23
Jun
11

Reliance: Corporate governance, Gas output and more…

With the highest weightage on Nifty and Sensex, RIL movement has large bearing on both indices. Last week, RIL touched its 2 years low, its Market Capitalization (M-Cap) fell below Rs. 3 lakh crores and it was no surprise that it dragged Nifty below 5400. In last one year, RIL has underperformed benchmark indices Sensex and Nifty.

Recently, the Comptroller and Auditor General of India (CAG) report said that the company was shown undue favor by the Director General of Hydrocarbons (DGH) in Krishna-Godavari (KG) basin. DGH allowed RIL to raise its Capital Expenditure (Cap-ex) from $2.4 billion to $8.5 billion in years 2004-2006. This impacted Government of India (GoI) revenues on account of lower profit share it received from KG basin. RIL is widely tracked stock and held widely across domestic and foreign institutions. CAG report has raised concerns among FII’s with lot of them opting to sell the stock. Most disappointing part is that there has been no denial or clarification from the company about CAG report.

Till now, RIL was struggling to ramp up gas production with output plateaued at 55 mmscmd, much lower than expected 80 mmscmd. One wonders if government refusal to raise regulated prices of $4.2 per mmbtu is the reason of technical difficulties in KG basin. Now RIL is also pressurizing government to approve RIL-BP deal saying that it needs BP technical expertise to ramp up gas production. Huge cash pile in its balance sheet and its deployment is also putting pressure on RIL stock. Not many investors would be enthused by the fact that the cash is getting deployed in unrelated ventures.

With so many subsidiaries, lack of disclosures in its balance sheet, RIL track record on corporate governance has always been shady. Despite all this, not many brokerages have downgraded RIL stock. Part reason could be attractive valuations. Given all the uncertainty around the company and  Euro-zone, it is difficult to initiate any kind of trade in RIL. Call IV’s have come down sharply and puts might be highly risky to write currently. One trade I am looking forward to is writing 700 put in July series. (Difficult to imagine RIL falling by another 17-18% in next one month)

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