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Is Reliance Industries' stock consolidating ahead of its next big up move?

Over the past two months, the stock has just been biding time and consolidating | Photo: Reuters
Mukesh Ambani-led Reliance Industries (RIL) topped the Fortune India-500 list for the second straight year on Tuesday, accounting for seven per cent of cumulative revenues and 11 per cent profit of the companies featured. Despite the feat, the stock slipped 0.9 per cent in Wednesday’s session to hit an intra-day low of Rs 1,935 on the BSE.

RIL has been on a roll at the bourses and has been one of the best performers on the BSE ever since the markets began recovering from March 2020 lows. From its 52-week low of Rs 868 – hit on March 23 – the stock has zoomed a massive 173 per cent on the BSE to hit a 52-week high of Rs 2,369 on September 16, 2020. Moreover, after outperforming by 224 per cent over FY15-19, RIL has rallied nearly 50 per cent YTD relative to Nifty’s 8 per cent decline.

Net debt-free status, digital expansion, and a retail re-rating on long-term potential backed by the global rally in digital plays have driven sharp outperformance, analysts say.

However, over the past two months, the stock has just been biding time and consolidating. It has underperformed at the bourses as compared to the frontline indices. Since October 1, RIL has declined 12 per cent on the BSE, as against a 15.4 per cent rally in the benchmark S&P BSE Sensex, ACE Equity data show.

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Analysts now believe that the stock could be consolidating and awaiting fresh triggers that could take it to a new high going ahead. Those at JP Morgan, for instance, do not dispute RIL’s compelling 10-year digital and retail opportunity, they believe the next positive catalyst would be from a refining margin recovery, likely only in the second half of calendar year 2021 (H2CY21).

"With deleveraging complete, Jio Platforms and Retail valuations established, and significant foreign investor ownership, we see a consolidation phase ahead for the stock over the next few quarters. We maintain our Neutral rating, acknowledging that it hasn’t worked," said a report by JP Morgan dated December 1.

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Adding: "A long-term story needs short-term positives/catalysts, which we see as limited in the near term. Ironically for a digital play, the next positive catalyst may be a sharp refining margin recovery, which is more of a H2CY21 story. The PE participation in Jio Platforms and RRVL means an IPO is possible at a future date, but we argue that it may be early to start pricing in IPOs for these units."

That said, JP Morgan sees downside risks to the stock if the global tech rally falters or the large improvement in earnings that the Street forecast across oil-to-chemicals (O2C), retail and telecom business segment does not come through.

The brokerage has cut its FY22E-23E earnings per share (EPS) estimate by 7 per cent – 8 per cent with September’21 target price of Rs 1,990, based on a Jio Platforms (JPL) + Reliance Retail (RRVL) enterprise value (EV) of $176 billion. Their RRVL value assumptions drive bull-bear ranges of Rs 2,649 – 1,654.

Naveen Kulkarni, chief investment officer at Axis Securities, meanwhile, says that the stock of RIL was the first stock to stage a major rally, and at one point, contributed almost 30 per cent of Nifty rally as it offered investors both growth and defensive characteristics.

"As the market breadth broadened, the defensive stocks have started taking a back seat... The market is looking at different plays like beaten down stories, vaccination plays and others. Therefore, while RIL will again perform as its subsidiaries could get listed on foreign exchanges, it could take some time before the rally resumes," he says.

Technical view

Over the last three months, RIL counter has struggled to stick to higher levels. When the uncharted territory of Rs 2,300 levels got conquered, the stock failed hold strength. This resulted in a breach of Rs 2,080 levels on the downside, which was its immediate support level, and now has become a hurdle / resistance.

At the current levels of Rs 1,946, RIL is trading below the 50-days moving average (DMA) and 100-DMA. However, till the 200-DMA – placed at Rs 1,753 levels – does not get breached, the upside possibility over the next three – six months remains intact. The current trend, however, indicates that the stock is in a consolidation/ sideways phase in the range of Rs 2,098 (100-DMA) and Rs 1,753 levels.

The Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) are trading flat, with RSI attempting to conquer 45 value and MACD trading in a range of -45 to -40 values, as per the daily chart.

The medium-term outlook suggests a strong upside if the stock is able to cross the resistance of Rs 2,080 towards. It can then head towards Rs 2,500 levels. CLICK HERE FOR THE CHART

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