Nomura downgrades Reliance stock
MUMBAI: Reliance Industries Ltd’s (RIL’s) stock was downgraded to ‘neutral’ from ‘buy’ by Nomura because of delays in telecom tariff hikes and steep valuations.
Although the outlook for RIL’s key businesses has improved, the valuation looks rich after the recent surge in the stock, the Japanese brokerage said.
“While the outlook for each of its key operating businesses has been improving, and we view RIL’s new energy forays positively, we believe that after the recent strong upward movement, valuations are becoming expensive,” analysts Anil Sharma and Aditya Bansal said in a note on October 18.
The recent RIL stock outperformance has been driven by investors’ positive stance on new energy, which attracts high environment, social and governance (ESG) investor interest, they said. However, there is still limited clarity on the new energy plans, overall capex and returns, they said.
Nomura has cut FY22 and FY23 Ebitda by 10% and 6%, respectively, due to the weak first half of 2021 and delays in telecom tariff hikes. “Our FY22 and FY23-24 earnings (estimates) are 8% and 16%, respectively, higher than consensus, and we see low scope for an earnings surprise. In our view, after the recent strong run, valuations at 20.5 times FY23 price to earnings (PE) and 12 times FY23 EV/ Ebitda are rich,” they said.
Further delays in telecom tariff hikes and margin declines in oil-to-chemical and retail are key risks to Nomura’s earnings forecasts.
Nomura has revised earnings to account for the impact of the second wave of the covid-19 pandemic on Reliance Retail, delays in tariff hikes at Reliance Jio and an increase in exploration and production estimates as R-cluster production in KG-D6 is ramping up faster than initial expectations.
As the markets are at all-time highs, there is an overall exuberance around Reliance Industries stock. However, in the first six months of 2021, the stock was relatively muted and underperformed the broader markets.