Posts Tagged ‘Market Capitalization


Coal India: India’s most valuable company

Coal India became India’s most valuable company by overtaking Reliance Industries. Four years ago RIL became M-cap leader by toppling ONGC. Coal India had announced its Q1 results on August 12. Results were above estimates with consolidated PAT increasing by 64.1 percent to Rs 4144 crore. After Q1 result, Coal India rallied sharply to 400 odd levels.

I saw this as an opportunity to write Coal India calls. In this volatile market environment, PSU giant stock has been rock steady and acted as a defensive. But to think that Coal India will move another 12% from current levels would be too much. New draft mining bill, according to which coal producers would have to share 26% of profits with local people, will continue to be an overhang on Coal India stock. Although some of this would be passed onto buyers as price increase. With this thought I wrote September series 440 call. This call will yield 11.36% in 41 days. I am not saying that Coal India will fall from these levels nor will it increase substantially. I can write puts as well but in this volatile market I shall refrain myself from writing naked puts (When I wrote Nifty puts, I bought protection through higher level puts).


New F&O additions

National Stock Exchange (NSE) will add 8 new stocks to its Futures & Options (F&O) list. It has not announced the exact date of inclusion. Stocks to be included are Arvind, BF Utilities, Gitanjali Gems, JSW Energy, Jubilant Foodworks, TTK Prestige, VIP Industries and South Indian Bank.

All these consumer driven stocks have given great returns to investors in  the past several months. Pizza maker Jubilant Foodworks share has risen 75% in the last 3 months. Since its IPO in February 2010, Jubilant Foodworks has gained 555% from its issue price of 145. Pizza maker topline grew by 60% and bottom line grew by 117.6% in the last financial year. Company has performed well and will continue to do well in near future. But, I think upside potential is more than captured in all these consumer driven stocks. Some of them are trading at astronomical valuations.

As of March 31, Jubilant had 378 stores. Market Capitalization (M-Cap) of Jubilant as per today’s closing share price is 5385 crore. M-Cap per store is 14.25 crore. This is 10 times of US owner of the brand, Dominos which Jubilant operates in India. Pizza maker is also valued at more than 50 times of its FY11 earnings. I think its inclusion in F&O will help some sanity to valuations, since investors will be able to short the stock if they think it is overvalued. These kind of richly valued stocks normally leave a little margin of error in terms of performance. Slight disappointment in terms of sales growth or margin slippage can lead to sharp reaction. For me, it will be an opportunity in terms of writing OTM calls.


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)

July 2018
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