Reliance shares down 22% from all-time high: Attractive entry opportunity, says JP Morgan

• Mukesh Ambani-led Reliance Industries’ stock has underperformed the Nifty50 index over the last two years.
• The company’s shares hit a fresh 52-week low on Thursday, declining for the sixth consecutive day.
• JP Morgan said that the catalysts for RIL’s stock performance are limited in the near-term.
• However, Reliance’s retail play, its shift in strategy of targeting premium subscribers in telecom, and its capacity to make large investments makes the company an attractive option in the long term, according to JP Morgan.

Reliance Industries Limited (RIL), India’s most-valuable company, saw its market capitalisation fall by ₹1.26 lakh crore in the last six days as foreign institutional investors (FIIs) continue to pull out money from Indian markets to redirect it to more lucrative markets. Despite limited catalysts in the near term for the stock, the fall in prices makes RIL attractive to long-term investors, says JP Morgan.

On Thursday, Reliance shares hit a fresh 52-week low. The shares have fallen by 8% in the last six days. Meanwhile, the benchmark Nifty50 index has lost 4.3% in the period.

Shares of Reliance hit an all-time high of ₹2,856 on April 28, 2022, taking its market capitalisation to ₹19.3 lakh crore. Since then, its shares have fallen by nearly 22%, marking a decline of ₹4.23 lakh crore in the company’s market capitalisation – this is almost equivalent to the market cap of Bharti Airtel.

Reliance Industries’ stock has underperformed the benchmark Nifty50 index in the last two years.

However, the fall in the oil-to-telecom conglomerate’s stock makes for a good entry point for investors, according to the analysts at JP Morgan.

“We think the stock offers long-term investors an attractive entry opportunity given the multiple catalysts over calendar year 2024-25 – potential listings of consumer businesses, petrochem growth, large 5G capex monetisation, new energy ramp-up,” said a JP Morgan report.

Foreign institutional outflows dampen Reliance’s stock

Reliance’s shares are currently trading barely above the bear-case scenario of the brokerage, which is ₹2,190.

However, JP Morgan says that this correction is not due to any new stock-specific risks, but due to outflows from foreign institutional investors (FIIs). The report mentions that FII holding in Reliance Industries has hit a six-year low in the December 2022 quarter, touching 23.5%.

FIIs have reduced their stake in Mukesh Ambani-led Reliance Industries over the last six consecutive quarters – from 25.4% in September 2021 to 23.5% at the end of December 2022.

No tariff hikes by Jio seen in 2023

Reliance Jio on Tuesday introduced a new set of postpaid family plans called Jio Plus, aimed at families with up to four members looking for a shared plan at an affordable price.

The launch of the Jio Plus postpaid plan could intensify competition in the telecom sector for the small but rich postpaid segment, and thereby delay tariff hikes, according to Kotak Institutional Equities.

“Reliance Jio has so far been unable to replicate its prepaid success in the postpaid category, but we believe its new family postpaid offerings are attractively priced and could lead to renewed price competition in postpaid," Kotak Institutional Equities said in a note.

The brokerage noted that this could even lead to a dilution of 1-3% in the average revenue per user (ARPU) of its rivals Airtel and Vodafone Idea.

According to JP Morgan, the telecom business could be looking at a no-tariff-hike scenario in 2023, as it believes Jio has made a shift in its strategy, targeting premium subscribers instead of the low-end ones.

“Jio’s change in strategy is also one of the reasons we believe tariff hikes won’t come in CY23, as telcos focus on defending – or, in the case of Jio, winning – market share through 5G rollouts. This should also drive deflation in high-ARPU (average revenue per user) subscribers, as Jio may launch unlimited data plans to attract 5G subscribers,” the brokerage noted.

Strong retail performance & RIL’s large investment capacity are positives

Reliance Retail’s performance has been strong and according to JP Morgan, it is on track to deliver a profit after tax of $2 billion by FY25.

“Reliance Retail has surprised positively on aggressive floor space additions through the last three years of Covid-19, with retail floor space additions, warehouse additions, acquisition of brands, and the launch of newer verticals with Retail,” the brokerage said in its note.

Beyond retail, JP Morgan believes Reliance’s capacity to make large investments is also a positive, especially in these times of tight liquidity.

“In an increasingly capital-scarce environment, RIL’s core strength of investing large amounts of capital in growth projects is a key positive,” JP Morgan added, but underlined that Reliance’s initiatives like new energy will take 12-18 months to emerge as an important aspect of an investment case.

However, with RIL in the midst of a capex cycle with investments in 5G, new energy and consumer brands, the company’s cash generation might outpace its capex over the next two years, Business Standard said citing a BOB Capital Markets report.

Overall, JP Morgan notes that while the catalysts for stock performance are limited in the near-term, the company remains an attractive option for investors in the long term.

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