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Reliance Industries: Recommendation Review

| 5/17/2012 9:00 PM Thursday

We had recommended in DSIJ Vol. 27, Issue No. 5 (dated February 13-26, 2012) that investors sell shares of Reliance Industries (RIL). Our bearish attitude on this counter stemmed from its continuously fading output at the KG-D6 basin, the sudden dip in its gross refining margins (GRMs) during the quarter ended December 2011 and the weak demand for petrochemicals.

Since our recommendation, the shares of RIL have yielded a negative 17 per cent return and have massively underperformed on the bourses. Going forward, despite a visible improvement in its GRMs as seen in its recently-announced quarterly earnings (March 2012), we, at DSIJ, continue to maintain an ‘avoid’ call on the counter.

The natural gas output from its prolific KG-D6 basin has hit new lows of 34 million metric standard cubic meters per day (mmscmd) in recent times, and as per government sources, the projected output may fall further to 20 mmscmd by 2014-15. With the oil and gas exploration business contributing nearly 27 per cent to RIL’s earnings before interest and taxes (EBIT), the fading KG-D6 output would hamper its growth prospects in the future. In fact, in its recent annual report for FY2011-12, the company has reduced its estimates of proven gas reserves from its KG blocks by 6.7 per cent to 3.67 trillion cubic feet (tcf), confirming the declining fortunes of its oil and gas business.

Based on the weak outlook for its flagship refining and petrochemicals business, coupled with the fact that its other businesses too have not been able to create an alpha, we reiterate our bearish stance on RIL and expect it to continue with its underperformance on the bourses.

 

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