Time to Buy These Stocks?

In a fiercely declining market, no one is spared. This is exactly what happened in 2011, which proved to be a very difficult year for investors. Usually, in a difficult scenario, investors turn to stocks in the ‘A’ group as they provide some solace. In 2011 though, even these did not perform up to expectations. Around 100 ‘A’ group counters underperformed the Sensex, which witnessed a significant decline of 24 per cent. The worst part for stocks in the ‘A’ group was that around 49 counters lost more than 50 per cent in value, with a few even closing at their 52-week low levels. Many investors entered these so-called defensive counters, only to get stuck as the scrips continued to get eroded. In some cases, the losses have been more than 80 per cent! In short, investors got a rude shock from a space that usually provided comfort.

We are sure a whole lot of investors would be confused about what to do with these investments that have turned sour. What is the future of these stocks? Is it time to get rid of these counters and park the money somewhere else? Or is this steep fall an opportunity to buy into these counters? Here, we provide you with an objective analysis of seven beaten down counters in order to help you make an informed decision on what to do with them now.

The list of beaten down stocks is quite a long one, and it is not possible for us to provide guidance on all of them due to space constraints. Since we had to be selective, we have picked those scrips that have a larger following and which would hence address a large number of shareholders.[PAGE BREAK]

The first stock that catches our attention belongs to Reliance Industries (RIL) – the company with the largest market cap in India and which has the highest weightage on the Sensex. Investors were frustrated on account of the highly range-bound activity of the RIL scrip with a downward bias. Even news of the buyback offer could not help.

Similarly, we have selected L&T and SBI, as they are the largest companies from their respective sectors. While L&T witnessed tremendous margin pressures and saw slower new order inflows, SBI faced challenges like poor financials on the back of higher provisioning made by the new chairman.

Next in line is Suzlon, which created ripples in the market by bringing the concept of renewable energy. There were hardly any competitors for the company in this regard, and hence, the scrip caught the investors’ fancy. The presence of more than nine lakh investors in the counter vindicates the same. Since its listing though, the scrip has destroyed the wealth of a large number of investors.

Another such counter is Educomp Solutions. This scrip was once the darling of investors on account of its new concepts in the business of education. Investors flocked to the scrip in droves. However, corporate governance issues and increasing competition impacted the company badly. The scenario is such that where once there were investors running after Educomp even at a P/E of 50x, now there are hardly any takers for the same even at a P/E of 8x.

Pantaloon Retail was also largely on the radar of investors. Known as face of retail in India the promoters of Pantaloon ruled this space for years. However increasing competition and reducing margins took away the sheen.

Similarly, Reliance Communications (R Comm) was always in the news, often for the wrong reasons. The involvement of two executives in the 2G scam only added to the woes.

Many investors have got stuck and want to know what to do now. Some may see this as an opportunity to enter at lower levels, as the fall has made the scrips more lucrative. Allow us to remind you though that lower does not necessarily mean better. The moot question then is, is this the right time to enter these stocks or should you avoid them? We have tried to find a decisive answer for each of the scrips.

SUZLON ENERGY

BSE CODE: 532667
FACE VALUE: Rs 2
CMP: Rs 29.10

HERE IS WHY:

• FCCB conversion at a very steep price is weighing high on the stock at the moment.
• Has a mountain of debt of Rs 13357 crore.
• Promoters have pledged 94.27 per cent of their shares.

The shares of Suzlon Energy, the fifth-largest wind power company in the world, tanked by about 67 per cent in CY11. This fall was very obvious and should not come as a surprise as the entire power sector has underperformed over the past couple of years. However, when looked at closely, the problems faced by Suzlon Energy seem to be very unique and are a result of many issues that have ultimately taken their toll on the share price. The stock is currently down by a whopping 80 per cent from its issue price at the time of its IPO (adjusted price). So, are we done with the declines? Well, we don’t think so. Despite getting many domestic orders, its bleak bottomline performance has led to the downfall of its share price on the bourses. 

