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Reliance: What went wrong…

Apr 23, 2001

In the current month, the Goliath, Reliance Industries Ltd. (RIL) has seen its stock price fall by 14.2%. Over this same period the index declined by 7.6%. However, the scrip made a comeback last week gaining 21.3% from the lows of the week before. The markets were lost for words on the sudden and steep fall seen on the counter for the week ended April 13, 2001. In the four days of trading the scrip lost 17.2% in value.

Although Reliance's exposure to the international markets is moderate in terms of exports (10% of total sales) a possible global slowdown could impact international prices of polymers and polyesters. Consequently, this could have a bearing on domestic prices. Nevertheless, the visibility on this front may not be lucid enough for justifying the sharp fall on the bourses.

Another development has been the increase in naphtha import duty from 5% to 10% at the beginning of FY02. Raw material costs accounted for 33% of the gross sales in FY00. Although not accounting for the entire raw material costs an increase of 5% in naphtha procurement prices could lead to raw material costs rising by 1% of gross sales. This could impact the bottomline by an estimated 8.4% in future. Adjusting for higher raw materials costs in FY01 the estimated EPS for the completed fiscal declines from Rs 25.8 to Rs 23.7.

Both these factors could have impacted the stock resulting in a correction in prices. However, besides the fundamentals there was also a sizeable amount of institutional selling in an illiquid market, which could have pulled down the scrip even further.

A small study could provide substance to the above statement. The 4-day average indicates that the number of trades were higher by 14,605 or more than twice than on April 2, 2001 a random sample. Further, the average volume per trade was higher by 55 shares. This results in an average addition of 813,589 shares traded on all of the 4 concerned days. Although the volume per trade numbers do not look big RIL has 1,054 m outstanding shares and an investor base of 22m. In which case the average holding per investor is only 48 shares.

Institutional selling?
  Volume Value Trades Vol/Trade Value/Trade
  (Nos) (Rs '000) (Nos) (Nos) (Rs)
2-Apr 1,509,128 579,631 11,401 132 50,840
9-Apr 5,010,496 1,805,442 25,987 193 69,475
10-Apr 4,321,369 1,458,380 23,257 186 62,707
11-Apr 4,760,665 1,530,384 29,457 162 51,953
12-Apr 5,370,258 1,642,539 25,324 212 64,861
4-day avg 4,865,697 1,609,186 26,006 188 62,249

At the current market price of Rs 359 the company trades on a multiple of 13.9x FY01 estimated earnings. On the adjusted eps for FY01 the P/E ratio is 15.1x.


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