RIL Shares Have Slipped 8% This Month; What Is Hurting Investor Sentiment?

Shares of Reliance Industries Ltd (RIL) declined 3 percent on Friday to an intraday low of Rs 1,915. Its the fourth consecutive day that the scrip is trading lower than its previous close.

For the whole month, the fall in stock price has been 8 percent and which comes immediately after the conglomerate reported its financial results for the September-ended quarter.

On 30 October, the RIL reported a 15 percent drop in net profit at Rs 9,567 crore on revenues worth Rs 1.1 lakh crore. Its petro-chem revenue rose 17.7 percent to Rs 29,665 crore, with a strong operational performance that witnessed a 44.3 percent sequential rise in the segment's EBIT to Rs 4,895 crore from Rs 3,392 crore and EBIT margin expansion of 300 basis points to 16.5 percent.

Its telecom arm Jio's net profit rose 12.9 percent to Rs 2,844 crore from Rs 2,520 crore, but the retail business reported a 4.9 percent decline in its revenue at Rs 39,199 crore due to COVID-19 related disruptions.

The company on Thursday said that it has completed its fundraising programme of selling 10.09 percent stake in Reliance Retail Venture. It received Rs 47,265 crore from financial partners from the sale.

However, investors are still looking for signs to justify its stock price, especially now that India's economic growth is being projected to see a contraction of around 10 percent this financial year.

Brokerage Macquarie had given an "underperform" rating to the stock after the Q2 results and maintained its target price at Rs 1,320, a steep downside from the current levels.

"With a one-two year view, we agree with India's long-term digital opportunity, but we continue to see meaningful execution challenges and no moat for Reliance particularly in retail. Our earnings and cash flow estimates are meaningful below consensus, and the stock is trading at our blue sky valuation," Macquarie said in its note.

Other concerns pointed out by the brokerage was that it sees a slower recovery in RIL's refining and chemical margins, slower pace of ARPU (average revenue per user) growth, lower retail margins as JioMart scales up, high competition in retail, higher working capital requirement for retail, higher CAPEX for Jio and retail, and higher minority interests.

Kotak Securities said at the start of the month that we may be seeing a corrective pattern in the stock, as previously seen in July, which is likely to end at Rs 1,810/1,790 levels.

Another concern is that with financial stocks at high risk due to the pandemic, most domestic mutual funds had overbought RIL, the company with better future prospects. However, due to regulatory norms that do not allow actively-managed funds to own more than 10 percent of a single stock, the purchase was restricted.