From factors such as order cancellations due to cracks in the blades to a highly leveraged balance-sheet and finally its near-term FCCB redemption, we believe that the stock is far away from its recovery path yet. The company had Rs 4249 crore to fund its acquisition of the German wind power company, REPower, for a price consideration of Rs 7314 crore. The acquisition of this company has put a lot of pressure on its operational performance, resulting in EBIDTA margins dropping to about 5 per cent from the level of over 20 per cent before the acquisition. In fact, this acquisition has stretched its balance-sheet in terms of the debt pile-up, which has since then surged by 2.5x.

REPower contributes about 57 per cent to Suzlon’s total order book. It has a major order book from Europe, especially Germany. With the European economies slowing down and the German government deciding to cut the subsidy on renewable projects we expect its order book to remain under stress. Its high receivables are also a major cause of concern. Its debtor days have increased from 85 in FY10 to 124 days in FY11 and are way higher when compared to global peers like Vestas (about 30 days). Further, a major part of its receivables (about Rs 1000 crore) are tied up with its US customer Edison International. We believe that the recovery process in this case is going to be prolonged.

It has outstanding foreign currency convertible bonds (FCCBs) of USD 654 million (about Rs 3249 crore). Of this amount, about USD 246 million are due in June 2012 while USD 142 million are due in October 2012. The remaining FCCBs of USD 265 million are due after 2014. The bonds which are due in June 2012 have a very steep conversion price. Besides, the redemption premium is over 140 per cent. Looking at the current market price, we believe that these FCCBs would be repaid instead of being converted. With the possibility of a weak rupee, this may pose further downside risk. We believe that the company would require huge cash in the near future to meet its FCCB obligations.

It has sold some of its assets to make provision for the FCCB repayment. Its promoters have pledged 94.27 per cent of shares. With the total debt remaining as high as Rs 13357 crore and its debt-to-equity ratio standing at 1.7x, Suzlon is in quite a fragile financial position and raising more funds will be very difficult. Any fresh borrowings will further see a drop in its profit margins and will drag the share price downwards. In our opinion, Suzlon Energy will not have a very smooth ride in the future. Even though for the first half of this fiscal the company has recorded a profit of Rs 108 crore, the counter doesn’t look attractive. It must be noted that in FY10 and FY11 Suzlon had posted losses. Investors should skip this scrip.[PAGE BREAK]

PANTALOON RETAIL

BSE CODE: 523574
FACE VALUE: Rs 2
CMP: Rs 192.75

HERE IS WHY:

• Huge operational area which is one of the major factor which will drive the PRIL growth.
• We expect Multi brand FDI will be welcomed and the restructuring of its Non-core retail business would be greatly beneficial.
• Increase in Private label sales would be positive for the company.

Pantaloon Retail (PRIL) has lost around 65 per cent of its share price in CY2011 led chiefly by uncertainties surrounding the 51 per cent FDI in the multi-brand retail. The first blow for the company came from the Union Budget of 2011-12 when the government decided to impose a service tax on rentals. This coupled with higher depreciation and Interest outgo resulted into an unsatisfactory performance of the company. However in 2012 the scrip has rallied 34 per cent. With this investors are wondering as to what one should do with this counter? We have analyzed the pros and cons of this counter and feel that this would be the right time for investing in the scrip.

Firstly before we commence our analysis, one should note that PRIL is not merely an apparel store but also has diversified interests in the food, home, consumer finance and insurance segment. It has many known brands like Central, e-zone, Fashion@ bigbazaar, Brand Factory, Big Bazaar, Food Bazaar, KB’s fair price etc, under its fold.

