Mumbai: Five of India’s largest companies owned by the Ambani brothers saw their combined market value erode by Rs 15,803.09 crore in a single trading session on Monday even as India’s bellwether equity index, the Sensex, lost 2.04% to close at a four-month low of 17,506.63 points.
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In absolute terms, the biggest loser in the pack was the Mukesh Ambani-led Reliance Industries Ltd (RIL), which saw an erosion in investors’ wealth to the tune of Rs 11,098.66 crore.
Shares of India’s largest company by market value continued their losing streak to close Monday’s trade on the Bombay Stock Exchange (BSE) at Rs 834.60 each, down 3.9%, their lowest since April 2009.
Shares of companies belonging to Ambani’s younger brother Anil Ambani’s Reliance Group— Reliance Communications Ltd (R-Com), Reliance Capital Ltd (R-Cap), Reliance Infrastructure Ltd (R-Infra) and Reliance Power Ltd (R-Power)—ended in the red as well, losing between 4.42% and 7.9%.
Mumbai-based independent stock market analyst S.P. Tulsian said recent media reports about the Comptroller and Auditor General of India’s finding that RIL may have gold-plated costs incurred to develop its gas reservoir in the Krishna-Godavari basin, coupled with sagging gas production from the field, have seen the stock lose ground.
“Foreign institutional investors appear apprehensive about the recent developments,” he said. “The management has not indicated any likely scenario with respect to gas production.”
Such delivery-based selling by institutional investors is an ominous sign, said Tulsian.
All companies run by the two brothers have underperformed the Sensex in the last year, losing between 20.91% (RIL) and 52.52% (R-Com), while the index lost 0.37%.
R-Com and R-Infra were the biggest losers, respectively, and are likely to come under significant selling pressure in ensuing trading sessions as managers of Sensex-linked mutual fund managers reduce their exposure to the stocks that were removed from the benchmark index on Friday.
Explaining the process of replacing stocks of companies that are on their way out from a particular index with new index constituents, an executive at a mutual fund house said that from the date of announcement that a particular company will be removed from an index, funds typically stop taking any fresh positions on the stock. He did not want to be identified.
Exposure to the stock is then gradually reduced till the date from which the revision of index constituents becomes effective. On the said date, mutual funds start taking fresh positions in stocks of the new entrants, the executive explained.
On Friday, BSE announced that R-Com and R-Infra will cease to be a part of the Sensex with effect from 8 August. The two stocks are to be replaced with state-run Coal India Ltd (CIL), which has emerged as the second most valuable company by market value, and Sun Pharmaceutical Industries Ltd.
Prakash Diwan, head of institutional broking at Networth Stock Broking Ltd, a Mumbai-based brokerage, said that the Reliance Group companies, especially R-Com, are suffering from the impact of a number of factors leading to an “unenviable position”.
“The 2G (second-generation) controversy is getting murkier and on operational parameters such as number of subscribers, the gap between R-Com and other telecom firms has widened,” he said.
R-Com’s involvement in the alleged wrong-doing over sale of 2G telecom spectrum in 2008 is being probed by government authorities. Three executives of the company are currently in prison pending investigation.
Also, R-Com’s debt level (at Rs 32,048 crore as on 31 March) has become unsustainable and the company might find it difficult to carry on operations if this is not reduced quickly, Diwan added.
Both Tulsian and Diwan said that while the sharp decline in stock prices of Mukesh Ambani-led companies, especially RIL, may present a buying opportunity to some investors, they may have to be patient through further falls in share price before realizing long-term gains.
“If an investor wants to stay invested in a front-line stock, but is not necessarily attracted to the oil and gas sector, he may replace RIL with something else in his portfolio,” Tulsian said.
Diwan said state-owned firms such as CIL may find favour with investors backed by a strong asset base and balance sheet. “People are not bothered too much with capital appreciation in this market. A flight to safety is more important for them,” he added.
Graphic by Ahmed Raza Khan/Mint