Top Reliance Analyst Downgrades Firm on Dimmer Cash Flow Outlook
A top-ranked analyst on Reliance Industries has downgraded India’s largest stock to underperform from neutral.
(Bloomberg) -- A top-ranked analyst on Reliance Industries Ltd. has downgraded India’s largest stock to underperform from neutral as he cut the firm’s cash flow outlook sharply post Covid-19.
The Mukesh Ambani-led conglomerate has “structurally higher-than-forecast” capital expenditure and “no meaningful free cash flow” as it transforms from an energy company to a technology play, Macquarie Capital Ltd.’s co-head of Asian energy research, Aditya Suresh, wrote in a report. He also raised his target price to 1,195 rupees ($15.8) from 1,124.34 on expectations of lower net debt, reflecting a 15% drop from Tuesday close.
The conglomerate’s profit plunged nearly 40% in the quarter ending March to a three-year low, as lockdowns globally slammed oil prices and hit its mainstay refining business. In an effort to reduce debt, Reliance is raising $7 billion through a rights issue -- its first share offer in about three decades -- and its digital services unit Jio has separately raked in almost $9 billion by selling stakes to companies including Facebook Inc.
Its shares have risen 61% from their March lows, significantly outperforming the nation’s stock benchmark. To justify the current equity value, Reliance must sustainably generate more than $11 billion in cash flow, Suresh said. However, according to his forecast, the energy giant will only be able to deliver an average of less than $2 billion per annum, with up to $10 billion in outflows due to major expenditures in the digital and retail businesses.
Reliance’s consumer-facing divisions face massive competition from Amazon Inc. in India, Suresh said. Furthermore, he expects the structural cut in energy demand and margins to “materially” eat into the post Covid-19 outlook for the refining and chemicals divisions.
At 44.1%, refining was the biggest contributor to Reliance’s revenues at the end of the March quarter followed by petrochemicals, whereas digital services accounted for about 10% of sales.
“So, while we see a path towards 2,000 rupees, this is far from our fundamental base case and in our ‘growth at reasonable price’ mindset we would take profit.”
The stock currently has 24 buy ratings and four sell recommendations, according to Bloomberg-compiled data. Suresh is ranked as a top analyst on the company by Bloomberg based on one-year returns.
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