Out of the total, around 91 per cent of the revenue comes from the core-retail business of which the high turnover yet low margin yielding food segment contributes around 63 per cent and the rest comes from the apparels and the home segment. Going forward, the company plans to focus on its core-retail segment and would divest its non-retail businesses when it gets the right opportunity. In the past we have heard about PRIL planning to divest its 53.67 per cent stake in the subsidiary Future Capital Holdings (FCH). If divested it would get an approximate of Rs 450 crore, resulting into cash inflow benefitting the company.

As on 30th June 2011, (the company follows year ending of 30th June) it had a huge operational area of 15.24 million square feet. Most of its outlets are situated in prime locations and have good footfalls which result into good revenues. The revenue per square feet has increased by 5.27 per cent to Rs 7239 per annum in FY11 and management expects the same to touch Rs 9000 per annum. Further it plans to expand its operational area by approximately 2.5 million sq ft every year for four to five years.

In FY11, Same store sales growth (SSSG) for the three segments i.e. food (value), apparels (Lifestyle) and Home segment grew by 10.3, 15.6 and 8.3 per cent respectively. After a muted September quarter performance we expect demand to soon pick up and drive growth for the company. With 65 per cent of revenues coming from the new stores, the proposed expansion in operational space will surely drive growth. Increasing Private labels sales will also augur well for the company.

In flipside however the company is burdened by huge debt amounting to Rs 4800 crore in the retail segment as on 30th September 2011. This could be solved to some extent if the 51 per cent FDI in Multi brand retail goes through. Despite the rollback of FDI by government, we believe, FDI in multi brand Retail will soon be welcomed and this could further trigger an up move in the stock.

Another concern lies on the average inventory days for the company which increased to 117 days in FY11 from 97 days in FY10 majorly due to inventory pile up in the Fashion segment. A company spokesperson said that this may gradually come down over the next couple of quarters.

PRIL currently is available at a price to earnings multiple of 26x of FY11. A huge existing operational space coupled with robust expansion plans and an increase in private label sales will improve the company’s performance going ahead. We believe FDI allowance in Multi brand Retail and restructuring of Non retail businesses would be a bonus for the company. Investors could park a portion of their funds in this scrip.[PAGE BREAK]

EDUCOMP SOLUTIONS

BSE CODE: 532696
FACE VALUE: Rs 2
CMP: Rs 236.60

HERE IS WHY:

• Company to carry on weak September 2011 quarter performance into the December 2011 quarter earnings to be declared on February 14, 2012.
• With the emergence of new entrants in the business, the incremental growth in the Smart Class is probably not sustainable.
• Due to recognition of revenue in two years under the Smart Class, the company will have to add more schools to maintain growth.

Educomp Solutions, India’s No. 1 private education company, has lost its charm over the past one year. The scrip has fallen by 61 per cent in CY11 on the back of various media reports about alleged tax evasion raids carried out by the income-tax sleuths on its office premises. The company has however denied any wrongdoing. Factors such as burgeoning debtors, high debt in its books and consequently not having enough resources to meet the FCCB redemption coupled with a subdued H1 FY12 performance have further added to the woes of the company and led to a decline in the share price. There are also some other factors which we have analysed – the purpose being to help investors make a sound investment decision on Educomp.

During the September 2011 quarter the company suffered a marked-to-market loss of Rs 37 crore on its outstanding FCCB loans of USD 78.5 million. This consequently put pressure on its margins and it saw a decline of 77 per cent (YoY) in its net profits to Rs 13 crore.

We expect the company to continue with this weak performance in the December 2011 quarter as well (results to be declared on February 14, 2012) as it still has to battle out the higher interest rates and the weak rupee woes, which were accentuated further between October and December of 2011. Moving on, the company is facing a near-term challenge to retire an outstanding FCCB loan of Rs 317.6 crore which is to mature in July 2012. With the scrip currently trading at a 61 per cent discount to the conversion price of Rs 587 per share, it is quite logical that the bond-holders will not opt for conversion and ask for redemption at 141 per cent of the face value on July 26, 2012.

