Here are the reasons:
1) RIL's Q4 profits were boosted by strong performance in its refining business. Its operating profit in the refining segment rose 48 per cent sequentially to Rs 4,730 crore. Its gross refining margin (GRM), the difference the company gets in turning one barrel of crude to fuel, came in at $10.1/bbl, which was above the Street's estimates. Piyush Jain of Morningstar says these margins are not sustainable. "RIL's margins were up due to seasonality and better product mix," added Mr Jain. In the fourth quarter of the previous fiscal, RIL reported refining margins of $9.3.
Morningstar expects RIL's refining margins to decline after May. "As we move forward we expect GRM to moderate to $8.5-$9," said Mr Jain. The refining business at RIL, which operates the world's largest refinery, accounted for over 70 per cent of the company's gross turnover in the year ended March 2015.
Mr Jain said the refining business in which RIL has invested major chunk of its capital is not generating sufficient return, which is the reason the return on its overall capital employed (ROIC) has come down. "Five year back refining margins were double than what the company has reported now," he added.
2) RIL's oil & gas business was a dampener this quarter, where its operating margins fell to 19.5 per cent against 27 per cent a year ago period. "Lower gas prices have hit the returns in the US shale business while Indian gas business continues to suffer from lower gas production," Morningstar wrote in a note.
3) Reliance Industries has invested nearly Rs 85,000 crore, or 19 per cent of its total capital, in its telecom arm, Reliance Jio, which is yet to generate any revenue. Piyush Jain says there is still no visibility in revenue for its telecom business, which is another dampener in its valuation.
Morningstar believes Rs 950 is the fair price of RIL. However, Mr Jain believes that the stock can start performing if its telecom business starts generating revenue. The stock may reach Rs 1,050 in a year's time, said Mr Jain.
RIL shares ended 4.65 per cent lower at Rs 883.75 apiece, underperforming the broader Nifty, which closed 1.83 per cent lower on Monday.
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