The correction expected on Wednesday finally happened during the second half of trading on Thursday. Wednesday’s foreign institutional investor (FII) figures were a revelation, with a selling spree in both the futures and cash markets. According to the Securities and Exchange Board of India (Sebi) data, FIIs were sellers worth $1.63 billion (Rs6,438.5 crore) on Wednesday in the cash and futures segments. Provisional data for Thursday point to net sales worth another $1 billion on Thursday.

Domestic buying had propped up the markets, but that support also seems to have given way. One of the reasons for the selling is purported to be market rumours that the prime minister would soon give in his resignation. Nevertheless, when there’s a clampdown on half the source of inflows, there’s bound to be a reaction. FII selling can also be seen from the rupee, which closed at 39.78 to the dollar.

The consensus seems to be that there’s still a lot of money waiting to come into the country. But much will depend upon Sebi’s willingness to allow it to enter. If, as seems to be the case, Sebi’s move was a response to the government and the Reserve Bank of India’s concerns about a sharply appreciating rupee, there is no reason to think that they would expedite FII registrations. And in the unlikely event of large amounts of money continuing to flow in, why wouldn’t the government use other, harsher measures to clampdown on the flows? The bottom line is that the government has signalled it will resist large capital inflows.

The market’s best bet would be moderate inflows, short-term pain and much more modest expectations. The risk/good thing, depending on your point of view, is that Sebi may have pricked the bubble.

The Reliance prop

The September quarter results that Reliance Industries Ltd (RIL) reported were much better than market expectations. Reported net profit stood at Rs3,837 crore, 16% higher than the consensus estimate of Rs3,300 crore of seven analysts polled by Bloomberg. RIL shares, which have had the largest role to play in the rise of the Sensex, could on Friday well prop up the markets, grappling with the implications of the quasi-ban on participatory notes.

RIL’s operating profit rose 1.9% over the June quarter, which is traditionally a very strong quarter for the refining business. Singapore refining margins fell nearly one-third from $9.5 a barrel in the June quarter to $6.4 last quarter. But RIL continues to improve on the spread it earns over Singapore margins. Its gross refining margin stood at $13.6 a barrel last quarter, just 12% lower than the margin of $15.4 it extracted in the June quarter. On a year-on-year basis, its spread over Singapore margins increased to $7.2 a barrel from $4.4 a year ago. Its refinery enables it to process heavy and sour crudes, resulting in higher-than-average margins.

Besides, it increased its capacity utilization from 97% in the June quarter to 99% last quarter, resulting in a 5.6% quarter-on-quarter increase in revenues of the refining division. But with refining margins lower compared with the seasonally strong June quarter, profit fell 9%.

The petrochemicals division made up for about three-fourths of the drop in refining profit. Its profit grew by 10% quarter-on-quarter, as product prices continued to rise, more than making up for the increase in feedstock prices. Analysts say the polyester cycle is expected to remain strong, and the company’s timely purchase of Hualon in Malaysia will help improve the performance of the petrochemicals division.

RIL’s other revenue-generating business, oil exploration and production and textiles, also saw a sharp rise in profit. Cumulatively, their profit rose 30% quarter-on-quarter, although it must be noted these account for just 8% of total profit.

Its profit-making ventures currently account for only about 50% of its market valuation. Analysts have assigned a value of Rs900-1,000 per share (the firm’s current share price is Rs2,583) for RIL’s many oil and gas discoveries. Recently, Macquarie Research assigned a value of Rs295 per share for the proposed 2mtpa petrochemical plant at Jamnagar. Moreover, RIL holds 75% in Reliance Petroleum—now worth nearly Rs400 per share, up from about Rs140 at the beginning of the year.

Analysts say at current levels of 175-180, Reliance Petroleum fully prices in benefits of early project implementation. Recent oil and gas discoveries have further propped up its shares. It’s no wonder RIL shares have outperformed the Nifty by more than 50% since January.

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