In November 2011, the company converted receivables worth Rs 410 crore from Smart Class through the securitisation route. Moreover, the company has also pointed towards a strategic sale of some of its subsidiaries which can be used to repay a part of its FCCB loans. This may be either K12 or a segment of the online business which is expected to generate around Rs 65-70 crore.

Given the cash flow that the company will generate through various modes it is very likely that it will meet its FCCB obligation. The management expects to meet this obligation through a fair mix of internal accruals and debts in the form of ECB loans. However, one concern still remains after availing of the ECB loan which is that the debt will increase and ultimately result in higher interest cost. Further, the education space has seen some crowding and competition has triggered a price war, resulting in erosion of margins for those in this sector. At present a major part of its total revenue comes from the Smart Class Division (60 per cent of the total revenue) operating at a 52 per cent EBITDA margin.

We believe that due to the emergence of new entrants in the business the incremental growth in this division will not be sustainable. Under the Smart Class Division the company signs a five-year contract with schools and it recognises 75 per cent of the contract value within the first two years through the securitisation route. However, this doesn’t ensure revenue visibility after two years and any slowdown in the additions under this division can result in slower revenue growth for the company going forward.

We believe the management guidance of topline at Rs 1760 crore and bottomline at Rs 400 crore for FY12 seems unlikely to be achievable. For the Smart Class too the company has added merely 12000 classrooms in H1 FY12, which is a far shot away from its full year guidance of 40000-45000. In short, we believe that the company’s full year targets look too aggressive in the current weak economic scenario.

On the valuations front, Educomp is currently trading at a PE of 8x its TTM EPS of Rs 30, which looks decent as the counter has been beaten down heavily over the past year. Going forward, given the concerns such as higher interest cost, pressure on margins due to increasing competition and lower additions in the number of schools under Smart Class, the company will not see similar kind of margins and growth which it has reported historically. Therefore we would like to recommend our investors to avoid the scrip from a long-term perspective.[PAGE BREAK]

RELIANCE COMMUNICATIONS

BSE CODE: 532712
FACE VALUE: Rs 5
CMP: Rs 90.90

HERE IS WHY:

• High debt pile-up and strained cash flows on the balance-sheet.
• One of the foremost losers on subscriber base as per the MNP records.
• Unsatisfactory financial performance.

Reliance Communications (R Comm) is one of the stocks which resulted in the mass destruction of shareholders’ wealth for quite some time. From its all time high of `844 in January 2008, currently the scrip is trading at Rs 93, down by 89 per cent. Even in CY11 the scrip corrected by as much as 53 per cent. This is on the back of multiple factors like heavy debt, alleged involvement of some of its employees in the 2G scam, poor financial performance, etc. Does the stock have more pain in store for investors? Or is it a good buying opportunity at its current levels? We believe that investors should stay away from the scrip as there are several headwinds which the company is still facing, resulting in an uncertain outlook for its growth prospects.

As on September 30, 2011, R Comm had a huge debt of Rs 31903 crore. The company had foreign currency convertible bonds (FCCB) of approximately Rs 6696 crore and foreign currency loans from banks of around Rs 20349 crore as of FY11.

Recently, R Comm announced that it is refinancing its FCCB loans worth Rs 6125 crore (due on March 1, 2012) through foreign loans from various foreign banks. With this there will be no FCCBs on its books but the debt burden will continue to remain on the company’s head. But the moot question that remains is: When will it reduce its debt? As per the management guidelines, it aims to reduce its debt significantly by March 2013.

Presently R Comm leads the pack of telecom players in terms of revenue per minute (RPM) particularly after a lot of players hiked their call rates and also reduced the free minutes provided to customers through schemes. R Comm’s RPM as of September 30, 2011 stood at Rs 0.45 per minute while that of Airtel and Idea was Rs 0.432 and Rs 0.427 per minute respectively. Though this sounds encouraging, another important factor which needs to be considered is the average revenue per user (ARPU) of the company which, as on Q2 FY12, is lower at Rs 101 versus that of Airtel (Rs 183) and that of Idea (Rs 155), indicating poor subscriber quality. Its market share in terms of subscribers stood at 18.8 per cent in FY09 which further decreased by 190 basis points and came in at 16.9 per cent in Q2 FY12.

