The recent underperformance of Reliance Industries has been puzzling, as the outlook across key verticals is sanguine, according to Kotak Institutional Equities. Earnings would likely remain robust in the energy sector with high margins, a lower export tax in refining, rising volumes, elevated prices in E&P and recovery in petchem spreads.
Reliance Industries shares have fallen 13 per cent year-to-date compared with a 5.5 per cent drop in the BSE Sensex during the same period. The scrip has underperformed the BSE barometer in the one and two-year periods but has outperformed it in the 3 --, 5 -- and 10 year periods, according to data.
In the telecom business, Kotak expects a rising competitive intensity and a likely delay in tariff hikes until 2024 elections. It said that this would lead to duopoly and result in accelerated market share gains for Reliance Jio.
Kotak believes that Reliance will have market leadership across several verticals because of recent acquisitions, store expansions and entry in new verticals in the retail segment. The broker reiterated its 'Buy' on the stock with a lower fair value of Rs 2,900 from Rs 3,000 earlier.
Kotak has lowered its 2024 -- 25 Ebitda by 4 -- 5 per cent, due to the delayed tariff hike assumption in Reliance Jio and higher net debt assumption.
With the 5 G roll out completed in 2023, we think the capex would moderate from current elevated levels but would remain at Rs 1 -- 1.1 lakh crore, due to expansion in retail and new energy investments.
After recent corrections, it believes that the market is not ascribing any value to RIL's new commerce and FMCG forays, new energy or duopoly benefits in Reliance Jio.
It seems to factor in a much lower multiple 25 times EV Ebitda versus base case valuation of 32.5 times for retail and Rs 50,000 crore higher net debt, Kotak said.