Mahantesh Sabarad, Head, Retail Research,
First a disclaimer, I own Reliance stock. One question that comes up is what is the capex programme going to be ahead as the 5G auctions are coming up. Telecom has become an important vertical for Reliance lately. The energy vertical is fairly steady. Any changes on the energy side does not really impact the stock movement. The Reliance outperformance during the pandemic period was attributable to the telecom vertical and the upcoming 5G auction is going to be an important event. Reliance will want to take a stance there.
On Reliance’s old economy business
As I said, while the energy vertical is fairly steady, it does not move the needle for the company. The valuation of Reliance used to be single digit EV/EBITDA multiples not too long ago. Now they have moved into double digit EV/EBITDA multiples. That is one way of looking at Reliance. One can also look at Reliance from a valuation perspective. But the standard EV/EBITDA multiple has moved into double digits and that has not happened because of the energy vertical. That double digit EV/EBITDA multiple will not move much even if there are expanding GRM margins on the refining side or the petrochemical margins improve.
In such a situation, for a good part of that business, there are no worries on the demand side now that the recovery has started. Petrochemical consumption in India is well above the pre-pandemic levels of last year and there is growth ahead. Something similar is happening across the globe. I do not think petrochemical or the refining businesses is something which we should be looking at with renewed focus as far as Reliance is concerned when it comes taking a call on the stock.
On the auto, auto ancillary pack
Automobile companies have done quite well. They have delivered a surprise on the positive side when it comes to production and a quick recovery. In the year ahead, despite the challenges on the cost side, metal prices are up and so there is an opportunity for the companies to raise their prices. In a situation where demand has become buoyant, they have the ability to raise prices. Most of the automobile companies will be taking this opportunity around the Budget time because they will wait to see the Budget proposals , particularly those related to automobile companies and then take a price hike.
There is also an expectation about automobile companies looking for lower GST. While the Budget does not decide GST rates, the cess that is levied on automobile companies can be reviewed favourably and that pushes the prospects of automobile companies for the better. Irrespective of that, demand is fairly strong and since they have started delivering double digit growth in a pandemic affected economy, most of the automobile companies will do well. When there is so much liquidity in the market, quality is the first corner where it will accumulate.
On Budget expectations of beleaguered sectors
It will be a very difficult task for the finance minister to balance the Budget this time around as the buoyancy in tax revenue is not really good. The first thing she needs to look at is how to increase the tax buoyancy without taxing the general public or the industry as a whole. The tried and tested method that has been adopted in the past is reducing the marginal rate of tax. The other way is not reducing the marginal rate of tax but reducing the multiple levels of personal income tax slabs. If that is simplified, there will be better tax compliance and tax buoyancy will follow through.