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Business News/ Market / Stock-market-news/  Mutual fund holdings in RIL rise on core profit expectations
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Mutual fund holdings in RIL rise on core profit expectations

Domestic mutual funds held 740 lakh RIL shares by end-March, up 25% from 589 lakh at the end of June 2014

A file photo of an RIL facility. For the last seven years, RIL’s shares have underperformed the benchmark BSE Sensex, after oil and natural gas production at its Krishna-Godavari D6 block fell sharply.Premium
A file photo of an RIL facility. For the last seven years, RIL’s shares have underperformed the benchmark BSE Sensex, after oil and natural gas production at its Krishna-Godavari D6 block fell sharply.

Domestic fund managers are steadily buying shares of Mukesh Ambani’s Reliance Industries Ltd (RIL) after remaining negative on the stock for a while, anticipating an improvement in the company’s core operating profits.

According to data aggregator firm Value Research, mutual fund holding in RIL has risen for three consecutive quarters. Domestic mutual funds (MFs) held 740 lakh RIL shares by end-March, a 25% increase from 589 lakh at the end of June 2014.

Bloomberg data bears out the rising institutional interest: domestic institutional investor (DII) holding in India’s largest private-sector energy firm rose from 10.93% at the end of first quarter of 2014-15 to 12.56% at the end of March 2015. DIIs include mutual funds, insurance firms and financial institutions.

The chief investment officer at a domestic fund house said his firm has been buying RIL shares “a little aggressively" and has been net buyers of the stock for at least the last three months. “With its capital expenditure cycle in its core business of refining and petchem coming to an end, there could be a possible upside from here," he said, requesting not to be named as he is not authorized to talk about such matters.

For the last seven years, RIL’s shares have underperformed the benchmark BSE Sensex, after oil and natural gas production at its Krishna-Godavari (KG) D6 block fell sharply. Lower gas prices and heavy investments in telecom sector too weighed on the stock.

In 2014, while the Sensex gained 31.72%, RIL shares rose a mere 0.49%. RIL shares have returned less than the benchmark index since 2008, but last year’s performance gap was the widest.

So far this year, RIL shares are down 0.1%, while the BSE Sensex is down 1.4%.

“There was a time around 2001-02 when RIL was the top pick of all fund houses because of the returns it gave. All funds gave an overweight weightage to the stock in their portfolio, but things started changing five years ago when the output from D6 started falling," said an analyst with a domestic brokerage who did not wish to be named due to internal company policy.

According to the analyst, RIL shares made up 12% of all mutual fund holdings during 2001-02, which came down to 4% in the last five years. After the 2014 correction, it is back to about 8%, he said.

RIL shares, which rose to 1,127.85 on 23 May 2014, were down 21% to 891.15 by 31 December 2014.

Fund managers, however, caution that the increased interest should not be mistaken for a bullish view on the stock, which may continue to face pressure from factors such as heavy investments made in the rollout of 4G services.

“Funds are still bearish on RIL but they have been underweight for such a long time that in case a rally comes, they do not want to be caught unawares," said the managing director of an international brokerage firm, who did not wish to be named.

The chief investment officer of another domestic fund house said the company’s huge telecom investments continue to be a big worry for all fund houses as there is no guidance on cash generation. The outlook for the company’s petrochemicals and refining segments looks promising from here, he said.

RIL is approaching the end of its $12 billion capital expenditure cycle in its core business of petrochemicals and refining. These investments are expected to increase its petrochemical capacity by 60% by the end of the current financial year and raise its gross refining margin— the sole factor of profitability of a crude oil refiner—by $2 per barrel by the next financial year, the company had informed analysts on 17 April.

Refining and petrochemicals together contribute up to 90% of the polyester-to-retail-to-telecom group’s overall operating profit.

The company has also invested up to $14 billion in its telecom venture, which is still to be launched.

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Published: 11 May 2015, 12:43 AM IST
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