One-year target price for Reliance is Rs 2,000: SBICAP Securities

‘We have seen some profit taking on Wednesday and the stock is most likely to stabilise around Rs 2,000 levels and then gradually earnings will be the catalyst.’

ETMarkets.com
After profit taking, more long-term investors will come in and event-based ones go out, says Rajiv Sharma, Head, Equity Research.

Everyone was waiting to see what else Mukesh Ambani would pull out of the hat after the spate of funding announcements and he definitely did supersede all expectations with announcements on the product side, on Jio, the way forward, mega investment by Google and of course outlining progress for retail and the Aramco deal.
The biggest surprise was the investment by Google. There has been speculation around it for the last few days and there were also discussions of Google getting into Vodafone. Everything got sorted yesterday and the most interesting part is that Facebook and Google are both strategic partners in Jio and Microsoft is a partner on the cloud side. So three big tech companies are working together with Jio, which gives a lot of visibility to its Indian telecom story.

Google on handsets will definitely help it address the 2G subscribers merely because of affordability issues. The other exciting announcement was that they have their home-grown 5G solution. That gives one visibility that this company will not face any hurdles or bump ups because of some geopolitical concerns. Now with home-grown solutions, this could be an export story as well. It is too early to say that, but at least there is a visibility that the 4G market expands and 5G will be a smooth run, given that you have sorted your equipment right.


So why did the stock reverse yesterday?
The way to think about it is that AGM is a big event always and every day for the last 40-50 days, we have been seeing some announcements on the funding side. Jio hit 25% in terms of strategic money coming in and after that AGM was the next event. There were a lot of event based investors into the stock which were playing for this AGM rally. Now, investors are looking more at the earnings, at value with all the strategic partnerships. Now, net debt-free is already priced into the stock and some amount of possible earnings and potential from these partnerships are also priced in. Now we have more tangible stuff which demands long-term investors coming in and event-based investors going out. So with this profit taking, the quality of investors will change from these levels.

What is the right way to look at Reliance now because a large part of fund raising is over? Should we now assume that the stock has a serious chance to consolidate because it cannot keep on going higher like this? Also, there are challenges on the petrochemical and refining side. Do you think those concerns now could really push the stock into a consolidation mode and what is your one-year price target now?
Let me answer the last question first. My one-year target price is Rs 2,000 but let us understand what could be the upside here. We are looking for more colour on the JioMart revenues or the traction. They talked about 250,000 orders and that is the first number we got. Also, we have to see how this whole market share in telecom plays out. So if you have 900 million subscribers in the overall telecom market, with a 200-250 ARPU, you are talking about a $36 billion opportunity. Assuming 50% EBITDA, it is $18 billion potential sector EBITDA. Now if Jio has got 50%, then it is $9 billion and current valuations are about $70 billion. That makes it priced at 7 times but if Jio can get this EBITDA share at 12-13 billion, then we are talking about Jio valuation of $130 billion.

Similarly, things will go for retail. These are the two businesses which will really decide. The whole Jio platform story is what investors are excited about but the simple story lies in telecom, market share and ARPU improvement and that still not in the price. We do not know what is the share of EBITDA which Jio is going to claim. But yes, we have seen some profit taking yesterday and so the stock is most likely to stabilise around Rs 2,000 levels and then gradually earnings will be the catalyst.
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