Reliance Industries shares extended losses for the fourth straight session on Thursday, falling over 3 per cent in intra-day after brokerage firm Morgan Stanley downgraded the Mukesh Ambani-led company to "equal-weight" with price target of Rs 1,349 per share. Since May 3, RIL shares have lost 10.8 per cent, taking the overall market capitalisation loss to more than Rs 96,288 crore (over USD 13.76 billion) during this period.
Continuing its losing streak, RIL share price declined as much as 3.45 per cent to touch an intra-day low of Rs 1251.50 against previous closing price of Rs 1,299.45 on the Bombay Stock Exchange. In line with the Indian benchmark indices, Sensex and Nifty, the RIL shares closed lower at Rs 1,255.15, down 3.41 per cent. Indian equity markets also settle in negative terrain for the seventh consecutive session on Thursday amid escalating US-China trade tension.
In a similar trend, RIL shares ended 3.56 per cent lower at Rs 1,253.15 apiece on the National Stock Exchange. The index heavyweight opened lower at Rs 1,258.35 against previous close level of Rs 1,299.45, and touched an intra-day low of Rs 1,251.75.
Here are three reasons for the weakness in the RIL shares:
Rising debt and weak gross refining margin: The investors remained concerned over RIL's rising debt, and weak gross refining margin. RIL has an outstanding debt of Rs 2,87,505 crore and it grew by Rs 69,000 crore in financial year 2019 because of its investments in Reliance Jio.
Rating downgrade by brokerage firm Morgan Stanley: The global rating agency has lowered RIL stock to "equal weight" with price target of Rs 1,349 per share. Morgan Stanley expects RIL's earnings growth to halve in FY20, after delivering a 17 percent compound annual growth rate (CAGR) between FY17 and FY19.
"We expect RIL's two-year earnings upswing to reverse, yet investors are dismissing refining headwinds amid tighter crude markets. A rising glut in the gas and polyester markets could also slow growth into 2020. Upside appears limited amid core business drags, with no material capacity adds," Morgan Stanley said in a report.
"We expect earnings growth to halve in F20, after a 17% CAGR, F17-F19. Downside earnings surprises in the energy business should unfold and attract increasing investor attention - a complete reversal in narrative after the positive triggers that played out since 2017. While the potential upside from digital investments could however offer structural upside as RIL rolls out new businesses, the cyclical headwinds in energy lead us to downgrade RIL to EW(equal weight)," the report said.
Refining business faces headwinds: In March quarter, Reliance Industries Gross refining margin (GRM) shrinked to a 17-quarter low at USD 8.2 a barrel, dented by lower crude throughput due to planned maintenance. The earnings before interest and taxes (EBIT) of refining business declined by 19.8 per cent to Rs 19,868 crore in FY19.