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RIL stock price factors in most positives, say brokerages

Puneet Wadhwa/New Delhi 22 Apr 19 | 10:08 AM

Reliance Industries (RIL) dipped nearly 2 per cent on Monday to Rs 1,345 levels on the NSE, after the company reported a 9.8 per cent jump in its net profit for the January – March 2018 quarter of the financial year 2018 – 19 (Q4CFY19) on Thursday. The gross refining margins (GRM), however, were a disappointment at $8.2 per barrel, compared to $11.1 per barrel y-o-y. The March 2019 quarter GRM is the lowest since the October-December 2014 period, which was at $7.3 per barrel.

Here’s how leading brokerages have interpreted the numbers:

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Refining was expectedly weak with margins at an 18-quarter low of US$8.2 with segment EBITDA now 40% lower than its peak six quarters back. Equally, though, Petchem EBITDA was resilient near all-time highs even with lower volumes although margins have since begun to soften. Domestic E&P was weak and US Shale had negative EBITDA again.

Overall, RIL reported an in line 4QFY19 with EBITDA down 1% q-o-q to $11.8 billion. Refining was weak, Petchem held up well, Telecom was a tad soft and Retail staggeringly strong. Equally staggering was the $6.7 billion q-o-q rise in net liabilities to $52.5 billion on capex, investments and adverse working capital. 

We keep our under-perform rating with a Rs990 price target (from Rs 935) noting that the fibre / tower deals may not be immediately SOTP (sum of the parts) accretive even as they transfer $16 billion of liabilities off the balance-sheet.


As natural decline takes its toll on both domestic and US production the profitability in E&P segment remained weak. JIO continued to add subscribers with net addition of 26.6 million (gross 33.2 million), taking the subscriber base to 307 million. Average revenue per user (ARPU), however, declined to 126.6 (4QFY18: 137) as 'JIO-Feature Phone' customers under the 'Monsoon Hungama' promotion, were on-boarded at lower price points.

We retain our HOLD rating on RIL, with a target price of Rs 1245, as we find the stock fairly valued but remain optimistic about the earnings potential of consumer facing businesses. With the stock trading at P/E of 14x FY21e and EV/EBITDA of 9x, we believe that our estimated earnings CAGR (FY19-21e) of around 17% and RoE around 15% are priced in.


Deleveraging is the key driver for RIL and further re-rating hinges on reputed investors in the InvIT and SPVs getting other tenants such as telcos, enterprises, and ISPs, which should lead to RIL’s preference shares redemption. We await Q1FY20 numbers to assess the P&L impact. Lower capex and FCF generation are other triggers and management has hinted the end of mobility capex with 99 per cent coverage. We downgrade RIL to Hold, being watchful of the above-mentioned triggers. Key risks are adverse commodity pricemargin and currency movement, competition and cost-capex overruns.


RIL is maximizing value through capital allocation changes. Divestment of utility-like businesses, such as tower and fibre arms (to which we ascribe a 43% premium to invested capital) and 6 VLEC’s to Mitsui monetizes NPV gains upfront. Moreover, the fibre/tower divestment will lower leverage at RIL in the future due to lower capex intensity. Part-monetization of refinery and retail businesses may similarly be on the anvil. 

We demonstrate that demergers during 2005/06 had triggered a 38 per cent stock price rally. We feel the proceeds will fuel future value-accretive investments into upstream, refinery, media, retail and broadband. We revise our SOTP based target price upwards by 4 per cent to Rs 1701/share, based on a valuation hike of Rs 380 billion (vs Rs 780bn by RIL) of fibre assets. Retain BUY rating.

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