Why is Reliance Industries Stock Falling? (11% Decline)

Reasons Behind Decline in Reliance Industries Ltd Stock

Introduction

The share price of Reliance Industries has been falling gradually since the last week. From a high of Rs.1,410 on 3^rd May 2019 it has come down to Rs.1,245 on 10^th May 2019. The share price of reliance Industries has seen a heavy drop of almost 11%-12%. Why is the Reliance Industries Stock dropped? What are the reason behind this?

Company Profile

• Reliance Industries Limited is an Indian conglomerate holding company headquartered in Mumbai, Maharashtra, India. Reliance owns businesses across India engaged in energy, petrochemicals, textiles, natural resources, retail, and telecommunications.
• Top Segments with % revenue contribution as on March, 2019 :

1. Refining (51.15%)
2. Petrochemicals (22.34%)
3. Organized Retail (17%)

Key Reasons : Why is Reliance Industries Stock Falling? (11% Decline)

Share Price v/c Net Profit Growth

• From a price of Rs. 900, the stock of Reliance Industries was trading at Rs. 1,400 in just a year. Hence, the stock of RIL saw a rally of close to 50% in the last 1 year.
• On the other hand, the net profit of the company increased from Rs. 36,000 in last fiscal year to Rs. 39,000+ in this Fiscal year. So, a YoY growth of around 10% can be seen.
• Where the stock of rallied almost 50% but the profits increased just 10%. Hence, what happened that the stock of RIL experienced such a rally?

P/E Ratio of Reliance Industries

• For quite a long time, almost 5-7 years, the stock of Reliance Industries was trading with a PE ratio of around 12. This means that the growth was very sluggish and always in line with the expectations.
• Now, the stock of Reliance Industries Ltd is trading with a PE ratio of close to 20. So, why has this stock received this valuation?
• There are 2 reason behind this. One the business of Reliance Jio and the other is the business of Reliance Retail. Because of these 2 business verticals of Reliance Industries, the stock of the company has received this premium valuation.

Valuations of Reliance Jio & Reliance Retail

• As per the current financial numbers and position in the current market, if the IPO of Reliance Jio is issues, then the company can have a market capitalization of Rs. 1.5 to 2 lakh Cr.
• And similarly Reliance Retail can have a market capitalization of Rs. 3 lakh Cr.

Shifting from a Value Stock to a Growth Stock

• Previously, the stock of Reliance Industries used to be a value stock, as it used to trade with low PE ratio but with a steady profit growth. Reliance Industries has created this big business as after 10-15 years, with around 70% of revenue is from refinery and petrochemicals currently. However, oil will not have the same market in future as of right now.
• For the same reason, although the organic growth of Reliance is going on but the company is now focusing on inorganic growth. The main oil business right now can be replaced by either Reliance Jio or Reliance Retail in near future.
• Thus, analysts thought that Reliance Industries has more potential of high profit growths in coming years. So, it was now on considered to be a growth stock by the analysts, which is also why the stock received premium valuations.
• One should also understand that, when a stock shifts from value stock category to growth category it also brings volatility along with it. It is important to understand that volatility is a part of growth. And this volatility can be observed in the recent drop in the share price of Reliance Industries.

FII Outflow of Rs.2,500 Crore

• In past 3 days specifically (8th May-10th May 2019), foreign portfolio selling has weighed down the market. Foreigners have pulled Rs 2,500 crore out of Indian stocks in these three days.
• Reliance Industries has the highest weightage on the BSE Sensex and Nifty50 indices. Thus, Reliance is one of the biggest sufferer of the FIIs outflow. This could because the stock of Reliance Industries provides easy liquidity option.

Brokerage Views on RIL Stock

• Brokerage houses like Morgan Stanley and Jefferies have downgraded the RIL to equal-weight from overweight, thus underperform rating on RIL. These brokerages have reduced the targets for Reliance Industries. They have brought these targets down till almost around Rs.1,100-1,150. This means that according to that the share price of this stock may come down till this price range.
• These brokerage houses have done so analysing that the oil business of RIL will have some falls in their profits. Reliance’s earnings growth is likely to halve in the current financial year 2019-20. Earnings are likely to be hit due to lower availability of Iranian crude on account of US-Iran problems. Also the oversupply in the polyester and gas markets is going to adversely affect the earnings growth in FY 2020.

RIL Lost Rs. 1 Lakh Crore Market Cap in 5 days

• Reliance Industries thus, lost nearly Rs 1 lakh crore in market value in the past week (6th May-10th May 2019) because of the nervous mood in the market and bearish commentary from brokerages.
• Reliance has lost its top position as the country’s most valuable company by market capitalisation on Thursday (9th May 2019) with Tata Consultancy Services (TCS) regaining the top position. Thus, RIL has lost the Most Valuable tag.
• The market cap of TCS stood at Rs 8.01 lakh crore on Friday (10th May 2019) while the market cap of RIL was Rs 7.93 lakh crore. 

Summary

• These were the major reason behind the fall the in the share price of Reliance Industries Ltd.
• No problems can be foreseen with the business of the company in the long term.
• Jio and Retail are going to be the 2 main granules of the company form where it will earn the majority chunk of their profits in the coming 10 years.

Notes: –

• The numbers that are used are approximate and have been rounded for presentation purposes.
• We are not in any way saying that this is a bad company, or the stock of this company is bad.
• We are also not suggesting anyone to immediately go and buy the stock or invest in the stock markets.
• Only an analysis has been presented here. No judgments or final statements are being made here.