By Mihir Gupta and Karan Pathak (University College London)
Stock Name: Reliance Industries Ltd
Sector: Energy, Petrochemicals, Textiles, Natural Resources, Retail, and Telecommunications
CMP: INR 2,114 (as on 3rd September 2020)
Target: INR 2200-2250
Timeline: 2.5 - 3 weeks
Reliance Industries Limited is a Fortune 500 company, headquartered in Mumbai, India. It is the largest corporation in India having evolved from being a textiles and polyester company to a conglomerate spread across the energy, materials, retail, entertainment and telecommunications sectors.
The company has experienced a 31.9% CAGR in its market capitalisation since it’s IPO in 1977. It was the first Indian company to surpass the INR 10 trillion market capitalisation mark.
Its 195,618-strong employee base has representation from over more than 15+ countries.
It was India’s largest private sector taxpayer in 2019. The conglomerate plays a big role in Indian Prime Minister Narendra Modi’s ‘Make in India’ programme which encourages Indian companies to manufacture their products at home as opposed to outsourcing.
It saw consolidated turnover of INR 6.5trillion, a rise of 5.4% year-on-year, which trickled down to profits of over INR 443billion which, in itself, displays a year-on-year growth rate of 11.3% (note: these figures are before exceptional items which include COVID-related costs).
The impact of COVID-19 and the ensuing destruction of demand that decimated the oil markets resulted in a loss to RIL of about INR 42.5 billion. India has the third-highest number of cases globally and is still on the rise. The lower urbanisation levels and expected future growth that will ensue will make it harder for RIL to accelerate their plans regarding the roll out of 4G and Jio Platforms. These costs were classified as exceptional items for the company.
Product Offerings Snapshot
As of Q1 of FY 2020-21, the consolidated/standalone business EBITDA decreased by 21%/48% YoY. This has mainly been attributed to a weak performance of the refining and Petro-chemical business of the company; predominantly because of weakened demand recovery in the former and a supply glut in the latter. Furthermore, the retail business also witnessed obstructions due to the country-wide lockdown imposed in India commencing April/May. However, the telecommunication and digital services segment of the company recorded an increase in revenue due to price hike in December 2019 complemented by a strong subscriber addition. Furthermore, RIL also operated its refinery and petrochemical units at approximately a 90% utilization rate, outdoing its competitors by a significant margin; due to its integrated Oils-to-Chemicals (O2C Model).
Reliance Jio: The net subscriber addition to the platform stood at 10.8 million subscribers for Q1 of FY 2020-2021 as compared to 17.5 million subscribers for Q4 of FY 2019-2020. This decrease may primarily be attributed to the nationwide lockdown that led to reduction in the speed of subscriber addition.
Reliance Retail: Due to 50% of the stores being closed and approximately 30% of the stores operating partially, revenues for the retail segment of Reliance fell by approximately 17% YoY. Although the Lifestyle and Consumer electronics sales witnessed a significant decrease of 71% and 69% YoY respectively, the grocery revenues actually increased by 5% YoY. This growth was primarily driven by the extensive outreach of Jiomart and Jiomart ‘kiranas’(small scale retail stores) spread across the country.
Refinery Process: This business segment was caught right in the middle of the global pandemic and volatility of crude prices, resulting in the demand destruction for transportation fuels, gas-oil and gasoline. However, refining increased by 6% which allowed RIL to function at relatively higher utilization rates, compared to its competitors.
Petro-chemicals: While RILs’ petrochemical production was 14% higher than the estimated volumes, margins suffered a big blow due to weakened demand and decreased export realizations at the end of Q1 of FY 2020-21.
Index: NIFTY 50 (11,527 as on 03/09/2020) Weight of RIL in Index: 14%
Figure 1: Trend analysis for NIFTY 50 with crucial support as well as resistance levels (NIFTY 50 Daily Chart, Investing.com as on 03/09/2020 post close of markets)
As on 03-09-2020, NIFTY 50 closed at 11,527, after having dropped 7.55 points since the opening of the trading day. Ever since the COVID-19 crash, the index has witnessed an extremely bullish sentiment supported with strong volumes in the market. However, there have been minor corrections in the middle which in our opinion is healthy for the market going forward. As per our analysis, the immediate support for the index is at 11,350 and the immediate resistance is at 11,790 (as shown by the yellow rectangles in Figure 1.)
Based on historical analysis of the index, some of the other crucial levels other than the immediate support and resistance are 11,090; 10,900 on the downside and 12,010; 12,200 on the up-side respectively (as shown by the orange rectangles in Figure 1.1). Moreover, both the increasing trend line for the index as well as the higher high and the higher low formation of candlesticks in Figure 1.1 are testimony to this bullish sentiment.
