We posted a question on the Orpheus forum: 'Can Reliance save India or Nifty?' The popular answer was 'yes' it can. We put the question up for a few reasons. First, Reliance is the leader in Nifty. Second, we live in an oil economy. Third, a stock cannot remain sideways for eternity. Reliance has completed 36 months of sideways action. Any fall below 700 will take its stock to 2009 lows.
Why are we in an oil economy? A friend of mine has been to Antarctica and has travelled as a researcher, a doctor, the world around, and is now settled in Sikkim. He asked me, "what's happening to oil?" For a minute, I was baffled. Why was this fun-loving guy concerned about oil? Then I realised he was also an ardent biker. Nothing else bothers a biker more than gasoline. His fun had a deep expense, which despite a fall in global oil prices, kept rising.
This is one reason why oil presents a larger risk than gold or even food, for that matter, touching the sky. Small farmlands can manage to produce naturally, but in large farmlands, the transportation of the produce could cause more than a mere stress. This is why hedging the oil risk becomes more important than any other risk.
Now, speaking about timing. Timing can differentiate between investing too early or too late and hence influencing the performance. Fundamental value is poor in timing and can cause irreparable damage if liquidity is a concern. And multi-year investing comes with its own risks. This because you are not investing just in the underlying, but also in the management, which could be a negative.
One way of timing is to rank performance, and because it is cyclical a worst performer can be studied for positive cycle inflexions and vice versa. The three top energy majors, Reliance, ONGC and COAL India, on a quarterly performance, stand at 80, 55 and 37 per cent, respectively. This on a performance perspective suggests a certain valuation of Reliance being the most expensive of the three.
We did the same with the BSE Oil indices and ranked them among 1000 Global equity and sector indices. Guess where is BSE Oil ranked in performance among its global equity composite and sector peers? It ranks at the bottom 10 per cent. Now, since performance is cyclical, BSE Oil offers an attractive value on the multi-month time-frame. It should fall less compared to the other sector peers or rise more if the market takes off from current levels.
We extended our filters and looked at the commodity index. Commodities looked negative for multi-weeks, while oil itself, we found, had bottomed from a multi-year perspective. This means to expect oil to go down is wishful thinking. As the cycle length increases, the possibility and probability of a reversion (bounce-back) increases, because the larger the cycle gets, fewer the signals, and fewer the signals, lesser the noise.
The conclusion is, Indian oil and gas are attractive, and if you can't buy BSE Oil and Gas as an ETF, you should be looking at the worst components in the index to accumulate, which is ONGC, IOC and Hind Petro, rather than Reliance or others, which still seem expensive. There is so much of a mindset linked with the stock that looking at Kokilaben cheering Mumbai Indians only adds to the emotional bias in favour of Reliance.
The author is CMT and co-founder, Orpheus CAPITALS, a global alternative research firm
