The Reliance Industries Ltd (RIL) stock has fallen 10% to Rs 846 per share after a draft report by the Comptroller and Auditor General of India (CAG) accused the government of favouring private companies in production-sharing contracts. In comparison, the benchmark Sensex has fallen by just 4%.
The draft report said private oil firms, including RIL, have benefited at the cost of the government. CAG has alleged that RIL had inflated development costs for the KG D6 gas block, which helped the company retain a higher share of the profits in the initial years. The issue seems likely to be caught up in a pile of red tape and back-and-forth reports between the oil ministry and the auditor.
However, it adds political risk to the already muted sentiment surrounding the stock. In recent times, investors had shied away from RIL because of negative news such as lower gas production at the KG D6 block and lack of clarity on how the company plans to use its huge cash pile.
The stock is trading at attractive valuations after the recent correction. Indeed, it is trading at a discount to regional refining and petrochemical peers, according to some analysts. Despite that, investors aren’t buying.
The broad refrain in the market goes a bit like this: “It’s true that valuations are attractive, but whether it will outperform, and most importantly, when, is difficult to say, thanks to uncertainty.”
In fact, the target price that most brokerages have for RIL is higher than the current market price, implying that there is a decent upside. According to Bloomberg data, this month eight analysts have pegged their target price in the range of Rs 1,020-1,250 apiece for RIL.
While some analysts Mint spoke with said they were “cautious” on the stock, there has been just a single downgrade since the CAG report was leaked on 13 June, according to Bloomberg. What is probably helping RIL is that the auditor’s report is still in a draft stage.
But the clear conclusion one can draw is that the scrip is likely to be under pressure for some time. Moreover, the deployment of cash is something investors are closely tracking, and if the past is any indication, use of cash for un-related ventures is unlikely to go down well with them.
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