“While the outlook for each of its key operating businesses has been improving, and we view RIL’s new energy forays positively, we believe that after the recent strong upward movement valuations are becoming expensive. We downgrade RIL to Neutral on our expectation of limited near-term upside,” Anil Sharma and Aditya Bansal, analysts, Nomura said in a note on 18 October.

They believe that bulk of recent RIL stock outperformance is driven by investors’ positive stance on new energy which attracts high environment social governance (ESG) investor interest. However, there is still limited clarity on RIL’s new energy plans, overall capex, returns, Nomura said.

Nomura has cut FY22 and FY23 Ebitda by 10% and 6% respectively due to weak first half of 2021 and delays in telecom tariff hikes. “Our FY22 and FY23-24 earnings are 8% and 16% respectively higher than consensus, and we see low scope for an earnings surprise. In our view, after the recent strong run, valuations at 20.5 times FY23 price to earnings (PE) and 12 times FY23 EV/Ebitda are rich,” they said.

Low and further delays in telecom tariff hikes and margin declines in oil-to-chemical and retail are key risks to Nomura’s earnings forecasts.

Nomura has revised earnings to account for the impact of the second wave of covid-19 pandemic on Reliance Retail, delays in tariff hikes at Reliance Jio and also increase exploration and production (E&P) estimates as R-cluster production in KG-D6 is ramping up faster than our initial expectations.

As the markets are at all-time highs, there is an overall exuberance around Reliance Industries stock. However, in the first six months of 2021, the stock was relatively muted and under-performed the broader markets. In the last three months, RIL shares have started to see a major rally, gaining nearly 28% which has performed benchmark index Nifty’s 12% gain in the same period. In this year so far, RIL stock is up 35%while the Nifty surged 28%.

Reason attributed to underperformance of the stock by Nomura are that the refining cycle remained weak while all key businesses were impacted by the second wave of the pandemic. In addition, there were delays in telecom tariff hikes expected in March-April.

Since it articulated its initial plans at its AGM in June, Reliance seems keen to fast-track its new energy foray, and particularly the initial focus of solar energy. To gain technology, manufacturing expertise, and execution capabilities, Reliance has made several acquisitions recently.