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10 September 2011
Strength is weakness, so said George Orwell. This sums up the predicament of Reliance Industries stock price on the bourses in the last two years. Reliance Industries Limited (RIL) is Indias largest company by market capitalization and profits. RIL has grossly underperformed several other blue chips on the bourses during the period. The bad news for the company seems to be over for the time being. Analysts see the conclusion of the BP deal and toned-down version of final CAG report as positive for the long-term. Is it time for the rerating of RILs stock?
Before answering the question, let us go back a little. The fall in RIL share price was more pronounced since the beginning of this calendar year following a flurry of negative news flow about the company. First, it was the reports of fall in production of gas in KG D6 well of the Krishna-Godavari Basin. Next a damning interim report by CAG in which it was alleged that RIL had escalated capital expenditure while developing oil blocks in KG Basin. Following the negative events, several brokerages had downgraded the stock to sell questioning RIL for its poor corporate governance practices. Even though the company had struck a $7.2-billion agreement with BP during February 2011, the stock price had continued to plummet till 26 August 2011 when it reached a multi-year low of Rs 714. The all-time high price for RIL stock was Rs 1,625 (price adjusted for 1:1 bonus in Nov.2009) on 15 January 2008.
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Some analysts see the developments in the past one week as a respite for RIL stock which is reflected in the sharp reversal in stock price from the lows of Rs 720. The stock has taken strong support around Rs 720-750 levels. The overhang of CAG report seems to be over for the time being. However, it is expected that the Government will take some action in response to the final CAG report. Investors need to follow the news flow surrounding the stock closely in the next few months.
Valuation
In the latest June 2011 quarter, exports accounted for more than 60 per cent of the total turnover. As such, in future, the sales growth will depend on the ability of the company to grow sales amidst fears of a slowing world economy. In the past one year, while the oil & gas segment disappointed with lower production, other business segments oil refining and petrochemicals have done well. The stock has strong support around Rs 750 level. At the current market price of Rs 826, the valuation appears to be reasonable for longterm investors with the stocks price-earnings multiple at 12.8, and price-book value at around 1.8. The dividend yield is a little less than one per cent. The face value is Rs 10 and the market capitalization is Rs 2.70 lakh crore. Total cash & cash equivalents on the balance sheet are Rs 45,775 crore.
References: BSE, RIL Abbreviations: CAG Comptroller and Auditor General of India, Disclaimer: The authors views are personal. He has a vested interest in the stock markets and his views should be taken with a pinch of salt. He may change his views very fast without any notice depending on the market and economic conditions. His views should not be construed as investment recommendation. There is a risk of loss in equity investments. Investors need to consult their certified financial adviser before making any investment decisions. For authors articles on financial markets, just click: www.scribd.com/vrk100 www.ramakrishnavadlamudi.blogspot.com
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