RIL a rally champion, again KRISHNA KANT writes
Its stock price up 17.3%, outperforming the index that is up 10.5%
Reliance Industries (RIL) — India’s biggest listed company — is once again leading the market rally on Dalal Street after being an under-performer for nearly a year. The stock was the best-performing index stock on Friday and closed the day with gains of 4.1 per cent, against half a per cent rise in the benchmark BSE Sensex during the day.
Before Friday’s rally, the stock was up 5.7 per cent in the first three trading sessions in August, against 1 per cent rise in the benchmark index in the period. The company’s stock price is now up 17.3 per cent since the end of July this year, outperforming the index that was up 10.5 per cent during the same period.
The stock closed Friday at a new lifetime high of ~2,388 per share, against a 52-week low of ~1,830 per share made on January 29 this year. In comparison, RIL didn’t participate in the rally for nearly a year. Its stock price moved in a narrow price band of ~1,950-2,020 per share between July 2020 and July 2021. In the same period, the benchmark index was up 40 per cent, boosted by a rally in metals and technology (tech) stocks.
Many analysts expect the recent rally in RIL to sustain for a few more weeks. They expect the company to report a much improved earnings growth in the July-september quarter (second quarter, or Q2) of 2021-22 (FY22).
“A fresh disruption in global supply chains is expected to boost the gross margins and profitability of RIL’S crude oil refining and petrochemical (petchem) business in the forthcoming quarter. As a result, we expect the company to report a big jump in earnings in Q2,” says G Chokkaligam, founder and managing director, Equinomics Research & Advisory. His firm has given a price target of ~2,500 on the stock - nearly 5 per cent higher from its Friday’s close.
While the company diversified its revenue and profits in the past few years by investing heavily into retail and telecommunications, oil refining and petchem business remains the top contributor to its earnings and its primary cash cow.
The company’s oil refining and petchem, which is now housed in its oil-tochemicals (O2C) division, accounted for nearly 55 per cent of RIL’S consolidated profit before interest and taxes of around ~19,000 crore in Q1FY22, up from its 49.6 per cent contribution in the first quarter (Q1) of 2019-20 (FY20).
The company’s retail division is also expected to do better in the remaining nine months of FY22 after a relatively poor showing in 2020-21 (FY21) and Q1FY22 due to Covid-19.
A higher earnings growth by its O2C and organised retail business is likely to boost the company’s key profitability, such as return on equity (ROE) and return on capital employed (ROCE), in FY22.
The company’s ROCE on a consolidated basis declined to 7.8 per cent in FY21 — its lowest level in at least three decades. The previous low was 9.5 per cent in 2014-15.
Similarly, the company’s return on net worth declined to a low of 8.4 per cent last financial year, according to the Capitaline database.
According to analysts, a likely improvement in ROE and ROCE is a positive trigger and could translate into higher valuation ratios for the company.
Others say investors are betting on an incremental earnings growth from the company’s planned foray into green energy, such as solar and hydrogen.
“The expectation in the market is that the proposed diversification into green energy will start contributing to RIL’S consolidated earnings in the next three years,” says Shailendra Kumar, chief investment officer, Narnolia Securities.
Speaking at the company’s annual general meeting in June this year, the company’s promoter and Chairman Mukesh Ambani announced a multiyear plan to invest around ~75,000 crore in solar energy, which includes a plan to manufacture solar photovoltaic panels in India. Ambani also announced a foray into 5G mobile tech and the rollout of a new affordable 4G-enabled smartphone by Diwali this year.
Analysts say RIL’S stock performance also depends upon the movement in the broader market. They say it now increasingly behaves like a safe-haven stock and does well when investors turn cautious.
“RIL’S earnings growth has become very predictable, much like what we can expect from top fast-moving consumer goods and interactive response tech services companies. This, coupled with the company’s huge size and market capitalisation, makes it a low beta and a defensive stock,” says Kumar.