Figure 2: 20-5 day Moving Average Analysis and RSI for NIFTY 50 (NIFTY 50 Daily Chart, Investing.com as on 03/09/2020 post close of markets)
The trend can further be backed by the positive crossover of the 20 Day - 5 Day MA formed on the 28th May 2020 which the index has been trailing ever since. Additionally, as observed in Figure 2 the price movement has been particularly sticky to it’s 5-day MA and has consistently been testing the 20-day MA, hence highlighting their importance in the analysis methodology.
Figure 2 also depicts the Relative Strength Index (RSI) of NIFTY 50. The support formed at the 55 level bound is testament to the strong buying sentiment that has been persistent in the market. Although on comparing the highs of the RSI to that of the candlestick movements in the index, there have been minor divergences created - we believe that the expected correction therefore seems to have occurred and that the index movement is line with that of the RSI.
Future Outlook for the Index
Figure 3: Cyclical movement in NIFTY 50 (NIFTY 50 Daily Chart, Investing.com as on 03/09/2020 post close of markets & Analysis by ‘The Financial Analyst’)
As per our analysis, we expect the bulls to drive certain phases of the market next week but are expecting a considerable amount of correction to come thereafter. Hence for the medium to long term, we have a bearish outlook for the index. Following are the reasons to back our outlook:
As it can be seen in Figure 1, an unexpected selling panic on 31st August, 2020 led to the index losing approximately 380 points in a single day. This correction was significant for two primary reasons. On the one hand, such a correction was first of its kind since 18th May 2020 and on the other it led to breaking of the rising wedge formation in the index which had been forming ever since the crash due to the pandemic (as noticed in Figure 1).
The index has been following a very strong cyclical pattern as noticed in Figure 3. As observed, commencing 8th June 2020 - the index has been making a new high every 16th day followed by major correction in the market. In that regard, the next date for a new high followed by a significant correction stems down to being 16th September 2020. However, why we feel the correction following a new high can be particularly damaging is because the next new high that could be made will most likely be between 12,010-12,200, both of which have been extremely strong resistance bounds for the market even before the pandemic crash.
Technical Outlook for the Stock
Figure 4: Trend analysis for Reliance with crucial support as well as resistance levels and the Pennant formation (Reliance Industries Ltd Daily Chart, Investing.com as on 03/09/2020)
Towards the end of June, the stock broke off its INR 1,670 resistance level as seen in Figure 4. It then tested this level due to immediate profit booking but due to the embedded momentum, the stock broke through its INR 1,800 resistance. The next pullback occurred at INR 2,010 which has now turned into a support level, with the current resistance being at INR 2,180. The stock has been trading in this range of INR 2,010-2,180 for the last month now in a sideways channel. We expect these price points to continue being significant levels of support and resistance, unless a momentum in the market on either side leads to the stock breaking it’s support or resistance.
However, the reason we have a bullish outlook for the stock is because a bullish pennant has begun to form indicating that neither sellers nor buyers are being able to push price considerably in either direction. This is further complemented by the fact that selling pressure has been decreasing and the trading volume has been below the 20-day average for the last 3 days as seen in Figure 4.
Moving Average Analysis
20 Day - 5 Day MA Analysis
Figure 5: Trend analysis for Reliance with 20- and 5-day SMAs (Reliance Industries Ltd Daily Chart, Investing.com as on 03/09/2020 post close of markets)
If we look at the 20-day MA alongside the 5-day MA for Reliance, we can see that on 1st June 2020 there was a positive crossover (i.e. the 5-day MA overtaking the 20-day MA) between the two which was followed by a further upward push in price, highlighting the significance of such crossovers. Furthermore, while on the one hand price movement has been particularly sticky to its 5-Day MA, on the other it has been taking support and testing the 20-Day MA multiple times as part of the correction procedure.
This can be a particularly important observation to keep in mind in case an extremely bullish rally comes in way of the stock as there is a high possibility that it would retest it’s 20-day MA and correct.
21 Day - 8 Day EMA Analysis
Figure 6: Trend analysis for Reliance with 21- and 8-day EMAs (Reliance Industries Ltd Daily Chart, Investing.com as on 03/09/2020 post close of markets)
These observations can be further supported by a positive crossover of the 21-Day and 8-Day Exponential Moving Averages (i.e. the 8-Day EMA overtaking the 21-Day EMA) on 8th April 2020 that the stock has been trailing ever since. As can be seen in Figure 6, just like our previous analysis of Moving Averages, even in this case the price movement has been particularly sticky to its 8-Day EMA and has been testing the 21-Day EMA multiple times as part of the correction procedure.
