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Reliance bonus boost is temporary at best

Reliance bonus boost is temporary at best
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First Published: Thu, Oct 08 2009. 01 20 AM IST

Updated: Thu, Oct 08 2009. 01 20 AM IST
The shares of Reliance Industries Ltd (RIL) have underperformed the market since the mid-July Bombay high court judgement related to the company’s gas supply to Reliance Natural Resources Ltd (RNRL). To add to RIL investors’ problems, the Union Budget announced in July included some unfavourable changes to tax rules affecting the company. The company’s shares have fallen by 11.2% since mid-July while the Nifty has risen by 8.8%.
The company’s decision to announce a 1:1 bonus is likely to improve sentiment for the shares, but only temporarily. RIL has a large institutional investor shareholder base, which realizes that bonus share issues don’t have any impact whatsoever on the valuations of a company. Still, there may be some buying by traders in the short term. The company’s global depository receipts listed in London were still trading at the time of announcement, and these rose by about 4% soon after the announcement.
Graphics: Ahmed Raza Khan / Mint
Servicing the doubled equity base should hardly be an issue for the company. Large capital expenditure is behind it and the company is expected to generate large amounts of cash in the next few years. According to Goldman Sachs Research, the company is expected to generate free cash flow worth $27 billion (Rs1.26 trillion) in the four-year period between 2010-11 and 2013-14. This will be a considerable jump from the estimated free cash flow generation of just $300 million this fiscal year. The brokerage expects the company to end with a net cash position from its current net debt level of around $9.5 billion. The large cash generation from operations and the possibility of generating further funds from the sale of treasury shares means that the possibility of inorganic growth and investments in other large projects is high.
As things stand, much of the upside in the firm’s shares is expected to be from unexpected discoveries in the exploration and production space. The outlook for the core refining and petrochemicals businesses has improved marginally with the recovery in the global economy, but is far from bright, given the large capacities that have come up in recent times. But in the near term, the overhang of the legal battle with RNRL and the trend of weak refining margins may continue to weigh the stock down.
Write to us at marktomarket@livemint.com
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First Published: Thu, Oct 08 2009. 01 20 AM IST