MUMBAI: Reliance Industries bore the brunt of bearishness in the market this week, losing a whopping Rs 1 lakh crore in market capitalisation (m-cap), and slipping into number two position in m-cap rankings below TCS, after several months, on Thursday. Being an index heavyweight, fall in Reliance share prices also drags down the indices. Though the downtrend in markets have been across the board, Reliance’s fall was put to note by a couple of foreign brokerages for downgrade of stock.
The downgrade by Morgan Stanley on the stock to equal-weight, from overweight it had reaffirmed on the stock after the March quarter earnings announcement last month, surprised the markets. Morgan Stanley, in a report dated May 8, downgraded the stock to equal weight with a price target of Rs 1,349 from the April 21 report that maintained overweight with a price target of Rs 1,230.
Share price of Reliance moved up from Rs 1,382 on April 18, before it announced its fourth quarter earnings, to hit a 52-week high of Rs 1,417 on May 3. Since then, the stock has moved down, losing 11 per cent in four trading sessions in the current week alone to close at Rs 1,250.50 on Friday. Worry for the stock on the refining side comes from the global oil price turbulence; the economic sanctions against Venezuela and Iran, which has blocked two sources of oil and also markets for its products; as well as weakness in the product cracks.
“Factoring in these headwinds, we cut our earnings estimates by 15-17 per cent and incorporate lower refining margins (due to lower crude sourcing discounts and naphtha margins), costs related with gas pipeline contracts, higher capex (adjusting for telecom InViT hive off) and a weaker USD,” Morgan Stanley said.
After Q4 earnings, 11 brokerages had increased price targets, with most of them looking at the capex cycle nearing an end, deleveraging debt through hiving off of telecom tower and fibre assets, along with liabilities to InvITs.
“While Capex rose QoQ, commentary suggests Capex intensity may have peaked. Building-in lease payments for demerged assets drives a 3-8 per cent cut in our EPS estimates, but we raise our target price from Rs 1,500 to Rs 1,665 as we include the value from broadband, IMO and its listed investments,” CLSA had said.
Centrum’s view
Domestic brokerage Centrum Research on Friday said the sharp 11 per cent correction offered an opportunity to buy. “We fine-tune our FY20-21E estimates to factor in the changed macro environment but note that earnings strength remains undiminished even now. With strength in the retail business supporting earnings, even at lower assumptions for Petchem and JIO, we still see EPS growing at a CAGR of 27% over FY19-21E,” it said.