RIL rally: No fundamentals, only global euphoria

Shares of Reliance Industries have risen more than 18 percent between the close of trading on 29 June and 17 September, when they closed at Rs 873.65, above the upper limit of Rs 870 for the company’s buyback offer. Today, the stock fell below that level.

The company had announced a buyback in February 2012 in a bid to prop up the shares that were pummelled by investors fearing a regulatory setback to the company after gas output from its KG-D6 block nosedived.

The buyback was for a maximum of Rs 10,440.00 crore and at a maximum price of Rs 870 per share.

[caption id=“attachment_460108” align=“alignleft” width=“380”]  Reuters[/caption]

As of 11 September, the company has bought back shares worthRs 3,198.35 crore. According to a report in the Financial Express, this is about 30 percent of the total amount earmarked for the buyback.

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The company had bought 3.9 crore shares at an average price of Rs 819.25, the report said.

So, what drove the share to these levels?

“We do not see any fundamental reason for the stock’s recent run-up and recommend selling into the unwarranted euphoria,” Kotak Institutional Equities said in a research report today.

The stock is generally following the market, which surged after the government unleashed a set of economic reforms and the US central bank announced unlimited bond buys.

The central bank’s actions are seen releasing cheap money that will find its way to the global commodity market, thus pushing up the prices there.

But this is unlikely to have any impact on RIL. In fact, the demand-supply situation is tilted against the company over the next two-three years.

“Global central banks’ unconventional monetary interventions are unlikely to result in any material positive impact on RIL’s core businesses. We note that RIL is a ‘convertor’ company whose profits depend on ‘conversion’ margins; it is not a commodity play,” the note said.

The E&P (exploration and production) business contributes modestly to RIL’s profits now. Without the gas business, whose prices are currently capped (up to FY2014), RIL has negligible exposure to pure commodities, it said.

The company’s margins will depend on fundamental supply and demand factors for various products in the chemicals chain and in refining.

“We do not see any material impact of the recent actions of global central banks on global economic growth and on supply-demand balance,” Kotak said.

The global supply-demand situation for petrochemicals and refining is comfortable over the next 2-3 years. But the refining supply and demand balance is seen deteriorating over two years as large capacities come on stream in the Middle East and Asia.

“Refining margins have declined over the past few weeks with the restart of refineries that had undertaken maintenance turnarounds in July-August. Chemical margins continue to be subdued,” Kotak said.