Short Term Relief For Reliance Industries

India, largest company by market capitalization, Reliance Industries (RIL) has found itself amidst all sorts of controversies over the past year, ranging from the flagging KG-D6 output to the arbitration battle with the govt. over the recovery of costs and finally to the recent dismal performance that company reported in the December quarter results.

Its ambitious efforts to venture into new business areas like financial services, telecom, retail and hotels have not yet exited investors nor create and alpha for its shareholders. The proposed buyback programme aimed at creating some fancy among investors also proved futile as the stock price has tanked by nearly 14 per cent since the announcements were made.

However, there may be some respite for the company in the near term as Prime Minister Manmohan Singh told reporters on Friday that the govt. had initiated the gas reforms to incentivize production of natural gas, raising hope for oil & gas major, which is seeking higher prices for the gas it produces from the D6 block.

As a recap to our readers, RIL has been pushing hard for raising D6 gas price, which was fixed at USD 4.2 per unit by an empowered group of ministers (EGoM) for five years ending April 2014 while spot prices of imported liquefied natural gas are about $15 per unit. Oil Ministry had referred the proposal to the law ministry to sought the latter’s opinion in the matter and said that govt. would take a decision on revising D6 gas price after obtaining legal opinion on mid-term price correction.

However, in view to adequately incentivise the private investors and also not forgetting to maintain the government’s strong control over natural gas resources, PM on the side-lines of the inaugural session of the 7th Asia Gas Partnership Summit decided to speed up the gas policy reforms process and create a win-win situation for both private players like RIL and also the govt.

Another near term relief for RIL could come in the form of the oil ministry allowing RIL to sells its coal bed methane (CBM) extracts from Sohagpur blocks in state of Madhya Pradesh at a price of USD 10 a unit. The ministry reckons that RIL followed the correct procedure of inviting bids on an arm's length basis but the issue must be scrutinized by the Directorate General of Hydrocarbons (DGH) before any decision is taken on that front.

Both these developments are positive triggers for the shares of RIL and we expect the counter to witness some upward movement on Monday as the markets open. However, we advise readers to not latch on the developments from a long term perspective as the fundamental drivers for the stock are still not favourable. The output from KG-D6 basin has fallen to a new low of 28 mmscmd and Singapore GRM’s has dipped sharply from USD 10.3 per barrel in last week of Jan to USD 5.1 per barrel. Both of these coupled with the persistently weak demand scenario for its petrochemical business will weigh heavily on the company’s Q4 performance.

Having already asked investors to avoid the counter in our magazine (Vol XXVII, No 5 dated February 26, 2012) we urge investors to stay away from the counter in the long run as we expect it to under-perform on the bourses in comparison to other index heavyweights.