Reliance Industries (RIL) was among the major newsmakers of 2020 – with big-ticket stake sales in Jio Platforms and Reliance Retail, a mega-rights issue and many acquisitions. Not just the company, the RIL stock too was much in the news with a heady roller-coaster ride over the year. From its peak of ₹1,610 in mid-December 2019, the stock had crashed to about ₹880 by end-March, hammered by the coronavirus impact; this had caused a historic crash in oil prices and raised scepticism whether Saudi Aramco will go ahead with its proposed plan to buy 20 per cent in the refining and petrochemical businesses of RIL.

Heady rally and reversal

But within a month, the stock gained more than 50 per cent despite the turmoil in the oil market; a good part of this rally was thanks to RIL’s top-dollar stake sale of about 10 per cent in Jio Platforms, the digital business holding company, to Facebook in April. This was followed by a series of rapid-fire stake sales in Jio Platforms to other marquee investors, culminating with Google in July; in all, more than ₹1.5 lakh crore was raised by selling nearly 33 per cent stake in Jio Platforms.

In between, RIL also raised about ₹53,000 crore through a rights issue in May -June. These huge fund-raises significantly eased concerns about RIL’s balance-sheet deleveraging plans. It also helped that in August, RIL announced important stake acquisitions – digital pharma marketplace Netmeds (for ₹620 crore) and the chunk of the Future Group’s businesses (for about ₹25,000 crore) – at attractive valuations to drive growth in the retail segment.

In early September, RIL also began big-ticket stake sales in Reliance Retail Ventures – eventually raising about ₹47,000 crore by divesting about 10 per cent over two months. All this, along with overall market buoyancy, saw the RIL stock go from strength to strength and by mid-September, it was trading over ₹2,300.

Since then though, the stock has lost about 14 per cent despite the market rally, stake sales in Reliance Retail continuing until November and Reliance Retail acquiring Urban Ladder for an attractive ₹182 crore. A few factors seem to have led to the reversal. While the digital business did well, RIL’s overall financial performance had taken a knock due to the coronavirus impact on the refining, petrochemicals and retail segments. This, along with the sharp rally in the stock had pushed up its trailing valuation to well above past averages.

Next, RIL’s acquisition of the Future Group’s major businesses came under jeopardy due to the legal challenge mounted by Amazon against the deal. Also, while the mega stake sales have established high valuation parameters for Jio Platforms and Reliance Retail, helped RIL reduce debt sharply, and will reduce interest cost -- it also means that the future consolidated revenue and profit of RIL will be lower to the extent of the stakes sold.

Opportunity

The price fall though presents an opportunity for investors with a long-term perspective to accumulate the RIL stock. One, valuations have moderated somewhat. At ₹1,994, the stock now trades at about 30 times trailing consolidated earnings, lower than the 35 times or so it traded at a few months back. While this is still expensive on a trailing basis (the past three-year average is about 20 times), the stock has likely been re-rated. This is due to the company’s strengthened balance-sheet position with significant debt reduction (debt-to-equity is less than 0.5 times as of September 2020) and the vote of confidence by marquee investors in the growth prospects of the digital and retail businesses. These segments have become the key growth drivers of the company over the past few years, and the opportunity in these businesses in India is big.

RIL, already a major player, plans to aggressively grow its share of the pie through an omni-commerce strategy, including brick-and-mortar and e-commerce, with an integrated digital-retail-financial troika approach. If executed well, this could translate into significant consolidated earnings growth for RIL in the coming years, even after the stake sales.

In this context, the sharp jump in the ‘financial services’ segment’s assets over the past few quarters also seems significant. It could position RIL to benefit from the recent suggestion of an RBI internal working group to allow large corporate and industrial houses to own banks. RIL already has a tie-up with SBI in Jio Payments Bank and holds 70 per cent in this venture. The collaboration with Facebook-controlled WhatsApp that has launched its UPI-based payment platform will also help.

Two, with the impending vaccine rollouts, the opening up of economies globally and in India should help the retail, refining and petrochemicals segments get back to normalcy in a few more quarters. This could mean a return to good growth across all major segments, especially the cyclical refining and petrochemicals businesses. Also, the company’s integrated oil-to-chemicals business and plans to convert most of the crude oil into chemicals should help in the long run.

Three, it is likely that Jio Platforms and Reliance Retail will be listed through initial public offerings in a few years – this could provide further value unlocking opportunities for RIL.

Four, the recent news about the start of gas production from the R Cluster gas field in the KG D6 block is a positive for the beleaguered hydrocarbon exploration and production business. It is unlikely to move the needle much for the company in the near-term but could help in the long-run, if volumes are good.

Whether and when the deal with the Future Group will go through is uncertain. If derailed, it will be a setback for RIL, but is unlikely to stop the organic growth momentum in the retail business, like in pre-Covid.

Also, the Saudi Aramco deal remains uncertain. But even if it does not go through, RIL is unlikely to be affected much since its deleveraging plan has already been executed. The company could possibly find other investors in the oil-to-chemicals business which has been carved out as a separate entity.

The digital and retail businesses are now contributing about half the overall operating profits; this is likely to increase in the coming years. A hedged business model has held RIL in good stead with the digital business doing well during the pandemic and mitigating the impact on the other segments. Likely tariff hikes in telecom will further benefit the digital business.

All said, it may be a good idea for investors not to go overboard. There are still many uncertainties about economic recovery, both globally and in India, and the trajectory of the virus. Also, the global rally in tech stocks has rubbed off on the RIL stock this year. Reversals could hurt too.

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online. )

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