Reliance Industries, which would easily win the title for the most popular stock among retail and institutional investors, is suddenly losing sheen among the analyst community. From a time when hardly anyone on the street said anything against the Mukesh Ambani-owned entity, the last few months have seen some of the leading brokerages releasing reports to downgrade their recommendations on RIL.
In the current calendar year (CY12), at least eight brokerages have lowered their rating on RIL ? once the largest company in terms of market capitalisation. The common reasons cited for the downgrade include a decline in production and falling gross refining margin (GRM) besides lower earnings visibility for the medium-term.
For example, BNP Paribas in its recent report, downgraded RIL to hold ?taking into account continuously declining gas reserve estimates at KG-D6 and concerns about refining margins declining further.?
Lack of earnings growth and higher valuations turned JP Morgan to turn cautious and downgrade the stock to underweight in mid-April this year. In a note the brokerage said that it expects sustained downstream weakness to cause earnings downgrades for FY13-14E while it called the upstream visibility cloudy
Not surprisingly, shares of RIL have underperformed the benchmark indices every year since 2008. Even for the first six months of 2012, the stock yielded 5.3% against a 10% return given by the 30-share Sensex.
Since January, Bank Of America Merrill Lynch (BofA ML), JP Morgan, BNP Paribas, Daiwa Securities, Antique Stock Broking, JM Financial Institutional Securities, Tata Securities and IFCI Financial Services have all reduced their rating. Further, Morgan Stanley had also downgraded its rating to ‘underweight’ in January though it upgraded RIL to ‘equalweight’ in May.
According to Bloomberg compilation of analyst ratings, from a mere 6% analysts with a sell rating on RIL, the share has grown to 15% in July. Another 35% of analysts tracking RIL have a hold rating. The share of analysts with a buy rating has fallen to 50% in July from 74% in January. Incidentally, global credit rating agency Moody’s downgraded RIL as credit negative in May, following the downward revision in the company’s assessment of natural gas reserve.
In its annual report for 2011-12, RIL cut its estimates for proven gas reserves from KG-D6 block ? India?s largest natural gas field ? by 7% to 3.67 cubic feet due to technical difficulties. The oil ministry has projected the gas output from RIL?s D6 block to decline to 20 million standard cubic metres a day (mscmd) in 2014-15 from an estimated 28 mscmd in this fiscal year.
Most of the shift in recommendations has happened since April 2012, after RIL?s March quarter earnings fell to its lowest in two years due to weak refining margin and declining gas production from its offshore fields. The overhang related to falling production at the flagship KG-D6 block continue to weigh on the earning visibility leading to downgrades.Following a sustained reduction in the number of buy calls on the stock, the 12-month target price has also come down by 27% to R814, shows the Bloomberg data.
A cut in gas estimates at KG-D6 by Canada?s Niko Resources that owns a 10% stake in the block, also lead to four downgrades on the stock. The Canadian oil and gas producer said proved plus probable (2P) reserves at the KG-D6 block had decreased to 1.93 trillion cubic feet (tcf), from its previous estimates of 9.65-9.9 tcf.
“We see limited share price upside potential and no major near-term catalysts . Recent disclosure from Niko suggested limited potential for D6 block,” said a Daiwa note, which it downgraded the stock to hold.