Here's why RIL's stock price has zoomed

Analysts say earnings are expected to double while valuations are still at multi-year lows

Did Mukesh Ambani say something unusual at Reliance Industries’ 41st annual general meeting (AGM) last week that resulted in the sharp move of its stock price? The stock has rallied over 12 per cent in the past week, closing at Rs 996.50 on Friday.

Analysts think so. Most of them have either upgraded their recommendation or have changed their price target.

So what was it that analysts saw in the AGM that they could not at the time of the company’s results?

Since the Lehman crisis, Reliance’s stock has been an underperformer. The company has not participated in the rally that saw the market touching new highs.

On the valuation front, Reliance is trading at multi-year lows, thus the gap with the market valuation has widened. Poor output of gas from its KG basin reserves plus a lower than expected increase in the price of gas and low crude oil prices saw a number of funds exiting from the stock. But the flow of bad news seems to be ebbing.

 

This is clear from Ambani’s commentary at the AGM, which was not detailed at the time of the company announcing its annual results.

The biggest takeaway is that Reliance Industries, since its incorporation in 1966, has built up an asset base of around Rs 2.3 lakh crore, or $31.5 billion, and this will be doubled in the next two years. In other words, 50 years of growth will be bundled in two years.

There is nothing new in the information that the company will be doubling its asset base, but Ambani in his AGM speech spelt out the timeline for commissioning of its projects.

Not only will new assets be added to the company’s books, but Reliance will also be sweating its existing assets more. Take the example of the closed petrol pumps. The company will be starting its 1,400 petrol pumps within a year. Reliance is planning to reach a market share of over 14 per cent it enjoyed in 2006 when the pumps were fully operational. This would mean better deployment of assets as it will also result in the company earning more profit by retailing fuel rather than selling it in bulk.

  Citi Research in its report on the company has cited three main reasons for re-rating the stock. The report says Reliance, after years of sustained declines in its operating profit — largely on account of the falling contribution from the gas business — will start showing growth. Second, there will be a gradual turnaround of its return ratios. Finally, the proportion of unproductive capital will reduce. Thus, after a long time, almost the entire balance sheet of the company will be at play, yielding perhaps higher than nominal or no returns.

However, there has been a delay of six months in the commissioning of the company’s refinery off-gas cracker, but other petrochemical projects are on line. Going forward, 50 per cent of the incremental earnings are expected from these projects, which will account for 40 per cent of the incremental capital expenditure.

What was a game changer for analysts was a clear timeline for Reliance Jio, the telecom initiative of the company. Ambani said 4G data services would be launched in December 2015 but trial runs would start in a couple of months. The services will reach 80 per cent of the country’s population in the first full year of operation in 2016-17 and 100 per cent in three years. Bharti Airtel currently covers only 86 per cent of the country.

Edelweiss says Reliance has already laid out 250,000 km of optical fibre network across the country compared to 197,000 km by Bharti and 93,400 km by Idea. Reliance intends to double its coverage over the next three years. What also seems to have excited the market is the response of 4G in the Chinese market. Ambani cited the example of China Mobile, where LTE 4G devices as a percentage of overall shipments have increased from 10 per cent to 84 per cent in just one year, thereby hinting that rapid growth for Reliance Jio was a strong possibility.

Not only have analysts covering Reliance upgraded the company, but those covering the telecom sector have turned cautious on their recommendations for other companies given the clarity on Reliance Jio’s game plan. Jefferies in its report on the telecom sector said the sector was fraught with risks. Competition will keep realisations in check for the sector while data is cannibalising voice and necessitating higher capital expenditure but is limiting returns.

Edelweiss sums up the market feeling on Reliance by using the analyst jargon GARP — growth at reasonable price. The company’s earnings are expected to double while its valuations are still at multi-year lows.