CLSA fears EPS downgrades for RIL but retains outperform

CLSA fears EPS downgrades for RIL but retains outperform

CLSA fears EPS downgrades for Reliance Industries as about 70% of 84% two year EPS growth comes from the uncertain telecom tariff hikes and refining margin rebound.

The brokerage said it is retaining outperform rating on the stock despite elevated expectations and earnings being an overhang as the stock holds long term promise.

“36% of RIL’s two-year EPS growth of 84% is contributed by our prediction of a 10% annual telecom tariff hike in Apr-21 and again in Apr-22. Another 32% comes from assumption of a gross refining margin rebound from US$6.8/barrel in FY21 to US$9 in FY22 and a further US$11 in FY23,” said CLSA. “These are uncertain and could pose earnings downgrades risk for RIL and thereby Nifty through 2021,” said CLSA.

The brokerage said Reliance Industries is likely to take steps to strengthen e-commerce and technology offerings in this year but investors may not receive instant gratification on their optimism after a strong 2020.

Stock market listings of Jio or retail may not happen this year and any progress on a stake sale in downstream business may not drive huge value accretion from current levels, said CLSA.

The stock gained 128.7% from its calendar year low of Rs 867.82 in March 2020 to end the year 2020 with a gain of 32.2%. The gains were driven by stake monetisation by the company across its retail and telecom businesses.

“In 2021 we expect steps to improve omnichannel offerings via JioMart, strengthening technology strategy by showcasing 5G readiness, and enhancing content apps,” said CLSA. “Likely ramp-up in broadband, rising telecom dominance, and a gas production pickup may not be immediate surprises but could boost long-term promise,” it added.

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