JP Morgan Cuts EPS On RIL By 7-8%; Sees Limited Upside In Share Price

JP Morgan has cut its earnings per share (EPS) on Reliance Industries, admitting that its longstanding neutral rating on the stock has not worked so far.

Despite it being the best performing large-cap stock in 2020, the global brokerage firm does not feel that the significant rally in RIL's share price will sustain going forward.

It has set a target price of Rs 1,990 for the stock for September next year, just Rs 31 or 1.5% upside from its closing on Tuesday. It is also Rs 70 less than its previous target of Rs 2,060 for June 2021.

This year, RIL shares hit a record high of Rs 2,369.35 on NSE on 16 September.

JP Morgan said that deleveraging, digital expansion, Jio Platform Ltd and a retail re-rating on long-term potential backed by the global rally in digital plays have driven sharp outperformance.

"However, with deleveraging complete, Jio Platform Ltd and retail valuations established, and significant foreign investor ownership, we see a consolidation phase ahead for the stock over the next few quarters. We maintain our neutral rating, acknowledging that it hasn't worked," it said in a note on 1 December.

JP Morgan has reduced EPS of RIL by 7-8% for FY22-23 adding that though it is enthused by the 10-year RIL thesis of driving India's increased digitization, even a long-term story needs short-term positives/catalysts, which it sees as limited in the near term.

"Ironically for a digital play, the next positive catalyst may be a sharp refining margin recovery, which is more of a second half of 2021 story," it said.

JP Morgan also spoke of RIL's under-performance in between 2007 and 2016, and now four years of large outperformance between 2017 and 2020.

"Similar to the exuberance now, at that point discovery of large reserves of gas in the KG block, followed by expectations of monetization via sale to strategic investor (BP invested into RIL's KG basin development) and strong earnings growth driven by the global growth upcycle saw investors pricing in very strong growth profile of the KG block, which drove the large outperformance versus the Nifty in 2004-07; and as the KG block under-performed, RIL had a decade of under-performance between 2007 and 2016," it noted.

Since 2017, Jio rolled out the telecom services, and gained subscribers, while the core refining and petchem businesses benefited from large earnings upgrades on the back of a very strong global upcycle in gross refining margins (GRMs) and petchem spreads, driving the large outperformance which hit the peak in 2020 on the large stake sales and de-leveraging.