Even in terms of mobile number portability (MNP), Reliance Communications was one of the players which lost the maximum subscriber base. According to media reports, from January 20, 2011 (when the MNP was implemented) till December 2011, the biggest gainer from MNP was Idea with 1.98 million and Vodafone which added around 1.32 million users. Contrary to this, R Comm was one of the biggest losers with around 1.34 million customers switching over to other providers. This indicates customer dissatisfaction in case of R Comm.

As on March 31, 2011, the company has nearly 50000 telecommunication towers in its portfolio. Recent press reports suggest that R Comm is trying to sell its tower business in a deal that could be worth more than Rs 15510 crore. Any news on the monetisation of its tower business would be a positive for the stock. However, there is no clarity as to when the things will move. Also, one should watch out for the financial performance of the company in Q3 FY12 and the management views which could provide further cues.

The telecom sector is presently shrouded in gloom unleashed by the 2G scam and the consequent SC judgement. The new telecom policy and other regulatory issues are some of the factors that will keep this sector in the dark for some more time.

The financial performance of the company is also not satisfactory. On a stand-alone basis, out of the last
10 quarters the company has reported losses in the last seven quarters. However, on a consolidated basis it manages to show marginal profits. It is currently available at a 12-month trailing price to earnings of 18.28x. R Comm, though one of the major players in the telecom business, is facing several internal issues like high debts, lower ARPU, unhealthy cash flows, etc. Though beaten down heavily we don’t see any key factor based on which the stock could bounce back riding the current upward trend of the market. We continue to believe that the counter will underperform despite the fact that it has moved up smartly since January 2012.[PAGE BREAK]

LARSEN & TUBRO

BSE CODE: 500510
FACE VALUE: Rs 2
CMP: Rs 1353.95

HERE IS WHY:

• Strong order book of Rs 145768 crore, providing good revenue visibility.
• Margins expected to improve as the raw material prices may decline.
• Increased infrastructure spending by the government to benefit L&T.

The infrastructure pack as a whole has been quite lackadaisical on the bourses and has underperformed the broader market in the past two years. All this is thanks to the slowing economy, rising interest cost and eventually the higher cost of capital having made many projects unviable. In fact, a whole lot of companies have not yet been able to come out of the 2008 shock. Even the year 2011 wasn’t good for the infrastructure companies and L&T was no exception then too. Factors like rising interest rates impacted the overall capex cycle and the margin erosion resulted in a 35 per cent decline in the scrip in 2011. One question that is vexing the investors right now is whether the fall makes the largest engineering player a good buy or is there more pain in store? Before drawing any conclusion let’s look at the reasons that triggered the fall. 

For L&T, FY11 ended on a strong note with the order book standing at Rs 130217 crore (3x of FY11 sales) and the management providing a guidance of 15 per cent growth in new order inflows. However, the start of FY12 was not so good. In Q1 the order inflow increased only by four per cent and in Q2 FY12 the company reduced its order flow guidance to just five per cent from the earlier level of 15 per cent. What added to the woes were the increasing raw material prices eroding the margins on a yearly and sequential basis too. The EBITDA margins for the June 2011 quarter declined to 11.90 per cent as compared to 12.90 per cent in FY11 as a whole. The margins have thereafter declined further to 10.40 per cent in September 2011 and stood at just 9.60 per cent in December 2011.

The situation now is such that at the end of 9M FY12 the new order flow is marginally down at Rs 49415 crore as compared to Rs 49456 crore in 9M FY11. Most on the street expect it to be difficult to achieve the target of even five per cent growth on new order inflows. However, despite so many negatives, we recommend investors to buy the scrip. This is a tough time when men will be separated from the boys and L&T has proved it in the past too. The first factor is that L&T still has an order backlog of Rs 145768 crore which is around 3x its FY12E revenues, providing revenue visibility. On the margins front, inflation has begun to cool off and the raw material prices are expected to decline, thereby resulting in better margins for the company.

