Does RIL set the stage for largecaps comeback? Not really, say analysts

On January 29, the Mukesh Ambani-led Reliance Industries (RIL) single-handedly contributed to a 38 percent surge in the Nifty 50 market capitalisation.

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A 6 percent rally in Reliance Industries on January 29 does not really indicate a comeback for largecap stocks, analysts told Moneycontrol. Money is simply flowing from one largecap to another as foreign investors are recasting their portfolios, they argued.

On January 29, Mukesh Ambani-led Reliance Industries (RIL) alone contributed to a 38 percent surge in the Nifty 50 market capitalisation, while ONGC, Adani Enterprises, Larsen & Toubro, HDFC Bank and Coal India together contributed over 26 percent to the rally.

“Reliance benefits from three things: Zee-Sony merger fallout, refining margins shaping well, and new energy vertical scaling up. It is a very stock-specific move,” said Pankaj Pandey of ICICI Direct.

Also Read: RIL rally triggered by funds taking refuge in ‘strong stock’ to hedge against short positions

“I don’t think the Reliance move indicates a trend reversal for largecaps, though largecaps are a lot more attractive than midcaps from a risk-reward perspective. Till the results season pans out, it will be a lot of stock-specific moves, I believe,” Pandey said.

RIL strong, other heavyweights weak

The sheer weight of Reliance Industries on the Nifty 50, which was 9.2 percent as of end-December, means that any further rally in the stock should propel the benchmark index further, in theory. But, other heavyweights like HDFC Bank and TCS are not showing enough strength for the index to move forward decisively, said analysts.

HDFC Bank is down 14 percent in the past one month while TCS is up barely 0.16 percent. As of December-end, HDFC Bank had 13.52 percent weightage on the index, TCS had 4.5 percent.

HDFC Bank shares have seen a sharp sell-off after its Q3 FY24 results. The bank reported a key miss in net interest margins (NIM) due to the low deposit growth and higher cost of funds. Higher provisions and decadal low earnings per share (EPS) growth in Q3 are also contributing to the decline in shares.

All IT companies, including TCS and Infosys, continued to post soft numbers in Q3.

Also Read: HDFC Bank faces tough task to deliver both on margins and costs: Suresh Ganapathy of Macquarie

On the other hand, the recent surge in Singapore GRMs (gross refining margins) indicates a positive outlook for RIL’s oil-to-chemicals business, said independent analyst Prakash Diwan.

This marks a valuation reset for RIL, which is currently under-owned by FIIs, he said. “As FIIs sell HDFC Bank, IT and FMCG stocks due to bleak outlook, they will redirect funds elsewhere. And, RIL will be a big beneficiary. FIIs can move out of some stocks but cannot move out of Indian markets as a whole, so money is now going to RIL,” Diwan added.

Where is Nifty headed next?

With the Interim Budget just a couple of months away, the Q3 results season still playing out, and valuations slightly out of the comfort zone, the Nifty 50 is expected to remain rangebound.

Going ahead, similar erratic movements may persist ahead of key events, said analysts at Angel One. Immediate resistance for the Nifty is apparent around the 21,850 – 21,950 zone, while immediate support has shifted higher towards the 21,600-21,550 zone.

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

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.