Reliance Industries’ shares fell for the second consecutive day on Friday; the stock was down more than 2.5 per cent in the morning trade. The reaction from the market suggests that investors were perhaps disappointed with the future roadmap that RIL chairman Mukesh Ambani announced at its Annual General Meeting on Thursday. This included a massive push in renewable energy, an ultra-affordable Android smartphone, and roping in the chairman of Saudi oil giant Aramco on RIL’s board, which Ambani has said will be the start of internationalisation of RIL.
But the sell off in RIL shares could also be the case of profit-booking after the run-up it had; it was up over 12 per cent in the past month till June 23.
The stock was still trading 2.3 per cent lower at Rs 2,103.75 in noon trade on Friday, even as the broader BSE Sensex was up 0.2 per cent or 100 points.
Analysts though largely remain bullish on RIL’s future prospects, although there are some uncertainties that may loom over the investors’ minds in the near-term.
In what was the biggest announcement in the AGM, Ambani said RIL will invest Rs 75,000 crore in a new-energy business, which will include four giga factories to manufacture critical components of the renewable energy ecosystem. A project management and construction division will be set up, too, and so will be a project finance division.
“The Rs 750 billion capex plan in next 3 years in new energy business may defer free cash flow generation; hence, may pose a near-term overhang till there is more clarity on potential return profile,” said Dayanand Mittal and Vishnu KG, analysts at JM Financial Institutional Securities.
Another potential winner for RIL is the ultra-affordable smartphone Jio is developing in partnership with Google. The tech giant had picked up a 7.7 per cent stake in Jio Platforms last year. The JioPhone Next, which will be powered by a highly optimised version of the Android operating system developed for the Indian market, is to go on sale from September 10. But with pricing details, build quality, and specifications still unknown, whether it can be the game-changer and propel a big shift from 2G feature phone users to this ultra-affordable smartphone as it is touted to, needs to be seen.
Analysts at Emkay Global Financial Services say that factoring in Jio’s aggression and underlying fundamentals of being affordable, the price point should be at a steep discount to current handset average selling prices. But pricing alone will not determine its success.
“The key for JioPhone Next success would be handset price/bundled services (similar to Jio Phone 1), along with product features as various surveys suggest that consumer buying behaviour for smartphones is influenced by camera, battery life, 5G capabilities, etc,” the Emkay analysts said.
Analysts at another broking firm Motilal Oswal Financial Services say JioPhone Next’s success will also depend on the durability and high data consumption capability, apart from pricing.
They also pointed out that Jio had seen a deceleration in revenue growth rates in recent past and to accelerate growth it will look to target the 300 million 2G feature phone subscribers, who till now haven’t been able to access Jio’s 4G services due to lack of device capabilities.
“It has historically proved challenging to upgrade customers from the low-income bracket (the product’s target market) to high data consumption packs. Therefore, RIL may offer long-term plans to subsidise the device cost and monthly spend, extending the return on investment,” said the Motilal Oswal analysts.
If JioPhone Next is successful, though, it could pose a risk to rivals Bharti Airtel as well as Vodafone Idea’s 40-50 per cent non-data subscriber base, which has yet to upgrade to 4G, the analysts add.
Motilal Oswal retained a “buy” rating on RIL with a target price of Rs 2,430 a share, buoyed by its green energy plans.
“RIL plans to repurpose its existing business without any asset write-downs and aims to be a zero-emission company by 2035—providing a multi-decadal growth path through this growth engine,” the analysts said.
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The JMFL analysts also maintained a “buy” on RIL with a target price of Rs 2,500 per share, citing its industry leading capabilities across businesses and expectation of a strong 17-18 per cent compounded annual growth in earnings per share over the next 3-5 years.
Emkay advises a “hold” on the stock, with a target price of Rs 2,330 a share. The analysts expect a 28 per cent compounded annual growth in Reliance Retail’s revenue, with the core retail business margins expanding to over 10 per cent. Acquisitions could offer further upside in the retail business growth, they added.
Ambani had said on Thursday that Reliance Retail aspires to be one of the top 10 retailers globally and expects to grow at least three times in revenue in the next 3-5 years.
HDFC Securities, meanwhile has an “add” rating on RIL, with a target price of Rs 2,280 a share.
It is premised on recovery in the oil-to-chemicals business; continued EBITDA growth in the digital business, driven by improvement in average revenue per user, subscriber addition, and newer revenue streams; and potential for further value unlocking in the digital and retail businesses, analysts Harshad Katkar and Nilesh Ghuge said.