Here's why RIL's stock price has zoomed

Did Mukesh Ambani say something unusual at RIL's 41st annual general meeting last week that has resulted in the sharp move of its stock price? The stock has rallied nearly 12% in the last one week and is trading at Rs 993 levels currently.

Analysts do feel so. Most of them have either upgraded their recommendation or have changed their price target.

So what was it that analysts saw in the AGM which they could not at the time of the company’s results?

Let’s first look at Reliance’s share performance over the years and why any news is good news for the company. Since the Lehman crisis, Reliance’s stock has been an under performer. The company has not participated in the rally which saw the market touching new highs.

On the valuation front, the company is trading at multi-year lows, thus the gap between the market valuation and that of Reliance has widened. Poor output of gas from its KG basin reserves plus lower than expected increase in price of gas and low crude oil prices saw a number of funds exiting from the stock. But the flow of bad news seems to be ebbing.

This is clear from Mukesh Ambani’s commentary at the AGM, which was not detailed at the time of the company announcing its annual results.

The biggest takeaway is that Reliance Industries, since its incorporation in 1966 has built up an asset base of around Rs 2.3 lakh crore or $31.5 billion, and this will be doubled in the next two years. In other words, 50 years of growth will be bundled in two years. There is nothing new in the information that the company will be doubling its asset base, but Ambani in his AGM speech spelt out the timeline of commissioning of its projects.

Not only will new assets be added to the company’s books, but the company will also be sweating its existing assets more. Take the example the closed retail petrol pumps. The company will be starting its 1,400 petrol pumps within a year. Reliance is planning to reach a market share of over 14 per cent it enjoyed in 2006 when the pumps were fully operational. This would mean better deployment of assets as it will also result in the company earning more profit by retailing the fuels rather than selling them in bulk.

Citi Research in its report on the company has cited three main reasons for re-rating the stock. The report says Reliance, after years of sustained decline in its operating profit (largely on account of falling contribution from gas business) will start showing growth. Second, there will be a gradual turnaround of its return ratios and finally the proportion of unproductive capital will reduce. Thus after a long time, almost the entire balance sheet of the company will be at play, yielding perhaps higher than nominal or no returns.

However, there has been a delay of six months in the commissioning of the company’s refinery off-gas cracker (ROGC), but other petrochemical projects are on line. Going forward, 50 per cent of the incremental earnings is expected to come from these projects which will account for 40 per cent of incremental capex.

What was a game changer for analysts was a clear timeline for Reliance Jio, the telecom initiative of the company. Ambani said that the 4G data services will be launched in December 2015 but its trial run will start in a couple of months. The services will reach 80 per cent of the country’s population in the first full year of operation (FY17) and 100 per cent in three years. Bharti Airtel currently covers only 86 per cent of the country.

Edelweiss says that Reliance has already laid out 2,50,000 km of optical fibre network across the country as compared to 1,97,000 kms of Bharti and 93,400 kms of Idea. Reliance intends to double its coverage over the next three years. What also seems to have excited the market is the response of 4G in the Chinese market. Ambani cited the example of China Mobile where LTE 4G devices as a percentage of overall shipment has increased from 10 per cent to 84 per cent in just one year, thereby hinting that fast growth for Reliance Jio is a strong possibility.

Not only have analysts covering Reliance upgraded the company, but those covering the telecom sector have turned cautious on their recommendations for other companies given the clarity on Reliance Jio's gameplan. Jefferies in its report on telecom sector has said that the sector is fraught with risks. High competition will keep realisations in check for the sector while data is cannibalising voice and necessitating higher capex but is limiting returns.

Edelweiss sums up the market feeling on Reliance by using the analyst jargon GARP -- Growth At Reasonable Price. The company’s earnings are expected to double while its valuations are still at multi years low.