The real story behind Reliance Industries' spectacular $40 billion bull-run

• Around $40 billion added to RIL’s market value in the last five months.
  
  
• The stock rallied RIL said that Saudi Aramco will infuse $15 billion to acquire 20% of stake in refining and petrochemical business.
  
  
• Internally, the company values Jio at $65 billion and retail at $35 billion, according to J P Morgan.

If something is too good to be true, it probably is. After Reliance Industries’ spectacular bull-run for the last three years, analysts are now waiting for the company to fulfill the promises that have brought the stock so far ⁠— around $40 billion added to its market valuation in the last five months.

One of the reasons for the surge in blue-chip stocks like RIL has been the lack of options for investors. Investors, including mutual funds, have been averse to risky, small companies ⁠— allowing a premium for established names in the stock market. But that’s not all.


A steady stream of positive news has helped the RIL stock. “We think investors would like to see completion of the various de-leveraging transactions - refining stake sale, completion of InvIT transactions, strategic investors in Jio/retail; that RIL initiated in the second half of last calendar year,” said a report by J P Morgan which has a neutral rating on the stock.

Good news that is yet to materialise

The stock rallied by a sharp 30% from August last year after chairman Mukesh Ambani said that Saudi Aramco will infuse as much as $15 billion to acquire 20% of stake in refining and petrochemical business.

The timeline of this deal closure was never mentioned at the annual general meeting (AGM). And investors fear that it might not be completed in the current financial year, as it is linked to many approvals.

The Indian government has already thrown a spanner in the refining sale deal over another dispute. The government is demanding $3 billion from RIL and its partners in Panna, Mukta Tapti oil fields to pay up a penalty over profit calculation.

Its July announcement of $3.7 billion infusion into telecom investment trusts by Canadian fund Brookfield is also yet to close, officially. But these delays are not affecting the positive sentiment that these large infusions have created.

Meanwhile, the debt on the books has soared to ₹2.9 lakh crore or $41.2 billion.

Given the uncertainties and the massive debt, a rapid rise in the share price, like in the case of RIL, would have been unlikely for any other company.

Mutual funds own too many shares of RIL

Parallel to the announcements, there have been significant changes in the stock holding patterns as well. It looks like most of the biggest bettors on RIL stock could be mutual funds. Their ownership of the stock is at a 10 year high at 5.5% stake in the company, according to J P Morgan.

In 2019, mutual funds were underweight on the stock – which simply means, the investor is more keen to ‘sell’ the stock than ‘buy’.

That is reversing now. “While on an aggregate basis, mutual funds are still under-weight the stock, we highlight that the underweight has now reduced materially and this is unlikely to be a driver of the stock in 2020,” said J P Morgan.

$100 bn companies –retail and Jio

There has been a steady stream of good news in both of its consumer businesses. Its retail business launched JioMart, the online grocery business. Jio too raised its tariffs which will add to its profit margin.

However, investors might seek more evidence of the reasons behind the sky high valuations that the businesses command. RIL, which has plans to spin off telecom and retail businesses, had restructured them and set benchmark valuations. Effectively, they value Jio at $65 billion and retail at $35 billion, according to J P Morgan.

There is a way this price for RIL can be justified.

If a strategic investor, like Aramco or any other company that may invest in the telecom investment trust, is willing to pay a similar amount, that would be a vindication for people who have bought RIL shares after the recent run-up.

“While there are internal benchmark valuations, we think large strategic investors buying over 10% stake in these businesses at or above the benchmark valuations would be seen positively,” the research report said.

A reinforcement of valuation in times of an erratic stock market performance might give the millions of RIL’s retail investors a reason to go with the flow.