Analysts are of the view that the stock price nevertheless factors in most of the negatives. In fact, analysts at HSBC say that after a sharp fall in the share price, the market is discounting a 40 per cent decline in downstream refining and chemical Ebitda margins — the lowest in 10 years, and assigning a zero value for its E&P (exploration and production of oil and gas) and real estate assets, and predicting a 40 per cent decline in retail business valuations and also a peak net-debt of $43 billion (Rs 3.2 trillion), including part of liabilities associated with fibre InvIT. In simple words, the Street is pricing in an extreme down-case outcome across its businesses.
It is in this backdrop, most analysts feel that valuations offer a long-term opportunity for investors, and the downside may be limited from the current levels. Analysts at BNP Paribas say with China somewhat stabilising after the Covid-19 pandemic and a widespread prevention measures globally, refining and chemical margins may recover in the second half CY20.
Analysts, drawing a parallel between the current and the Global Financial Crisis of 2008-09, say oil & gas stocks are trading below the financial crisis levels in terms of valuations. To justify the current valuations, FY21 earnings should see up to 75 per cent cut, and the oil price should average at $25 a barrel. Not surprising, analysts at HSBC say pessimism leaves room for surprises, while BNP Paribas expects fast recovery for RIL
once the scenario changes.
On debt reduction, while the Street is now expecting a delayed or no deal with Saudi Aramco amid weak oil prices, reports indicate that Facebook (FB) is in discussions with RIL
to take a minority 10 per cent stake in the latter’s digital business under Jio. Analysts at Kotak Institutional Equities say that FB’s interest, if at all, may perhaps be driven to enhance the addressable opportunity in its largest market in terms of subscriber base. Jio’s engagement levels with its own subscribers through the digital ecosystem may have an appeal. The deal, if happens, can help reduce debt.
Analysts, such as Abhijeet Bora at Sharekhan, say the stock factors in the recent market meltdown, lower refining and petrochem margin assumption, and a delay in potential re-rating given concerns over the likely deferment of RIL-Saudi Aramco deal. However, Bora adds that it also ignores the positive of improving growth prospects for the telecom business (potential ARPU hikes) and sustained high growth for the retail business.
Analysts at Emkay Global on Thursday cut their FY21/22 estimated EPS by 25 per cent and 14 per cent, respectively, to building in lower earnings in petrochem and refining. Despite the cuts, earnings are expected to grow about 10 per cent each in FY21 and FY22. While they also reduced their target price by 25 per cent to Rs 1,310, they have maintained ‘buy’ on the stock. “RIL
remains well-poised to outperform a market recovery and we remain overweight,” they note.