It must be noted that the last month has been a story of consolidation for RIL stock and crossovers during consolidations are not as reliable an indicator as they are during a trending market. Hence, it is imperative that the next major 20/5 MA or 21/8 EMA crossover be supported by volume and some kind of a strong price action signal for the stock to establish a trend again. Until that happens, any such cross overs may simply be false signals.
200 Day - 50 Day MA Analysis
Figure 7: Trend analysis for Reliance with 200- and 50-day SMAs (Reliance Industries Ltd Daily Chart, Investing.com as on 03/09/2020 post close of markets)
The 200-Day MA is a very reliable indicator to understand whether or not the general long-term outlook for the stock is bullish or bearish taking into account the historic movement of the prices. If the price-movement is above the 200-day MA, it may be concluded that the stock is in the bullish zone and may trend upwards. Conversely, if the price-movement is below the 200-day MA, the stock is likely to enter a downtrend if not already in one. The same can be said about the 50-Day MA from a medium term perspective.
Resultantly, a crossover between the 200-day and 50-day MAs, such that the latter overtakes the former is commonly referred to as the ‘Golden Crossover’ due to its reliability as an indicator of long-term trends. RIL saw a Golden Crossover in June and the current continuing divergence between these two MAs supports a positive outlook for the stock.
Looking at these MAs it seems that in the next 4-6 weeks, RIL stock is likely to remain bullish, however in the next 1-1.5 weeks, if and only if we see a crossover coupled with a breakout with strong volumes below the aforementioned support at INR 2,010 occurs, the price movement is more likely to be range-bound between the aforementioned levels.
Stochastic and RSI Analysis
Figure 8: Stochastic and RSI of Reliance (Reliance Industries Ltd Daily Chart, Investing.com as on 03/09/2020 post close of markets)
The first indicator in Figure 8 is the Relative Strength Index (RSI) of RIL for a 14-day period. The support formed at the 55 level bound, it is testament to the strong buying sentiment that has been persistent in the market. Moreover, there does not seem to be any significant divergence either on the positive or negative end due to the consolidatory movement of price-action.
The second indicator shown in Figure 8 is the stochastic oscillator. The blue line is the stochastic line and the red line is the 3-Day MA. The stochastic for RIL does not seem to be raising any significant red flags as the stochastic movement has been within the 80-20 range.
News Event Box
RIL has launched its “Naye India ka Naya Josh” campaign this year (loosely translated to “New India’s New Passion”). The aim is to leverage its Jio Platform alongside an increasing market for the internet-of-things in India to establish a more digitised India where technology can be used by everyone for everything, everywhere : JioKrishi for Aerial Tech, JioPOS for Payment Services, JioMart for online shopping being among a plethora of other variants. In some respects, this is potentially the most important aspect of Reliance’s business operations going forward into the next decade.
It is also in the midst of a deal to receive its largest foreign investment (c. $15bn). Saudi Aramco will invest c.$15bn in return for 20% of RIL’s O2C business - specifically its refinery, petrochemicals and marketing arms. This is in line with RIL’s goal to divest from non-renewable energy sources and also reduce its debt load, the latter being furthered with the cash infusion from its partnership with Facebook in its Jio platform. For the time being the Saudi Aramco deal remains on hold due to COVID-19 and a tumultuous energy market distorting valuation of RIL’s O2C business as well as Aramco’s profits falling by 73% in 2020Q1.
India’s relations with China, after a recent dispute at their border, will certainly impact RIL’s telecoms operations. China is India’s largest trading partner after the US, representing 5% and 14% of India’s exports and imports, respectively. RIL has been in talks with Chinese smartphone providers such as Xiaomi to provide low-cost phone packages to the Indian market in conjunction with Jio. However, with souring tensions as well as India’s ban on Huawei, these plans may be delayed or even put to rest.
The US-China Trade War will also impact RIL’s petrochemicals operations. Demand for polymers has shrunk as the world’s two largest economies cut back on trading with each other. It has also depressed crude oil prices, straining suppliers of RIL’s refinery businesses.
The Government of India’s decision to open up access to its sovereign bonds to foreign investors is positive news for RIL. $100bn worth of securities were made available which will bring in much-needed FDI to help fuel India’s economic growth and speed up urbanisation, which can help expedite RIL’s Jio plans.
The company has recently entered into talks with ByteDance to take over the Indian operations of TikTok. India is TikTok’s largest market outside of China and the deal, valued at around $3bn, can help Reliance gain more access to consumer data and would complement its Jio Platforms services.