"We believe several bullish factors have already been captured in our base case. Even still, we note downside to consensus forecast two-year forward nearly 60 per cent earnings growth versus Macquarie’s 45 per cent base case, 30 per cent excluding International Maritime Organization (IMO)," wrote Aditya Suresh, Co-Head of Asian Energy Research at Macquarie Group.
Using its "objective valuation" framework, Macquarie notes that the R-2 for consensus monthly rolling 2-year forward earnings per share (EPS) expectations versus RIL’s share price is a high 89 per cent going back to 2006. R-2 is a statistical measure which is interpreted as the percentage of a fund or security's movements that can be explained by movements in a benchmark index. A high R-squared, between 85 per cent and 100 per cent, indicates the stock or fund's performance moves relatively in line with the index.
"Fair value using Macquarie-consensus lies in a band of Rs 1,290-1,410... we believe, the marginal buyer at today’s price needs to essentially embrace ‘valuations don’t matter'," the brokerage said. It added that it could be tactial buyer of RIL around Rs 1,200.
Macquarie cautions that its fundamental bear case is nearly 35 per cent below current price and it would assign at least a 30 per cent weight to each of the risk factors. Some of the key risks highlighed include no Saudi Aramco bid, Reliance Jio's average revenue per user (ARPU), no IMO benefit, and rising competition in the retail segment.
"We estimate Jio ARPU at Rs 135 - Rs 140/month for FY21. Thereafter we assume a gradual 10-15 per cent per annum tariff increases, with our exit FY25 ARPU at nearly 1.5 per cent GDP per capita or Rs 240/month. If India has to reach 1.5 per cent GDP per capita, then charging for content is a pre-requisite," it added.
As regards Reliance Retail, the report said that currently it generates a nearly 20 per cent return on assets (ROA) and this rises to nearly 25 per cent in its base case outlook. Consensus has DMart’s ROA rising from 15 per cent to 17 per cent. "We ask: Is this highly attractive returns outlook sustainable in view of rising competition and why is RIL’s success here a given particularly when Amazon etc already has a strong foothold,"? it added.
As RIL does not produce any fuel oil, the sharp fall in High-sulfur fuel oil (HSFO) doesn’t impact margins...in-fact to the extent global ‘simple’ capacity is rationalized that would help margins for complex refiners like Reliance, the brokerage noted.
Looking ahead into FY25, the brokerage believes RIL could double group EBIT with the contribution of the consumer-facing JIO and retail divisions rising to nearly around 60 per cent.