RIL recently declared what appeared to be stellar Q2 and half-yearly results, with a $1 Billion profit during the quarter (which is more than the annual turnover of many listed companies). Why did the market react indifferently to the excellent numbers? A closer inspection of the figures paints a less rosy picture.
In this month’s guest post, Nishit looks at the RIL stock from both fundamental and technical points of view to help investors take an informed decision about what to do with a stock that has been a favourite of investors for many years.
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Reliance (RIL – CMP Rs 812) has come out with its half yearly results. Let us find out how this bellwether stock is faring. For RIL, the main sources of profits come from 3 segments: Refining, which contributes 80% of the top line; Petrochem, which is their old bread and butter business; and oil and gas business. Retail and Broadband businesses are still in nascent stages and are yet to generate any substantial profits.
Refining business is booming and gross refining margins (GRM) are almost $9.50 per barrel. This is a decent GRM, because of high oil prices. Typically, GRMs are 8-10% of the price of oil. However, GRM was lower than the year-ago quarter, though it was higher than Q1.
Gas business has hit a roadblock with Krishna Godavari basin not generating as much gas as was earlier expected or planned. The company has also got embroiled in a controversy with the government on cost allocation for exploration.
Petrochem business, which is the old solid business, has seen margin contraction. Other income contributed almost 31% to the profits. Other income is obtained by investing surplus cash in the financial markets. This is more like a treasury operation and the income generated is like that of a financial institution.
If RIL generates 31% income from financial investing, it means it has much surplus cash but very little idea of new businesses to invest in. To be fair to RIL, they are looking at broadband and content related to broadband (e.g. Network 18 rights issue). It is also doing a share buyback, extinguishing shares by buying them from the market.
So, those buying RIL shares are buying it on the bet that its Retail, broadband and content businesses may expand into something more substantial.
RIL’s share price will depend on the gas it generates from KG Basin and also any output from its recent Shale gas purchases. A fundamental buy on RIL would be for buying its future expansions. Those who trust the management and its promises can look at buying RIL. At a valuation of a P/E of 10-12 range, the fair price comes to Rs 610 to Rs 750.
Elliot Wave analysis:
The bottom which the stock hit in October 2008 was Rs 465. After that the stock hit a peak of Rs 1149. So, if we take a corrective A-B-C to the entire up move which terminated at 1614 in Jan 2008:
- A – 1614 – 465
- Ba – 465 – 1149
- Bb – 1149 – 681
- Bc - 681 - ??? (942, 1023 or 1149 can be targets); currently made a high of only Rs 881.
Bottomline: The future outlook for RIL is hazy and only those with an appetite for risk can venture to buy it.
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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.
Nishit blogs at Money Manthan).
Related Posts
1. Why rely on Reliance?
http://investmentsfordummieslikeme.blogspot.in/2009/01/why-rely-on-reliance.html
2. Why did Reliance announce a share buyback?
http://investmentsfordummieslikeme.blogspot.in/2012/01/why-did-reliance-announce-share-buyback.html
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