RIL sinks after Morgan Stanley downgrade it to 'underweight'

MUMBAI: Shares of Reliance Industries, India's most valued company by market capitalisation, plunged over 4.5% to Rs 818.70 against a 1.2% fall in the Sensex after Morgan Stanley downgraded its stock rating to 'Underweight' from 'Equal-weight', citing overvaluation, lack of near-term triggers and expectation of weaker refining and petrochemical margins.


"We're turning cautious on RIL," said the Morgan Stanley report released on Monday. "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 will announce its earnings for the quarter ended September next Monday.

Domestic brokerage Ambit Capital expects RIL's earnings growth to be muted because of a lack of volume growth in the downstream business till FY14. Even E&P business is unlikely to be an earnings driver unless it gets import parity in gas pricing. Since the beginning of this year, nearly 16 brokers have downgraded RIL stocks to 'Hold' from 'Buy' and eight brokers to sell.




RIL's RoCE/RoE, according to Morgan Stanley, is on a declining trend and unlikely to reverse soon, as a majority of its capex is being spent on low value-adding downstream businesses vis-a-vis peers, who spend a majority of their capex on high value-adding upstream businesses.

RIL stock has risen 14% in the past three months and has outperformed the Sensex by nearly 6%. The stock is currently trading at a 15-20% premium to its global peers on a one-year forward P/E valuation. Hence, analysts believe the stock is overvalued.

"The stock is now trading at FY13 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 said.

Morgan Stanley projected RIL's FY 2012-15 earnings to grow by a compounded rate 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%.