Secondly, the interest rates have peaked out and the RBI may soon start cutting the repo rate also. This will provide the much needed impetus to the slowing economy which would benefit the infra sector and in turn L&T. Also, it is said that Re 1 invested in infrastructure generates 10 times’ worth of opportunities. Hence even the government has no option but to focus on infrastructure growth to bring the economy back on track. In addition to that, huge chunks of money raised through infrastructure bonds by more than 10 players is expected to fuel the growth in this sector. L&T being the largest player stands to benefit.

On the financial front, on account of slower execution, the topline for 9M FY12 was up by 21 per cent to Rs 34726
crore. The bottomline stood at Rs 2536 crore, up by 12 per cent. On the valuations front, L&T has always enjoyed a premium over the broader market. Its CMP of Rs 1297 discounts its trailing four-quarter earnings by 18x. We feel that as the scenario improves, the execution will also improve and help the company post better growth at better margins. Given this growth trajectory forecast, we recommend that investors buy the scrip.[PAGE BREAK]

STATE BANK OF INDIA

BSE CODE: 500112
FACE VALUE: Rs 10
CMP: Rs 2152.05

HERE IS WHY:

• Revival in economic growth will prove beneficial for the SBI.
• Peaking out of interest rates and near-term expectations of trend reversal will boost the growth prospects for the bank.
• Capital infusion from the government will improve its CAR and the same could be used for expansion activities.

State Bank of India (SBI), India’s largest bank, has been in the limelight over the past one year because of various reasons. Internally, it disappointed the streets when it posted its Q4 FY11 numbers. On a consolidated basis its net profit declined by 45 per cent to Rs 1469 crore on the back of higher provisioning. The other major issue that hurt the stock was the news of Moody’s downgrading its financial strength rating.

Another factor that hit the SBI was its exposure to Kingfisher Airlines which is at present in deep trouble. Also, a lack of clarity on capital infusion (in CY 2011) whether through a rights issue or through government funding made investors nervous about this stock. All these factors put together impacted the stock so badly that it lost its status of being the most valuable financial company – albeit for a brief period – to HDFC Bank. The result was a massive 43 per cent decline in the stock price over CY 2011. But January 2012 has been rather contrary to what the whole of 2011 has been for it. The stock has surged by almost 25 per cent during the first month of this year itself. All the negatives have been factored into the stock price for now and though there are some positives, the question remains as to whether one should get into the stock at its current levels?

We believe that overall the scenario is improving for the Indian economy. The Index of Industrial Production (IIP) has shown signs of moving northwards after a lot of sluggishness. On the other hand, inflation, which has remained a big concern for a major part of CY11, has shown signs of cooling and is nearing the RBI’s comfort level of seven per cent. Another factor that needs to be considered is that of the interest rate cycle which is likely to reverse soon, thus creating an incremental advantage for the banking space.

This may result in the bank’s bond portfolio witnessing some marked to market profit. Moreover, the SBI is likely to benefit more than its peers considering that it has a good market share. The bank’s market share in total deposits and advances stood at approximately around 16.40 per cent as of FY11.

In a recent announcement the SBI has informed the BSE that the bank is to receive funds from the government to the extent of Rs 7900 crore. However, the timeline for the same is still unknown. This move will help in improving its capital adequacy ratio (CAR) which currently stands at 11.4 per cent (with Tier 1 CAR at 7.47 per cent) and will also help the bank in its expansion activities. One very important fact to be noted in the case of SBI is that even in a rising interest rate environment its net interest margin (NIM) has improved. Sequentially it increased by 55 basis points in June 2011 and by 17 basis points to 3.79 per cent as of September 2011.

