Mumbai: Morgan Stanley has downgraded Reliance Industries to ‘underweight’ from ‘equalweight’, saying it expects the energy major’s gross refining margins, exploration and production volumes to fall.
The bank cut its price target for the company to Rs 650 from Rs 921.
Morgan Stanley said the gross refining margins for the company had peaked in 2011 as there were shut downs in Japan and low additions in China. But in 2012 Japan is expected to ramp up production and India and China are adding new capacities.
On expectations of falling refining margins, exploration and production volumes, the energy major has been downgraded to 'underweight'. Reuters
In petrochemicals too the company could see demand slow down in demand due to global economic worries.
Its production in exploration and production (E&P) arm has also fallen from a peak of
80 mmscmd (touched briefly for facilities testing purpose) in Dec-09 in D6 to less than 40 mmscmd currently.
Morgan Stanley says, “Although we view this as the bottom for volume slippage, the sale of a 30 percent stake to BP should lead to a lower contribution from E&P” in the next financial year.
Morgan Stanley analysts are also not happy that cash flow is greater than capital expenditure undertaken by the company. Moreover, most of the cash flows are being used in non core businesses. In fact share of non operating incomes could increase to 21 percent by financial year 2014 from the historical average of 13 percent, and diversification into non crore areas could lead to a derating of the stock. Its investment in retail and telecom would take long time for investments to start earning profits and the industries are also highly competitive.
Finally, the report says Reliance Industries is incrementally turning into a conglomerate with presence in several segments such as Retail, SEZs,Telecom, Financial Services, Hotels and Media as compared to its core business. “We believe the risk is market applies a conglomerate discount to in line with globally traded conglomerates.”
The main risks to the call are stronger than expected petrochemical and refining cycle, huge production increases, or either the company declares a buyback of shares to return cash to shareholders or announces a definite method to deploy the cash.