Reliance Gets 'Sell' As Ambit Sees No Inflection Point, Uncertain Investments: 5 Key Points

Ambit Capital Pvt. retained its "sell" rating on Reliance Industries Ltd. on Thursday, citing that it sees "no inflection point" amid "long gestation and uncertain investments" for the oil-to-telecom conglomerate.

End-game like monetisation of deleveraging via InvITs remains unclear, it said. Reliance Group's entities other than fossil fuel and consumer businesses are "earning no returns,"  the brokerage said.

Here are five key takeaways from Ambit's note on RIL.

Ambit, while retaining the sell rating on RIL, revised its target price to Rs 2,650 per share from Rs 2,600 in its previous estimate, which implies a downside of 9.5% from its Oct. 1 closing price.

The target price builds in Rs 1,116 per share for O2C vertical, Rs 822 per share for Jio, Rs 365 per share for Reliance Retail, and ascribes Rs 223 per share for Jio Mart and Rs 124 for digital commerce optionality and investments, it added.

RIL’s share price trailed Sensex by 3% last year but underperformance has been starker since September 2020 after the fundraise for the consumer businesses, it said.

In its consumer businesses, Reliance Industries is "trailing peers in growth" despite lower capital efficiency, the brokerage said.

Citing its research, Ambit said that accounting profits in the company's consumer businesses are not aligned with the underlying cash flow generation.

The aspiration of continuously scaling up its consumer businesses has put RIL on a "collision course" with global and domestic specialists and put it at "risk of persistently low returns,"  the note further said.

RIL's new energy investment plans are facing delays, and the company is "unable to attract new strategic investors,"  Ambit said. "We remain circumspect of RIL’s growth aspirations in new energy and retail."

In the retail segment, RIL is a "late entrant" in the e-commerce market and attempted to leapfrog over its rivals through "new commerce" that involved partnering with retailers rather than the traditional e-commerce model, Ambit said.

"Its ‘new commerce’ revenue contribution (ex-Jio) is stagnating at 18%, implying annualised $4 billion revenue. Revenue growth in both traditional and new commerce slowed down to 3-8% YoY in the last couple of quarters, likely impacted by the expansion of quick commerce," it added.

The brokerage sees RIL’s retail strategy being "all over the place" as it is adding new store formats, building private labels and is highly acquisitive "even as it struggles to compete effectively with specialised peers in traditional and e-commerce/quick commerce."

Ambit was upbeat about Jio, RIL's telecom arm, and optimistic about the company's oil-to-chemical business prospects.

O2C remains the company's biggest segment in terms of revenue collection, the brokerage pointed out.

On Jio, Ambit said it "likes" the firm given its market dominance and the telecom industry’s currently low tariffs that can steadily rise for long-time periods. However, it also underlined that Jio has not been able to "build anything beyond telecom.".

Moreover, Ambit is "gung-ho about O2C, upstream, and Jio as RIL is pursuing a strategy of profit maximisation in these businesses from a position of strength."

"Throughout its journey, RIL has invested in new projects and enlarged its addressable market, thereby achieving revenue, Ebitda, and earnings growth ahead of nominal GDP growth. We see RIL’s scale being the biggest limiting factor of continuing on this journey," Ambit said.

According to the brokerage, its large uncertain capex outlay across retail and new energy will put pressure on the company's return on capital employed and the return on equity.

For the consumer businesses, the true return on capital employed "would be lower if standalone-funded ‘others’ entities stopped providing subsidised services to the former," it added.

Shares of RIL closed 3.95% lower at Rs 2,813.95 apiece on the NSE, compared to a 2.05% decline in the Nifty 50 at 3:30 p.m.

The stock is up by 8.8% on a year-to-date basis and by 21.4% over the past 12 months.

Out of 36 analysts tracking the company, 25 have a 'buy' rating on the stock, eight suggest a 'hold' and three have a 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential upside of 17%.