Reliance: Even at Rs 684 per share, outlook remains bleak

Reliance Industries is having a torrid time, to say the least. Shares in India’s largest private-sector conglomerate plunged to their lowest since March 2009 and below the psychologically important Rs 700 level on continuing worries over its gas output from the KG-D6 basin.

Late last week, the company lowered its estimates of proven gas reserves in its Indian blocks by 7 percent to 3.67 trillion cubic feet. On Monday, that prompted ratings agency Moody’s to downgrade RIL to ‘credit negative’ . “The revisions are credit negative for the company, as it confirms the technical difficulties that it faces in its exploration and production business from declining production and consequently, lower cash flows,” Moody’s said in its weekly credit outlook.

Declining gas output has also sparked a long-running battle between the government and the company.Earlier this month, in the latest development in that saga, the government struck down Reliance’s plan to recover $1.2 billion in costs before the energy major starts sharing profits with the government from its KG-D6 gas field.Reliance, on its part, has filed for arbitration proceedings to resolve its issues with the government.

Moody’s believes that will be a drag on Reliance as well.“We expect arbitration to be a long process but not to have any meaningful impact on company’s cash flows for the next 12-18 months,” it said. “However, the regulatory pressure on the company will continue to increase as long as the production levels continue to decline.”

The rating agency noted that the 12.8 billion cubic metre-reduction in proved reserves would reduce total cash flows from theproject by about $1.7 billion, based on the existing gas price of $4.2 per million metric British thermal units.

Troubles in the gas business is not the only reason why investors are deserting Reliance. Disappointing fourth-quarter results, which suggested that Reliance was making more money from its other income than its dominant refining business, and a lack of clarity on what it plans to do with its Rs 70,000-plus cash hoard have also aroused concerns among investors.

Moody’s views were echoed by Kotak Securities. _“A difficult operating environment in the core chemical and refining segments, declining reserves and regulatory issues in the E&P segment and fair valuations constrain us from taking a more positive view on the company despite the recent sharp correction in the stock price,"_Sanjeev Prasad of Kotak Institutional Equities said in a report dated 11 May. The reportmaintained a ‘reduce’ rating on the stock with a lowered 12-month target price of Rs 730.

Investor disillusionment is clearly evident from the fact that Reliance’s shares have lost more than Rs 22,000 crore, or 10 percent of market capitalisation, in the past one month. In contrast, the benchmark Sensex has lost 5.5 percent. The company also had to cede the title of India’s most valuable private-sector company to Tata Consultancy Services.

Even Reliance’s ongoing buyback programme has done little to prop up the value of the share price. According to a report in Business Standard, the company bought an average of 600,000 shares a day seven times this month, more than double of what it bought in April. Still, they haven’t buoyed the stock price.

Reliance shares are currently trading at Rs 684, after tumbling to Rs 674 earlier.Even so, the short-term future looks bleak.

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