Reliance breaks Rs 700 on the downside yet again …this should test conviction of even loyalists…the name ‘Reliance’ appears to be a misnomer and misplaced too !

The Name ‘Reliance’ is a misnomer and misplaced  here….and not for the first time either !

Reliance breaks Rs 700 on the downside yet again…Two days ago on May 8,2012 to it recorded  it’s 52 Week Low of Rs 671 ……this should test conviction of even loyalists

Closing at Rs 695,Reliance’s Market Cap is Rs 227371 crs => @ US $ 42 Billion…it’s now at Rank 2 after TCS which is at Rs 240000 crs => US $ 45 billion

What do we Believe !?…how can you expect us to Rely on ‘Reliance’!?

…it says it erred in estimating Gas Reserves

Reliance has announced that it had overestimated proven gas reserves in the Krishna Godavari Basin…It says that the current estimates are now 6.7% lower at 3.67 trillion cubic feet….Oil Minister,Mr Jaipal Reddy told Parliament two days ago that Reliance’s D6 Block Output will drop to just 20 Million standard cubic meters per day by 2014-15….there is going to be a huge demand and supply gap and this will be met by LNG Imports…Currently LNG consumption is 166 mmscmd  which should rise to 356 mmscmd by 2014-15

All Reliance Valuations over the past few years were excitedly based on increasing Gas Output from D6…these are no longer valid as we were valuing gas that Reliance says is not there now !….and I will not be surprised that when in 2014 there is fresh gas pricing negotiated with the Government,Reliance will turnaround and suddenly discover huge gas reserves ! 

…government has slapped a huge penalty for the lower gas output from KG D 6 Field and accused  Reliance of  violating the Production Sharing Contract 

The Government has slapped a US $ One Billion Penalty on Reliance for lower output from D6 and for wilfully cdrilling less wells than it had committed to in the approved plan and thus having violated the Production Sharing Contract…Reliance has termed this penalty as ‘illegal’ and blames unexpected geological reasons for the lower output that could not have been resolved by drilling more wells

.….fresh 13 year Loan of US $ 2 Billion taken while it is said to be moving towards becoming debt free by next year

Reliance also boasted of having garnered a 13 year loan of US $ 2 Billion on May 7,2012 to fund goods and services from German Suppliers for it’s Petrochemicals Business

http://www.bseindia.com/xml-data/corpfiling/AttachLive/Reliance_Industries_Ltd_090512.pdf

A Thought crosses my mind….some time ago there was huge hype of Reliance moving towards  Zero Debt by 2013…and then this US $ 2 Billion Fresh Loan….Reliance’s Cash Flows have been buoyed by the huge payment of US $ 7.2 Billion from BP treated as FDI ….Reliance is creating Shale Assets in USA and also applying Funds to Buy Back it’s shares

...Why indulge in Buy back of Shares when you need Monies for Operations,especially when it does not even meet objectives

As on April 30,2012 ,Reliance  had bought back @ 72 lakh shares expending @ Rs 538 crs ex brokerage and costs…this would compute to @ Rs 750 per share…Buy back is primarily done when the Company has surplus funds that cannot be otherwise gainfully deployed and when it assesses that the Share Price is on the lower side than it should be…Buy back serves as an assurance to shareholders….but with the Share Price having sunk to below Rs 700,it needs to revisit the rationale and basis for it’s Buy back Strategy….the company need not borrow for operations when it has cash…buy back is not adding to shareholder value on falling share prices and company adding to the debt position with fresh loans   

….it yet has to settle Insider Trading Charges that realised gains of over Rs 1000 crs in November 2007

It has tried repeatedly with SEBI to settle an Insider Trading Case that involved Reliance Petroleum Shares…if I recollect its last offer was to pay a Fine of Rs 50 crs for a Consent Order…SEBI has kept this Case alive ….want to recall facts of this matter  access an earlier blog of mine nearly four years ago in August 2008…at the time SEBI was turning a blind eye to this…later to it’s credit it did investigate this and has kept the matter alive

Proof Of Insider Trading in RPL…Yet Blind Eye Turned by SEBI

Wednesday, August 6th, 2008

How should we Play Reliance ? 

Should we Short in the Short Term !?

Short term remains Ominous….So will Reliance seek a lower level of Rs 500 soon  on the bourses in the coming months !…it’s not improbable !…even if  ‘Mumbai Indians’ enter the IPL Playoff  this year and even goes on to win the IPL !

….so should we short Reliance even now @ Rs 700 ! ?….I don’t short sell as a norm as I reiterate my mindset is that Shorting creates Wealth by destroying Wealth !…and I prefer the Investment route…..Yet My Mind  shorted Reliance at Rs 850 and even at Rs 800 despite Reliance announcing a  ‘Buy back’ and  Goldman Sachs announcing  a ‘Buy’ with a good target !…so I guess you can say I am sitting on strong Notional Profits now that will always remain Notional !  

A 2014-15 Long Call 

Let’s take a 2014-15 View…will we see Reliance Share price at Rs 1500 + levels then !…Remember General Elections are scheduled in 2014…Also ,as stated above,Reliance’s gas Output from D6 should be only 20 mmscmd per day…so the Profitability Growth will have to come in from existing Refining and Petrochemicals Business and the new Retail, Telecommunication and US Shale Business Forays

However having said this,Let me put it this way…If Share Price does drop to Rs 500 the temptation to buy Reliance for a three year hold will be difficult to ignore

For the time being I prefer to be an observer as Reliance battles challenges as listed above…for those who hold Reliance,I will advise to continue to do so with a long term view….also be careful if you wish to increase exposure to it and endeavour to average your holding cost…do so only if convinced and if it fits in your defined asset allocation and equity weightages

Lest you have forgotten, Reliance has been a wealth destroyer in the 2009 to 2011 period despite  Sensex recovering strongly from lows of 8000 in October 2008 and March 2009 to cross record levels of 21000 + in 2010