notes that its two-stage reverse-discounted cash flow (DCF) analysis of RIL stock
shows that the market is baking in high earnings per share (EPS) growth, particularly for Jio Platforms - 35 per cent compound annual growth rate (CAGR) and 31 per cent for Reliance Retail sustaining over the next ten years, which by any measure is a tall ask.
The brokerage notes that the Street has prematurely fired up the valuation of the entire consolidated entity—RIL—to those commanded by major tech companies such as Facebook, Amazon, Apple, Netflix, and Google, popularly known as FAANG stocks / companies. "This unhindered run-up in the stock price is primarily fueled by a slew of big-ticket investments in Jio Platforms at heady valuations. The cutting-edge FAANG companies boast large free cash flows already. In contrast, RIL is still primarily an oil-to-chemicals (O2C) business that shall continue to generate the bulk of cash flows over the medium term, the brokerage says.
Another issue raised by the brokerage firm is that RIL has ventured into multiple business verticals, right from telecom, e-commerce, entertainment to the education sector; however, what matters is the ability to achieve leadership in these areas. That apart, the business integration process, Edelweiss believes, will be a long-drawn affair.
“Although RJio launched its entertainment apps at an early stage of business evolution, invested aggressively in business, and forged the right partnerships, it has not been able to achieve leadership in any of these businesses," the brokerage notes. In the entertainment ecosystem, too, RIL faces a Herculean task to displace the existing market leaders while in the healthcare and internet of things (IoT) ecosystems too, RJio, is lagging. Further, in the Education vertical, taking on BYJU’s is again a tall order.
Those at CLSA, too, have shared similar concerns and have downgraded the stock from ‘buy’ to ‘outperform’ even as they project Reliance’s market cap to rise to $220 billion by March 2022 as per their valuation framework.
“Despite a lenient valuation framework, our new target of Rs 2,250 (Rs 1,753.38 earlier) offers only 4 per cent upside, which sees us downgrade our rating from BUY to outperform. Following a 400 per cent rally over the past seven years and over 150 per cent in four months, the stock may take a pause. Its promising long-term story and underweight positioning in institutional portfolios should provide support. Any big surprise beyond $70 billion, if and when the stake in Retail is sold, could be needed to justify large immediate upside," wrote Vikash Kumar Jain and Surajdev Yadav, of CLSA
in a July 28 note.