Reliance Industries Limited's (RIL) shares have surged over 150 percent from the stock's 52-week low last seen in March after the conglomerate received big-ticket investments for its digital arm Jio Platforms and subsequent achievement of net debt-free target much before its scheduled target.
However, Edelweiss on Tuesday downgraded the stock to 'Hold' from 'Buy' with the target price of Rs 2,105 as the brokerage believes that the market may be too optimistic on the Mukesh Ambani-led company.
According to the brokerage, the stock markets have "significantly and prematurely" driven up the valuation of RIL levels enjoyed by the so-called FAANG companies in the US. FAANG refers to Facebook, Apple, Amazon, Netflix and Google.
While these multinational tech giants have large free cash flows, for Reliance, it is still its oil-to-chemicals business that generates bulk of the cash.
Edelweiss Securities said in its note that the two-stage reverse-discounted cash flow (DCF) analysis of RIL stock shows that the market is baking in high earnings per share (EPS) growth- that is 35 percent compound annual growth rate (CAGR) for Jio Platforms and 31 percent for Reliance Retail sustaining over the next ten years, "which by any measure is a tall ask".
It explained that the factors that triggered the rally in valuation- deleveraging, asset monetization, and digital momentum- have played out and although the prospect of a Reliance "super app" is compelling, India's open architecture makes its success uncertain.
"We believe that comparing Jio Platforms with the FAANG companies is the market's newfangled makeover of the stock," its analysts wrote. "While Reliance Industries' management has a tenable vision that promises long-term growth potential in that direction, we believe it shall be a long journey."
"The pendulum has swung entirely from extreme pessimism to exuberance, infallible expectations on execution and a peak analyst 'buy' ratio (80%)," Edelweiss said. "The proverbial excessive exuberance" is a recipe for disappointment, it added.