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RIL: The differences drag

'Ownership issue' may be the reason why the Reliance Industries stock is underperforming

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Emcee Mumbai
The "ownership issue" between the Ambani brothers is now out in the open, but the markets seem to have had a whiff of the problems between them, if the underperformance of the Reliance Industries stock is any guide.
 
In the last month and a half, over the period October 1 to November 18, the Reliance Industries scrip has appreciated by a mere 2.3 per cent, compared to a rise of 6.2 per cent in the Sensex.
 
That doesn't take into account Friday's selling in the Reliance counters. Given its large weight in the Sensex, it would be fair to say that Reliance has been a drag on the index.
 
Interestingly, this underperformance comes at a time when the petrochemicals market has been booming, and refining margins have been hitting new highs. For the quarter ended September 30, RIL's earnings per share rose by 39 per cent on a year-on-year basis.
 
Also, the Sensex has risen by 3 per cent this calendar year, while the RIL scrip is down 5 per cent. Even if we take the year to November 18, the rise in the RIL scrip, at 18 per cent, is lower than the 25 per cent rise in the Sensex.
 
The other listed stocks in the group""-Reliance Energy and Reliance Capital""-are trading at prices lower than on October 1. But it's also true that Reliance Capital's net profits in the second quarter have fallen, while the Reliance Energy stock had already run up quite a bit.
 
In short, although there can be no definitive conclusions, it's possible that RIL's underperformance may well be the result of market concerns about the Ambani family's problems.
 
More importantly, now that the issue is out in the open, there's no running away from the fact that it will weigh on the Reliance stocks. The markets hate uncertainty, and the sooner the family puts forward a clean resolution of the matter, the better it will be for investors.
 
M&As in cement
 
The cement sector is once again looking ripe for further consolidation . Cement sales of the top 5 companies currently account for an estimated 60 per cent of total sales, virtually double their share 5 years ago, and this proportion is set to rise to almost 75 per cent over the next 3 years, as smaller players lose market share. Foreign players like Lafarge and Cemex are considered more likely to go in for M&As.
 
Why should M&As be back in fashion now? Average cement prices have risen around 8 per cent in H1 FY 05 on a year-to-year basis, and they're expected to go up another 6 - 7 per cent in FY06.
 
Further, the Middle East is in the midst of a construction boom, and a plant located in regions close to port facilities like on the West coast or in the south would be attractive to buyers.
 
But domestic players like Grasim (which has recently taken over Ultra Tech CemCo) and ACC ( which had taken over Bargarh Cement, formerly IDCOL Cement) are being ruled out of the M&A race, given their need to squeeze synergies from their recent purchases.
 
What are the costs buyers are looking at? Acquiring a cement plant is typically benchmarked at $ 60 - $65 a tonne, but foreign players could pay up as much as $ 90 - $ 100 a tonne for plants that offer high levels of energy efficiency or locational synergy with ports. That should be good news for cement stocks.
 
FIIs: waning interest in mid-caps
 
Where have FIIs (foreign institutional investors) invested the Rs 30,000 odd crore they brought into the Indian stock market this year? A look at how market indices have performed this year suggests that a reasonable amount would have gone into mid cap stocks. After all, NSE's Midcap 200 index has risen 24 per cent this year, a much better performance than the mere 1 per cent rise in the Nifty.
 
But shareholding data suggests that FII interest in Indian mid-cap stocks seems to be waning. Their total holding in the stocks that make up the Midcap 200 index amounted to 2.89 per cent of the total equity of these firms in the September quarter, marginally higher than the 2.53 per cent holding at the end of year 2003. The study excludes 27 stocks for which shareholding data is not available for certain periods. 
 
Going out of favour
 

FII shareholding (%)

Midcap 200*Nifty #
June 20031.379.64
September 20031.5710.52
December 20032.5312.05
March 20042.8313.26
June 20042.8713.01
September 20042.8913.80
* excludes 27 stocks for which data was not availavle for all quarters; # excludes Maruti
 
More recently, between July and September, FII holding in mid-cap stocks barely inched up from 2.87 per cent to 2.89 per cent, suggesting that foreign institutions had little to do with the 31 per cent jump in the Midcap 200 index during the period.
 
FIIs moved heavily into mid-cap stocks in last year's rally - their holding had moved from just 1.37 per cent in June 2003 to 2.83 per cent in March 2004. It seems now that mid-caps are either overpriced according to FIIs or that there's a dearth of good quality mid-cap stocks in India.
 
So where is the FII money headed now? Definitely, large cap stocks: FII holding in Nifty scrips has risen from 12.05 per cent in December 2003 to 13.8 per cent now. Also, FII money has poured into big IPOs like TCS and NTPC.
 
With contributions by Amriteshwar Mathur and Mobis Philipose

 

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First Published: Nov 20 2004 | 12:00 AM IST

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