Reliance Industries stock on the rise despite Arvind Kejriwal's repeated attacks

MUMBAI: Shares of Reliance Industries Ltd (RIL) climbed over 15% in the past month, outperforming the 6% rise in Sensex as renewed investor appetite for India and the country’s second- most valuable company outweighed negative news flow on gas pricing and Arvind Kejriwal’s repeated attacks on RIL chairman Mukesh Ambani.

Foreign funds are pouring into Indian equity markets, with a net inflow of about $3 billion this month, and market experts say RIL, which has lagged the market for long, is a preferred stock for many. “When foreign funds buy Indian stocks, Reliance is a natural choice and it gains more than others. By the same token, when they exit, Reliance’s shares fall more than others as it happened in the past,” a fund manager at a foreign brokerage said. The stock still has alot of potential, as it has lagged the benchmark index for a long time, and can fire a Sensex rally in the future, he said.

With macroeconomic indicators looking better than a year ago and expectations of an stable government to be voted to power in May, Indian markets are back on the radar screens of global funds. Indian markets have recently outperformed Brazil, China and Russia, helping index heavyweights gain.

Analysts said the market remains broadly upbeat about RIL’s exploration and production business. They are also keenly watching its retail business, which has now become profitable as well as its broadband business, which brokers and traders say has the potential to shake up the telecoms market with a likely “irresistible offer” to customers just as it offered extremely low-cost mobile services in the past.

Reliance’s shares closed at Rs 914.5 at the BSE on Friday, close to their 52-week high of Rs 927.9 hit in July last year. Shares had fallen to a six month low below Rs 800 at the end of February, but have risen since then, barring temporary dips, including the day when the Election Commission asked the government to defer its decision to nearly double gas prices from April 1.

Experts don’t see the gas price issue and the FIR ordered by Kejriwal, when he was Delhi’s chief minister, as major hurdles for RIL’s stock, although they would worry if the Aam Admi Party performs better than expectations in the general elections, or if a Third Front government comes to power. They say change in asset allocations in emerging market and the huge flow of foreign money into Indian equities mainly into index stocks could be a reason for the recent surge in RIL stock.

“The current rally in RIL shares is mainly because of the amount of foreign money flowing into Indian stocks and with over 10% weightage in Sensex, RIL is one among the top picks of foreign fund managers who are investing in index stocks,” said Deven Choksey, managing director of K R Choksey Shares and Securities.

The RIL stock accounts for about 5.5% of total FII investments against its 7.9% weight in the MSCI India index.

“Long-term investors anticipate a huge return in RIL stock over the next twothree years as they expect the company is close to operational and financial turnaround” Choksey added.
Analysts are upbeat about RIL’s gas business as well as the performance of the world’s biggest refining complex at Jamnagar. “We expect KG-D6 discovery, which may be largest ever in the block to drive reserve upgrades for Reliance in 2014. At the same time, recent strength in GRMs and rebound in KG-D6 production will drive record quarterly profit for Reliance in Q4,” said Vikas Kumar Jain, analyst at CLSA.

“We find the stock below historical average multiples and launch of 4G telecom services may also be a supportive factor in 2014.”

Vinay Jaising, analyst at Morgan Stanley says “RIL is set to double its profits over F13-17e, driven by higher gas prices and volumes and downstream expansion”.

Reliance Industries, which holds thirdhighest weight in the Sensex after ITC and Infosys has been stuck in a range for quite some time. The stock has risen just 21% in the last five years against the 133% surge in benchmark Sensex.

The stock is currently trading at 10 times its F2015 estimated earnings, a 15-20% discount to its historical average since 2008. Its 1.3x P/B is now at a 30% discount to its historical average since 2008.

“Singapore complex GRM has improved to $6.6/bbl so far in Q4 against $4.3/bbl in Q3 with pick up in all product cracks, particularly gasoline and fuel oil which had seen a sharp decline in the previous quarter. We estimate Reliance’s GRM in Q4FY14 to date to be $10/bbl against $7.6/bbl in Q3FY14 GRM till date is $8.2/bbl. Every $1/bbl change in GRM impacts RIL’s FY14 EPS by 10%,” said Arya Sen, equity analyst at Jefferies.