RIL: Valuations at multi-year lows, should you invest?

Recent news flow around government imposing a fine of $1.55 billion in respect of gas migrated from neighbouring blocks is just one of the factors weighing on the Reliance Industries (RIL) stock. Despite RIL's decision to contest this penalty via arbitration, the stock has not moved much. Concerns on project delays and cost over-runs along with expectations of delayed break-even of its telecom venture — Jio have also kept the stock price under check in recent times.

In fact, at current levels, the RIL scrip trades at just 1.1 times FY18 estimated book value which is closer to its 10-year low. On a price to earnings basis as well, the scrip trades at 10.5 times FY18 estimated earnings which is below its historical average one-year forward price to earnings ratio of about 13.5 times. These valuations seem to adequately capture most of the concerns around RIL, believe analysts. But does this mean the stock could rally from here on? Not quite, at least for short-term investors.

 

Notably, in the past one year, investors have increasingly focused on the progress, investment as well as monetisation of Jio as well as the time-line of new project commissioning in the core oil and gas business. Both these factors are key to bring about a meaningful improvement in RIL's earnings as well as return ratios. So, till there is progress on either of these factors, the stock is likely to remain range bound, believe analysts.

"While core refining and petchem data points have broadly ticked higher over the last few weeks, there is no major news flow on telecom or the new projects expected in the near term and this could weigh on the stock in the near term," says Pinakin Parekh, analyst at JP Morgan in a recent report on the company. The brokerage has a neutral view on the stock with a target price of Rs 1,070 per share.

In telecom, though Jio has managed to garner a decent subscriber base of 16 million till September, analysts remain concerned about its monetisation. Some such as Vinay Jaising of Morgan Stanley believe that "there is a risk for Jio to delay its commercial launch by another quarter to April-17". If that happens, not only will this business' losses widen but the breakeven period too will be pushed ahead. Jaising though is positive on RIL as he believes the risk-reward appears favourable at current levels. His target price of Rs 1,280 indicates upside of 28 per cent from current levels. RIL's core oil and gas business has been doing well and the momentum is likely to continue going forward as well. Most analysts believe the new capacities could come on-stream in the second half of FY18 and boost RIL's earnings. In this backdrop, long-term investors can look at accumulating the stock.