Shares of Reliance Industries erased early gains to close 1% higher on Thursday, as near-term concerns over earnings growth
outweighed the feel-good sentiment arising out of the 1:1 bonus share issue.
The stock witnessed higher than usual volumes on both stock exchanges, but most investors
used the opportunity to book profits for the time being.
On BSE, the stock closed at Rs 2,119.20, up Rs 20 over the previous close, after having touched Rs 2,209 early on in the session. Brokers expect the stock to trade in line with the broad market trend, at least till the run-up to its second quarter numbers.
“Lower refining and petrochem margins and higher capital charges will offset higher volumes from KG-D6 and RPET refinery in 2QFY10,” says a earnings preview note by brokerage house CLSA to clients last month.
“We estimate a 3% Q-o-Q (quarter-on-quarter) rise in RIL and RPET profits to Rs 3,850 crore and see downside risks to consensus FY10 EPS estimates even after the 5% downgrade since June. FY11 earnings are more relevant, but we find Reliance 19-55% more expensive than peers even on these estimates. Clarity on growth projects, inorganic or organic, will be crucial, therefore, to sustain stock performance by keeping the SOTP (sum of the parts) framework relevant,” the note adds.
RIL shares have been performed in line with the market over the past one month. The company’s ongoing legal battle with ADAG over gas supplies, and sluggishness in refining margins are among the key reasons why the stock has performed to the extent that most investors were expecting it to.
According to brokerage house Ambit, RIL’s blended gross refining margin for June-September is expected to be $6.5/bbl compared with $7.5/bbl during the preceding quarter.
“RIL’s profit is expected to grow marginally Q-o-Q, as increase in earnings from higher gas production and merger of the RPL refinery offset the fall in refining margins and petrochemicals’ EBIT,” brokerage house Edelweiss has said in its results preview note. Edelweiss has rated ONGC and GAIL as top picks in the oil & gas sector. Some feel the pull-back in RIL stock could be attributed to the overall weakness in the market on Thursday.
“The (bonus) announcement is particularly significant, after the recent sale of treasury shares by the company. This is because a section of the investors perceived the treasury share sales as a negative event, capping the stock price upside in the short term,” Angel Broking said in a note to its clients. The brokerage has a ‘buy’ rating on the stock.
Credit Suisse recently upgraded its rating on the stock to ‘outperform’ saying relative valuations of the stock were attractive. “While absolute valuations are clearly more demanding now, RIL’s forward P/E is currently at a 10% discount to MSCI India compared with a 55% premium in October 2008. EPS momentum means this discount will expand even if RIL moves with the market,” the brokerage said in a note to its clients last month.