock is trading nearly 12% higher than its low of Rs 2,201 a share, which was reached on March 20 of this year.

Demerger

According to analysts, investors are buying the stock ahead of RIL’s plan to demerge its financial services business housed under Jio Financial Services. Earlier, Bloomberg reported that Jio Financial Services was likely to list on the stock exchanges in October.

Recently, RIL has received approval from its shareholders and creditors for the demerger of Reliance Strategic Investments Ltd (RSIL) from the company. Following this demerger, RSIL will be renamed Jio Financial Services Limited (JFSL). Under the demerger scheme, RIL shareholders will receive one share of Jio Financial for each share they own.

Jio Financial has the potential to become the fifth-largest financier in India based on its net worth, surpassing renowned financial institutions like Kotak Mahindra Bank and Bajaj Finance, according to analysts. Estimates from Centrum Broking suggest that Jio Financial’s total net worth is valued at approximately Rs 10.84 lakh crore.

The stock, however, is still around 13% lower than its all-time high of Rs 2,819.85, seen on April 28, 2022. Until March 28, the stock was under pressure due to concerns surrounding RIL’s high capital expenditure and increasing net debt levels.

Recently brokerage firm Kotak Institutional Equities said in its March report, that the underperformance of RIL has been puzzling, considering the positive outlook across its key verticals. The brokerage firm highlighted in its latest note that despite recent correction in RIL’s shares, the market appears to not assign any value to the company’s ventures in new commerce, FMCG, new energy, or the potential duopoly benefits of Reliance Jio.

Kotak also observed that the stock price reflects a lower multiple (25 times EV/Ebitda) for the retail segment, compared to their base case valuation of 32.5 times. Additionally, the market seems to factor in higher net debt by Rs 50,000 crore.

The financials

RIL reported a net profit of Rs 19,299 crore for the March quarter, up 19 percent from the year-ago period. Gross revenue from operations was at Rs 2.39 lakh crore, up 2.8 percent. Capital expenditure in FY23 was at Rs 1.41 lakh crore, and net debt as of 31st March 2023 stood at Rs 1.10 lakh crore.

According to most analysts, RIL is expected to maintain high capital expenditure (capex) levels in the year 2023-24. This projection is primarily attributed to the implementation of the 5G network and the ongoing expansion of its offline and online retail presence. As a result, it is expected that RIL’s return on equity (RoE) and return on capital employed (RoCE) may experience a decline in the near term.

The significant investments required for these ventures are likely to impact the profitability ratios, reflecting the company’s focus on future growth and market positioning.

Disclaimer:  Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.