Here's why CLSA and Edelweiss have downgraded Reliance Industries' stock

Edelweiss Securities notes that the stock’s primary triggers – deleveraging, asset monetisation and digital momentum – have already played out.

Market News: It has been a dream run for Reliance Industries’ (RIL) stock in calendar year 2020 (CY20). From hitting a low of Rs 868 on March 23, the stock has skyrocketed over 150 per cent to a record high of Rs 2,199 on July 27. The stellar rally came on the back of a series of big-ticket investments by marquee names such as Facebook, Google, Intel Capital, and Qualcomm Ventures into RIL’s digital arm, Jio Platforms. Further, the company’s announcement of becoming a net-debt free entity way before its schedule of March 31, 2021, made Street in awe of RIL, thus firing up the stock price.

However, not everyone looks convinced with the current valuation of the stock and believes that the market is way too optimistic on Mukesh Ambani-controlled RIL, overlooking the risks associated with it. For instance, Edelweiss Securities, in its report dated July 27, notes that the stock’s primary triggers — deleveraging, asset monetisation and digital momentum — have already played out. Also, the current exuberance witnessed in the stock seems redux of euphoria seen earlier, in 1994 (India liberalisation), 2000 (Y2K bug), and 2008 (KG-D6 offshore gas field), which suggests associated risk is high. Edelweiss has downgraded the stock to ‘Hold’ from ‘Buy’ with the target price of Rs 2,105.

Edelweiss Securities notes that its two-stage reverse-discounted cash flow (DCF) analysis of RIL stock shows that the market is baking in high earnings per share (EPS) growth, particularly for Jio Platforms – 35 per cent compound annual growth rate (CAGR) and 31 per cent for Reliance Retail sustaining over the next ten years, which by any measure is a tall ask.

Brokerages bullish on RIL post Aramco deal buzz, Jio’s commercial launch

The announcements saw the stock rally over 8 per cent in intra-day trade on the National Stock Exchange (NSE) to Rs 1,257 levels on Tuesday

From a possible deal with Saudi Aramco for a 20 per cent stake in the company’s oil-to-chemicals (O2C) business segment and the commercial launch of Jio GigaFiber on September 5, the slew of announcements made by Reliance Industries’ chairman Mukesh Ambani in its 42nd annual general meeting (AGM) on Monday have been taken positively by brokerages, who now maintain a ‘buy’ rating on the stock from a 12-month perspective.

The announcements saw the stock rally over 8 per cent in intra-day trade on the National Stock Exchange (NSE) to Rs 1,257 levels on Tuesday.

Here’s how leading brokerages have interpreted the statements:

JEFFERIES

We like this clear intent to lighten the balance-sheet even if the central plank for now is Aramco picking up a non-voting instrument that will give it a 20 per cent economic interest in its refining & petrochem (O2C) business. In return, Aramco will also get a board seat at Reliance and has also assured 0.5mbpd of oil supplies at market prices. For Reliance, though, this complex structure prevents a ring-fencing of O2C cashflow until it is transferred to an SPV in about five year…