Reliance Industries shares plunge over 3.5% on Morgan Stanley downgrade

Shares of Reliance Industries, India’s most valued company in terms of market capitalisation plunged over 3.5% to Rs 826.75 as against a half a percent fall in the benchmark Sensex at around 1 pm after Morgan Stanley downgraded the stock to ‘Underweight’ from ‘Equal-weight’. RIL will announce its earnings for the second quarter (ended September) on Monday, October 15, 2012.

“We're turning cautious on RIL. We cite valuation, lack of near-term triggers, increased risk of investments into the low-ROE businesses, expectations of a weaker margin environment in refining, and a subdued outlook on petrochemicals,” said a report by Morgan Stanley released on Monday.

“RIL stock is up 14% in the last three months and has outperformed the Sensex by around 6%. It is now trading at FY2013 estimated P/E of 13.7 times and EV/EBITDA of 8.7 times, above its historical five-year averages of 12.6 times and 8.3 times respectively, making valuations unattractive,” the report added.

Morgan Stanley projected RIL F2012-15 earnings CAGR of 6-7% and RoE of about 12% as against historical five-year average growth of 11% and RoE of 15%. The outlook for the Indian market is earnings CAGR of 12-13% and RoE of 17%.

However, Deutsche Bank last week maintained its ‘Buy’ rating on RIL with a target price of Rs 900, saying “RIL is on the verge of another capex cycle, with already announced investment of $12 bn in refining and petrochemicals over the next four years. We estimate capex in RIL's domestic upstream segment to rise from FY14 as regulatory approvals pick up pace.”