Reliance Industries (RIL) has come down from Rs 1070 levels to Rs 950 levels in the last 3 weeks, without much resistance. The selling pressure was partly due to FIs offloading their holdings, and short-sellers accelerating the downward push. Many market analysts, who were bullish on RIL just 4 weeks back are now talking about further downside in price. But that does not bother us. These are attractive prices on RIL, which is one of the best quality stocks in India.
As long term investors, Rs 950-960 is a great buying opportunity in this top quality business. We estimate RIL FY11 EPS to be around Rs 70, and at a P/E of 20 (justifiable for a market leader like RIL with top quality assets), the fair value of RIL stock is about Rs 1400, and we are confident this will be achieved in the coming months/quarters.
Therefore, the stock is available to a 30% discount to its fair value, and the price will catch up in the coming months. So we are seeing this as an early Diwali/Christmas gift, and we will buy more if the sellers pushed down the RIL stock price further down for any reasons.
Investors must note that RIL has never underperformed the Nifty/Sensex Index for long stretches, and the recent months of under performance will be reversed with a sharp rise in the coming quarters. It is not possible to time the stock purchase, and the best approach is to buy when the price is good.
One concern stated by sellers if that KG D6 basin gas production is being capped at 60 mmscmd and that RIL has been making stray acquisitions of shale gas assets in USA.
We differ on both points. We are confident KG D6 basin gas production will be increased as and when the government wants more gas to be available to the Indian industry, while selling it at profit. International Natural Gas prices are currently at $4 / mmbtu compared to peak prices of $10-14 /mmbtu 4-5 years back, and the commodity cycle will reverse like it always does, and RIL will get opportunities to sell its gas at much higher profits. We also support the purchase of Shale Gas assets in the USA because of the same reason, because they are available today at much lower prices than what they will command in 4-5 years from now. Even if RIL just sells them to other energy investors after 5 years, a 100-200% ROI can be achieved. Therefore, we remain strong buyers of RIL at current stock price.