Why Reliance Industries Is Going Down?
August 14, 2011 | In: Large Cap Stocks, Stocks Analysis
I get a couple of visitors on a daily basis who search these phrases. Taking a look over google trends, it seems Reliance Industries shares are a lot searched in google since 2009. Reliance Industries is a stock that has been trading around 1000 levels ever since May 2009. Taking a look at the EPS of FY09, the company had posted an EPS of close to 50 and that just means the stock went as high as 20 kind of P/E multiple right in 2009. Now profits were completely flat in FY10, so there was no question of any kind of further re rating in the scrip, thus the stock continued to trade in the level. Now around these times, there were positive outlook that the gas out could possibly increase from 60 mmscd to 80 mmscd. This rumour was there till sometime in FY11 and then just things started to get clear that the gas output increase is very unlikely. The company had a hard time getting 60mmscd, forget about an increase.
As we moved later into the FY11, we started getting more clarity on the gas front, the gas output went down from 60 mmscd to 48 mmscd after third quarter. No doubt Reliance Industries saw an increase in profits in FY11, around 25%, but then the valuations were so rich already that simply improving the bottomline margins were not going to re rate the stock on the upside. So again the stock kept languishing around the same 1000 mark. Our indices tested a new high and came back but the stock didnt move much on the upside or on the downside. Now the gas output decrease was such a horrible news as it was a clear opposite direction move on the expectations front. Now this definitely was a huge dampener in terms of earnings visibility for the future. This could be a reason why Reliance is only expected to post a 12-13% profits growth for full year FY12. Thus as the markets started correcting, Reliance industries also started moving down. It started under performing due to dull earnings outlook.
As far as I feel, Reliance actually should have never crossed 750 rupees till FY10. In FY11, the stock should have moved up to 900 or so levels and in FY12 the fair targets for RIL could be around 1050-1100. The whole upmove to 1000+ levels right in 2009 was very wrong as the earnings did not justify such kind of valuations and that is the major reason why the share never performed after mid 2009, it remains a market under performer for the last 2.5 years. However, now with RIL quoting around 760 rupees, any further downside will make this stock go close to 10 times FY12 earnings and there it could become really interesting from a long term view.
Reliance is likely to post an EPS of close to 70 for FY12 and if the stock comes closer to 700 rupee mark, then one can initiate a BUY on Reliance Industries with a long term view. This buy call on reliance is solely based on a bottom picking approach. Reliance will post a okay okay kind of growth in FY12 with no revision in gas output on the upside, however we believe in FY13, BP will help Reliance increase the output, atleast back to 60 mmscd where they were in the past. That could somewhat get back the confidence among investors and then we will also get some outlook on the Shale gas venture RIL had entered into. So in short, you are getting a large cap at a cheap valuation with hopeful positive outlook in future. So it could form a very interesting buy around 700 with a target price of atleast 1050 in 12 months or so. A 50% upside in long term is definitely on the cards and on top of it if we get some positive news, then that would just work as an added bonus and re rate the stock further on the upside. There is some hope atleast in the future that gas out will increase, atleast in FY13.
A bottom picking approach can be applied on this stock from a long term horizon but only at these lower levels of 700 – 725, and definitely not on the higher levels because that just defeats the entire purpose. We will only buy reliance due to cheap valuation and any kind of higher levels nullifies our approach. For investors who are already holding Reliance, should continue to hold the stock with a long term horizon. If you had the patience to hold till now, then I think you can definitely hold for some more time. Reliance was an exit from mid 2009 upto mid 2011, but now it is coming close to the levels where one can initiate a buy call.
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