Buying opportunity in Reliance Industries
12 Aug 2016
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Reliance Industries (RIL) is grossly underperforming the broader market for the last several years. While the Sensex is 34 per cent above its 2008 peak, RIL is 38 per cent down from its 2008 peak.
The underperformance is clearly visible even if you compare absolute returns for the last 3 or 5-year holding periods. So what should investors do now? Should they continue to avoid this counter or pick it now as a contrarian buy?
Is it time to buy Reliance Industries?
Huge amount of capital expenditure over the last 6-7 years will start giving fruits now and once the market realises this, the stock start moving upwards.
Since Reliance is a diversified company, let us analyse it segment wise.
Petrochemicals & refining remain as the fortes for Reliance. Due to strong performance on the polypropylene and polyester segments, petrochemical division has reported good numbers during the first quarter of 2015-16 as well. Due to strong improvement in gross refining margin (GRM), refining segment could also report strong numbers in first quarter.
Since Reliance's refining complexity is very high, its GRM will always be better than industry average and also the benchmark Singapore GRM. The entire focus of the market now is on the commercial launch of its telecom division, Reliance Jio. This is because the capital expenditure on this division is close to Rs 1,50,000 crore.
However, investors should note that a successful Reliance Jio launch will not reflect in its bottom line immediately. This is because the cost is now capitalised and Reliance will charge these expenses to profit and loss account after its commercial launch. However, experts feel that Reliance Jio will report operational profits in first year itself.
Reliance is planning to take on this challenge by launching its own e-commerce platforms. "Reliance's e-commerce platform may be ready by Diwali
This new platform will leverage existing infrastructure of Reliance Retail and Reliance Jio and therefore, will be able to give customers access to both online and offline stores together.
Upstream oil & gas assets have been a drag on Reliance for many years. With production coming down in domestic and foreign assets, last quarter was also not any different. However, further reaction is not expected in the counter because both these negatives are already priced in.
Experts feel this is the best time to enter because the price now is depressed due to the uncertainty. In addition to successful Reliance Jio launch, there are other possible triggers.
While petrochemical and refining will continue to generate cash, the capex requirement from retail and telecom will come down. That means its free cash flow will become positive in the coming years and this should get reflected in market later
RIL has formed a symmetrical triangle pattern since 2007. Since the price range now has become narrow (between Rs 900 and Rs 1,100), breakout may happen soon
If the breakout happens as expected, the price actions will be significant because it is happening after a long consolidation. What is the expected target? "Probability of upside breakout is high and if that happens, immediate target is Rs 1,500