RELIANCE INDUSTRIES: Sell Call on RIL at Historic High, But Some Hold a Contra View

Analysts appear to have become the most bearish in three years on Reliance Industries, India’s largest company by market capitalization, according to data compiled from Bloomberg. Most analysts have turned neutral, while ‘sell’ recommendations on the stock are at a historic high. There are brokerages with a bullish view on the company on the back of the recent positive news flow, but retail investors should be cautious in taking a bet on the stock.
Data since 2006 on analysts’ recommendations on RIL shows only 15, or close to 30%, of a total of 49 analysts tracking the company have a ‘buy’ call on it in November. One in four analysts have given a ‘sell’ call, which is unprecedented. Last November, nearly 80% of the analysts had a ‘buy’ recommendation. A similar situation was last seen only between September and December of 2009 when less than 30% of the analysts were bullish on the company with the rest being either neutral or bearish. The RIL stock remained flat over the next 12 months.
But there are some who are betting on an improved external environment, especially at the government level, besides the company’s share buyback programme to make a positive impact. “Reliance agreeing to CAG’s terms of audit of the D6 block should pave the way for some important approvals even as an expert committee submits its recommendations on gas prices by end 2012,” says a CLSA report dated November 22, while pegging the one-year target price at . 850. “While the recent step-up in buyback should support the stock, positive upstream news flow and the launch of Reliance’s broadband businesses are the nearterm news flow triggers,” it says.
The global equity research wing of UBS is also bullish on the company, saying a positive regulatory momentum is building up for it. In its report dated November 22, it listed five key catalysts that will help RIL’s share price move up: 1) formal approvals for MA, D1-D3 revised FDPs (field development plans) with start of workovers; 2) exploration approval at KGD6; 3) GRMs (gross refining margins) staying firm despite volatility and growing shale gas contribution to drive cash flows; 4) efficient cash usage for E&P, LNG; 5) gas price hike post 2014/CBM pricing.” UBS has reiterated its ‘buy’ rating while keeping the one-year price target at . 1,015.
RIL has been hit by falling natural gas output from its KG-D6 block, while the performance of its refining and petrochemical businesses was hit by commodity cycles. The company’s plans to use its huge cash pile for further growth are longterm in nature. This means there is no near-term trigger to improve earnings or prop up the stock price.