Can RIL stock shed recent underperformance and stand out again in coming months?

By any measure, a 20% return on a stock would be considered a very good performance. But when the benchmark index has gained 27% over the same period, the same performance would pale in comparison.

This is exactly what has happened to billionaire Mukesh Ambani-led Reliance Industries Ltd (RIL), India’s most valuable company. 

With a market capitalization in excess of Rs 15.8 trillion, RIL dwarfs the next biggest counter, Tata Consultancy Services, by a mile. So, it’s likely performance over the coming years becomes a matter of great interest among the investor community and analysts alike. 

If analysts at JP Morgan are to be believed, RIL is likely to keep underperforming over the next one year. 

JP Morgan analyst Pinakin Parekh says that catalysts that could further propel the stock to outperform the market are still sometime away.

“With key catalysts—deleveraging, tariff hikes and O2C stake sale—out of the way, any material stock outperformance would have to wait for the next set of potential catalysts which, in our view, is still some time away,” said Parekh, according to a report in The Economic Times.

What factors have propelled the counter over the last few years?

According to the report, RIL’s multibagger performance in the last five years have been reliant upon its entry and eventual success in the telecom business and great strides it took in retailing space. The company also raised a lot of cash selling a stake in these two ventures, which helped the company cut down debt, the report noted.

The report says that at 23 times its 2022-23 price-to-earnings ratio, a compound annual growth rate of 25% for the period FY21-24 has already been factored in. As a result, there is little room for an upside from here on in. 

What price range does JP Morgan see the RIL stock at?

JPMorgan is ‘neutral’ on Reliance Industries with a target of Rs 2,575. This was close to the consensus price target of Rs 2,687. The highest target on Reliance is at Rs 3,185 and the lowest at Rs 1,800.  At present, the counter is trading at Rs 2,370 levels. 

So, what can make the next 12 months again stand out for RIL? 

JP Morgan thinks that the RIL counter could see an upside if it goes in for a stake sale in its renewable energy business, lists its telecom or retail businesses and again goes in for any other stake sale, like the one that was planned with Saudi oil and gas major Aramco, but was called off. 

Alternative energy is a large long-term opportunity for Reliance and the company has laid out its vision across solar, storage, fuel cells, hydrogen, and has taken the first steps with the recent REC acquisition, the report noted.

“We also see RIL eventually bringing large external investors into its new energy business, similar to what it has done for Jio and retail, but do not see this happening in the near term, given the very nascent stage at which it is currently,” said Parekh, according to the report.

The report further said that investors and analysts are expecting that RIL will look to unlock value out of its retail business and telecom venture Jio, which have emerged as two of its crown jewels over the last decade or so.

“Given the presence of large external investors in both the businesses, a listing of these two segments is likely in future, though we do not see a listing of Jio/Retail at least for the next 18 months,” said Parekh. “With RIL’s stock price reflecting large premiums to the transacted value, we believe the company would like to show more progress in its non-telecom digital initiatives at Jio and digital commerce at retail, and this could take more time.”

Moreover, RIL has not ruled out reviving plans of a stake sale, like the aborted plans with Aramco. 

“Any stake sales in any other businesses (ecommerce/smaller stake sale in O2C) would be positive: With the O2C stake sale off the table for now, investors would like to see RIL bring external investors into other businesses,” Parekh said.