All for M-cap glory: Reliance may have the last laugh

In a span of one week, Reliance Industries came down by two notches from its pole position as the most expensive company in terms of market capitalisation. First, it lost its position to Coal India on Wednesday and by Friday, it lost its second position to ONGC, from whom it had wrestled the top position in early 2007. A higher closing by Reliance has, however, helped it maintain its second position as of now.

Market capitalisation is a multiple of share price and the equity capital of a company and is generally used to calculate its value. Public sector ONGC has historically been the highest market capitalisation company till 2007, but with the announcement of a huge gas find in the KG Basin, shares of Reliance Industries shot up as investors saw a higher growth potential in the company.

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Since February 2007, ONGC moved up from Rs 220 to a high of Rs 346.25 in November 2007 and currently trades at Rs 275. Reliance, on the other hand, moved up from Rs 676 to a high of Rs 1,649 in January 2008 and is trading at Rs 758.30 on Monday, August 22, 2011. Reliance is near its 2-year low while ONGC has moved higher from its low of Rs 285.30 it touched in June 2011.

The world over, energy companies are among the largest market capitalisation ones in their indices. In the US, Exxon Mobil has the largest market capitalisation while in the UK, Royal Dutch Shell is the second-largest company after BHP Billiton, a coal and metal mining company.

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In India, the top three companies by market capitalisation are all in the energy space – Coal India, ONGC and Reliance Industries. Reliance Industries currently derives a substantial amount of its turnover from the petrochemicals business, but the real growth in its business is expected to come from the oil and gas operations.

Coal India has a consolidated annual turnover of Rs 53,196.9 crore while its net profit was Rs 10,867 crore for financial year 2010-11. On the other hand, ONGC posted a net profit of Rs 22,824.97 crore on a sales figure of Rs 1,17,610.59 crore. Reliance Industries has sales of Rs 2,48,170 crore and a net profit of Rs 20,286 crore for the given period.It may be noted that ONGC’s profit comes despite the subsidy it offers to refiners.

These three companies also share a common supply side problem. Coal India can not increase its production due to logistical problems, ONGC and Reliance do not have enough recoverable reserves of oil to boost sales. Reliance, however, has the flexibility of a faster decision making, which is extremely important in the energy sector, compared to the other two. ONGC has lost out to their Chinese competitors in a number of occasions due to the government’s delay in clearing its bids for overseas oil reserve acquisitions. Coal India is still awaiting clearance for five acquisitions from the government.

Analysts projections, however, say Reliance has a brighter future and might retain its top spot. While consensus target for Reliance is over Rs 1,100 as compared to its current price of Rs 731, a potential rise of 50 percent, targets for Coal India and ONGC are only 10 percent higher.

Current market capitalisation of Reliance Industries is at Rs 247,604 crore and that of ONGC and Coal India at Rs 245,328 crore and Rs 249,685 crore. The targets suggest that in case of a rebound in markets, Reliance may regain its top position again.