Analysts feel RIL shares cheap; what about the promoters? (Money control)

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With Reliance Industries shares now at their lowest level in almost two-and-a-half years, leading brokerage houses think it is a good time to start buying the stock as the downside appears limited. The stock touched Rs 722 intra-day, and has shed 40% in less than 10 months. But as veteran market players point out, with the Reliance, it is not about what analysts and fund managers think of the stock. Rather, it is about what promoters think of their stock. So far, there is no indication that promoters feel their stock is a compelling buy, after the steady decline over the past few months. At least, there has not been any open market purchase by them recently, which could suggest the stock price is close to bottoming out. Insider buying, more than insider selling, is more closely followed by the market, as it speaks of the owner’s confidence in his business. Many fund managers—domestic and foreign—have cut exposure to the stock during the April-June quarter, or stayed neutral even as the prices weakened. It is not easy for fund managers to ignore RIL, because of its highest weightage in both the Sensex and Nifty. But the promoters' indifference—as perceived by the market—to the slide in the stock price is leading many fund managers to believe that there could be a strong reason for the price being allowed to drift. Meanwhile, here is what CLSA has to say of Reliance Industries in its report dated August 18. "The exploration and production (E&P) value implied by the stock price is also near its five-year lows. Given beaten-down expectations, a significantly milder final audit report by CAG (within coming weeks) should pave the way for a stock-price rally." The brokerage house has cut its price target for the stock from Rs 1050 to Rs 960, but recommends buying the stock as the risk-reward ratio is attractive. "Taking into account current downstream peer multiples; assuming a repeat of FY10, ie, a US$6.7/bbl gross refining margin (1QFY12=US$10.3/bbl); a petchem margin of US$348/t (1QFY12=US$453/t); upstream at an implied base of US$7.2bn BP deal value (ignoring the US$1.8bn development bonus); and Reliance’s investments, below book value of 0.4x PB, returning a bear-case value of Rs705 per share, this implies 6% downside," say CLSA analysts Somshankar Sinha and Vikash Jain. JP Morgan feels the market is pricing in a "gloom and doom" valuation, which may be exaggerated. "RIL stock has corrected 14% since July and now reflects refining margins of approximately US$6.5/bbl(vs. US$10.2 year-till-date), 30% downside to our petchem (petrochemical) spreads, and a 60 mmscmd plateau for D6 gas with no further value attributed to E&P. We maintain the asset is attractively priced," JP Morgan analysts Pradeep Mirchandani and Neil Gupte say in their report. "RIL is currently trading at 5.2 times EV/EBITDA on our earnings projections. This is below its 2008 trough. Earnings would need to contract 32% to reflect the multiples (seen during the global financial crisis)," they add.