RIL shares have been under pressure and fell to their 52-week low of Rs 875.70 on Monday. On Wednesday, it closed at Rs 1,081 on the Bombay Stock Exchange, after touching the day’s high of Rs 1,152.
On Tuesday, the Financial Times reported that Facebook seeks to buy around 10 per cent in Reliance Jio in a multibillion-dollar deal and is close to signing a preliminary pact.
Kotak Institutional Equities said that Facebook’s reported interest may be driven to enhance addressable opportunity in its largest market in terms of subscriber base. While Jio’s engagement levels with its own subscribers through the digital ecosystem may have an appeal, it is yet to be commercialised beyond connectivity service on a larger scale, the brokerage said.
“RIL has been seeking strategic partnerships across its businesses, while targeting to deleverage its balance sheet; a concrete progress on potential inorganic transactions is required to allay investor concerns. Unauthenticated media articles indicate that Facebook was in discussions with RIL to take a minority 10 per cent stake in the latter’s digital business under Jio; however, the talks have been stalled for now amid travel restrictions due to the Covid-19 outbreak,” Kotak said.
Earlier this month, Bloomberg reported that Saudi Aramco is continuing its due diligence process to buy a stake in RIL’s oil-tochemicals business amid concerns that the Covid-19 pandemic and the fall in crude oil prices would delay the deal.
In reports released on Wednesday, HSBC and Kotak Institutional Equities lowered their earnings estimates for RIL to factor in the lower downstream margins and challenging macro-environment but have maintained their ‘buy’ rating on the shares.
Kotak lowered the earnings per share estimate for RIL by 6 per cent in FY20, 13 per cent in FY21 and 7 per cent in FY22 to factor in lower refining and petchem margins, as an adverse supply-surplus environment has exacerbated amid near-term weakness in demand, revised Rupee and crude price assumptions and other minor changes. The brokerage lowered its ‘fair value’ estimate for the company’s shares to Rs 1,700 from Rs1,850 earlier, to reflect these changes.
HSBC has cut estimated FY20-22 earnings by 5-16 per cent and lowered the target price for shares to Rs 1,490 from Rs 1,740 earlier.
“At the current market price (CMP), the stock is trading at estimated FY22 EV/Ebitda ratio of 6.5 times, which is at a 30 per cent discount to its historical average and which we find attractive as RIL’s energy business offers annuity-like cash flows and its transition to become a consumer play presents the optionality of a large value creation opportunity in the long run,” HSBC said.
HSBC said that the market is discounting “extreme down case outcomes.” The brokerage said the recent sharp decline in share price suggests that the market is discounting a 40 per cent decline in downstream refining and chemical operating profit margins – the lowest in 10 years, zero value for its exploration and production and real estate assets, a 40 per cent decline in retail business valuations and a peak net-debt of $ 43 billion, including part of liabilities associated with fibre infrastructure investment trust.
“Pessimism leaves room for positive surprise,” HSBC said.