Coronavirus impact: RIL's stock pricing in a worst-case scenario

Not long ago, Reliance Industries (RIL) was the most sought after action among investors and RIL was the first Indian company to reach a market value of R $ 10 trillion on November 28, 2019.

However, a series of recent events, many of which have also affected broader markets, have resulted in a strong 40% correction in the stock from February’s highs. Concerns about the margins of its refining and petrochemical activities, the potential impact of Covid-19 on retail sales and the possible delay / cancellation of its agreement with Saudi Aramco and therefore the reduction of debt, are the main reasons for the decline. However, analysts now say that the worst seems to be taken into account and that the decline now seems limited.

In its main refining and petrochemical activities, the refining margins remain low and the expected gains from the Sulfur Fuels Regulations of the International Maritime Organization (IMO) of 2020 also did not materialize due to the spread coronavirus that has an impact on demand. The Singapore complex’s refining gross margin (GRM), of approximately $ 1.6 per barrel in the fourth quarter of 2020, fell further from $ 3.2 in the fourth quarter of 2019. In addition, with demand Prices affected by polymers, which had bottomed out in December and showed some recovery, should also be affected by higher supply and higher supply.

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The telecommunications sector, however, is one of the few triggers that could support the stock. Analysts say short-term headwinds on RIL’s profits come from weaker downstream (petrochemical) margins in a deteriorating macro environment; however, it can be partially mitigated by a plausible increase in telecommunications prices at an appropriate time. The fact that consumer businesses (telecommunications, retail, etc.) are now seeing an increased contribution (now about a third) to RIL’s revenues is comforting.

Analysts believe that the stock price nevertheless takes into account most of the negatives. In fact, HSBC analysts say that after a sharp drop in the share price, the market expects a 40% drop in downstream refining and chemical EBITDA margins – the lowest in 10 years, worth zero for its E&P (exploration and production of oil and gas)) and real estate assets, a drop of 40% in valuations of retail businesses and a peak in net debt of Rs 3.2 trillion, including part of the liabilities associated with InvIT fiber. In simple terms, the street evaluates the results in an extreme case in its activities.

It is in this context that most analysts believe that the valuations offer longer-term opportunities for investors, and that the decline may be limited from current levels. BNP Paribas analysts say that China is stabilizing somewhat after the impact of Covid-19 and global preventive measures, they expect refining and chemicals margins to recover in the second half of the 20th century.

Analysts, drawing a parallel between the current financial crisis and the global financial crisis in 2008-08, say that oil and gas stocks are trading below financial crisis levels in terms of valuations. To justify current market valuations, profits for year 21 should see a reduction of up to 75%, and the price of oil should average 25 dollars per barrel. No wonder, HSBC analysts say that pessimism leaves room for surprises while BNP Paribas expects a rapid recovery in a changed scenario for RIL.

Regarding debt reduction, as the street now expects a delayed or canceled deal on Saudi Aramco due to low oil prices, reports indicate that Facebook (FB) is in talks with RIL to take a minority stake of 10% in the digital activity of the latter within the framework of Jio. Analysts at Kotak Institutional Equities say FB’s interest, if any, could be pushed to improve addressable opportunities in its largest market in terms of subscriber numbers. Jio’s levels of engagement with its own subscribers across the digital ecosystem can be appealing. The deal, if it arrives, can help reduce the debt.

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Analysts like Abhijeet Bora at Sharekhan say stocks reflect recent market collapse, decline in refinery and Petchem margin assumption and delay in potential revaluation due to concerns about the delay likely from the RIL-Saudi Aramco agreement. However, Bora adds that it also does not take into account the improved growth prospects for telecommunications activities (potential increases in ARPU) and the sustained high growth in retail activities.

Emkay Global analysts on Thursday cut their estimated earnings per share for EF21 / 22 by 25% and 14%, respectively, to lower profits from petrochemical and refining. Despite these reductions, profits are expected to increase by about 10% each in fiscal years 21 and 22. Although they also reduced their target price by 25% to 1,310 rupees, they maintained the purchase on the stock. “The RIL remains well placed to outperform a market recovery and we remain overweight,” they note.


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