The restructuring of Kingfisher Airlines would be seen in H2 FY12 which will further affect its numbers. The overall numbers for H2 FY12 probably could be better than that of the first half but there is still high uncertainty on the provisions and the asset quality front of the bank. One has to watch out for the Q3 FY12 numbers and the management guidance which will provide some cues going ahead.

Currently, the stock is available at a price to book value (P/BV) of 2x which can be considered reasonable given the size of the SBI. HDFC Bank is available at 4.48x. Public sector banks like Punjab National Bank and Bank of Baroda have a P/BV of 1.54x and 1.40x respectively. There could be some pressure for the bank in the short run on account of deterioration in its asset quality.

However, we believe that the SBI is a long-term bet and will create wealth for its shareholders over the long term and will also play a key role in driving the Indian economy. The two key elements i.e. interest rates which are at their peak and capital infusion from the government will definitely help the bank in the coming quarters. We, at DSIJ, believe that the Indian economy will soon recover, and this will drive the State Bank of India going forward.[PAGE BREAK]

RELIANCE INDUSTRIES

BSE CODE: 500325
FACE VALUE: Rs 10
CMP: Rs 844.75

HERE IS WHY:

• Flagging gas output from the KG-D6 basin showing no signs of near-term recovery.
• Downward pressure on refining business due to weak global demand outlook for crude oil and falling product cracks.
• Inability to create wealth for shareholders through foray into other business areas.

India's largest company by market capitalisation, Reliance Industries (RIL) has found itself amidst all sorts of controversies over the past year, ranging from falling gas output at its prolific KG-D6 basin to the recent arbitration battle with the government over the recovery of costs. Its ambitious efforts to venture into new areas of businesses like financial services, telecom and hotels have not yet excited investors nor created any alpha for its shareholders. After losing around 34 per cent of its share price in CY11, the stock has managed to gain some ground and rallied by 17 per cent in January 2012.

Against the backdrop of a dismal Q3 performance and the proposed buy-back, investors are left asking a million dollar question: Can one invest their hard-earned money into the shares of RIL and hope for wealth creation? Before we draw any conclusion, let us briefly analyse the major headwinds and challenges faced by the company and their implications.

While it is common knowledge that the flagging gas output from the KG-D6 basin has been the foremost over-hang on its share performance, the recent fall in its gross refining margins (GRM) from its flagship refinery business has also thrown up some fresh concerns. For the first time in many years, the company’s GRM has dropped below the benchmark Singapore GRMs. This was mainly as a result of a steep fall seen in product cracks, particularly in light distillates and solids.

With the global oil demand falling by 0.3 million barrels per day in 4Q CY11 and the International Energy Agency (IEA) consequently revising its demand forecasts downward for CY12, the refining business will come under further pressure. The persistent weakness in product cracks will also hurt the company’s GRMs and eventually affect its overall earnings.

As for the dwindling production from the KG-D6 basin, given the limited window period to work on the gas fields we believe the woes emanating from its oil & gas business are not going to be resolved any time soon. The synergies from its deal with BP Plc are yet to start yielding results and at present there is no concrete clarity on the company’s plans to ramp up production. Also, the DHG has recently stated that the gas output from KGD6 may fall further as all oil & gas fields see a natural decline.

Apart from these factors, investors are of the view that RIL’s recent foray into new business areas has not been strategically planned and are ad-hoc so that they may not bear any fruit for its shareholders and consequently reduce the fancy premium awarded by the investors. Also, the company operates in a sector whose operational environment is constantly under threat from uncertain and unruly government policies. On the valuations front too, the counter is expensive at 12.99x its CMP of Rs 837 when global peers like Exxon Mobil (9.94x), Chevron (7.69x) and China Petroleum & Chemical Corp (10.03x) who operate in similar business areas are cheaper. In light of all these facts, we continue to believe that RIL will underperform on the bourses in comparison with the other index heavyweights.