Home >Companies >News >Brokerage firms downgrade RIL stock on steep valuations despite a robust rally

Analysts have downgraded the shares of Reliance Industries Ltd (RIL), citing steep valuations after a robust rally over the past few weeks. Despite the move, foreign brokerage firms CLSA and Goldman Sachs said the stock will see upside to the current price.

The stock has risen 151% from the lows in March, with a 27.83% jump so far in July. Year-to-date, the stock has rallied 45.17%, outpacing the benchmark Sensex, which is down by around 7% so far.

While downgrading its rating from ‘outperform’ to ‘buy’, CLSA analysts said while its long-term promise and underweight position in portfolios may support the stock price, large valuation surprises may be difficult in the near term. CLSA set a target price of 2,250 factoring in the street-high valuation for Reliance Jio and Reliance Retail. CLSA expects the company’s market capitalization to cross $220 billion by March 2022.

“Any big surprise beyond $70 billion, if and when the stake in Retail is sold, could be needed to justify large immediate upside,” CLSA said in a note on 28 July.

Edelweiss analysts have downgraded the RIL stock to ‘hold’, but raised the target by 25% to 2,105 apiece. “RIL’s FAANG-like valuation (particularly Jio’s) is misplaced as oil to chemical and telecom make up 70% of value,” it added. FAANG is Facebook, Amazon, Apple, Netflix and Google.

“We also believe the pendulum has swung entirely from extreme pessimism to exuberance, infallible expectations on execution and a peak analyst ‘Buy’ ratio (80%). That the valuation is pricing in overly high growth expectations when its weighted average cost of capital (WACC) is rising and economic spread is negative suggest that risks lie on the downside. This is, however, not RIL’s first brush with euphoria,” Edelweiss said in a note on 28 July.

Edelweiss analysts said the associated risk for RIL is high and, despite its strong past execution, it is not infallible.

Meanwhile, Goldman Sachs reiterated its ‘buy’ rating on Reliance Industries and raised its 12-month target price by 31% to 2,325. “We are raising our valuation for the TMT (technology, media and telecom) businesses mainly to reflect faster-than-expected e-commerce roll out and monetization of the app ecosystems at Jio Platforms,” Goldman Sachs analysts said in a note Tuesday.

Currently, Reliance Industries has 28 ‘buy’ ratings, three ‘hold’ ratings and five ‘sell’ ratings by analysts on Bloomberg. On Tuesday, RIL shares ended at 2,177.45, up 1% on the BSE

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