Reliance

Reliance Industries (RIL) has been continuously going south the last few days and this warrants some attention. This is what Reliance Looks Like:

This is quite amazing really – six continuous down days, kissing the lower Bollinger band, way below moving averages, and MACD so negative it’s scary.

There’s a reasonable support at 975 and a one year low at 955 which should act as a secondary support. Right now it needs to bounce off those levels, and there’s talk in the markets of managers exiting because performance isn’t all that great.

I like the stock on a fundamental basis. The folks are huge on oil and energy – whose prices are going up. They have a lot of cash, which again is helping them acquire new technologies and to scale. They have invested in BWA and can be a huge game changer in the next five years. Recent results were very good – Rs. 14.8 EPS versus Rs. 11.55 last year, a 27% growth, in what is the largest company by market cap in India. Even if on a technical basis, this is weak, there’s honestly no long term difference in buying at 970 or 1100; if the projected growth of the company is as strong as I think there is substantially higher value in the stock.

Yet, there’s more to this because RIL is the biggest piece of both the Sensex and Nifty. When have we seen such a breakdown earlier? Take a look:

This is June 2008. Then what happened?

First, the stock recovered to hit the 20 day MA, and then flattened back for a while till Lehman said goodbye, when it went “crash” again.

The difference is that the last time around volumes peaked around the recovery time at nearly 2x average, and we need to see that happen before you time a recovery, even to retrace to 20 MA, currently around 5% above today’s levels.

Technical charts are useful indicators of sentiment and/or money-flow. In this case, when the market’s near a 2 year high, and RIL is the biggest stock in the indices, there can be no real lack of positive sentiment; it has got to be money flow. But – no bulk or block deals on the NSE in the last 15 days. Turnover averaged 500 cr. a day in the last few days. Delivery volumes were 60% averaged in the last few days – it’s about 48% on 11th, again, nothing substantial to note there.

And, strangely Reliance Puts have a lower implied volatility (the measure of time value) than calls. This is inverted – for a falling stock, it should be the other way around! People are selling Reliance puts at lower values relative to the calls, when the stock’s fallen

(Note to Dev questions: I wrote this tool that does option IV charting. It’s part of a software product I’m building.)

And the Reliance future still trades at a premium, and is continuing to do so – though it’s narrowed to 5 points.

While this may sound strange – the really strong stocks like Tata motors and ICICI Bank are trading at discounts in the futures market.

It’s altogether difficult to say which direction RIL will go, and because of it, the indices. I think what we should see is – a heavy down volume day, and then a recovery to 20 day moving averages. The support levels are important in that if the heavy volumes hold supports, we should see a rise. If it breaks 955, then we should quite easily see 915 on the stock. Odds wise I’d think of buying a call on the high volume down day, or buying the future at support. Selling calls or buying puts on a breakdown below 955 is the other strategy.

[Yes, that’s a long post to say “I don’t know”, but that’s how trading is – you react, you don’t predict, and you watch.]

Sorry for the highly technical posts. I can explain better using video – that’s what my new startup is about. But let me know if you have specific questions, or comments.

Disclosure: Hedged semi-longish position on RIL.

So is the big brouhaha warranted? For most investors it makes ZERO difference. The share price will come down by half, and the number of shares will double, on the announced "ex-date". That means your net worth does not change. With the shares priced lower, it might become more affordable so liquidity *may* increase - but with a company like Reliance which is already hugely liquid, there shouldn't be any impact.

Does it matter to the company? No. Whatever is being distributed as "bonus" shares is simply a recapitalization of reserves. (Read "Of Shares, IPOs And Stock Markets" for background) Reserves are created by accumulation of profit (whatever is left over after paying dividends). For Reliance this is a HUGE amount - since they have been immensely profitable over the years. They can even give a 10:1 bonus and still have reserves left over.

(RIL has over 100K crores - a trillion rupees - in reserves, with only about 2000 cr. as the face value of equity shares. Some of it has complex implications with debt and FCCBs but there is a HECK of a lot left over)

A lot of people think a "bonus" is a good thing. It's no big deal at all, in companies like Reliance, unless they were to do a 1:5 split or something bringing the price below Rs. 500 (then a lot more people get interested, for some reason). It used to be a tax saving scheme but even that's been plugged now. Some say this will increase dividend - but by and large, dividend yield remains constant (so it's more a function of the stock price, not the number of shares outstanding) Reliance is paying Rs. 13 per share dividend this year. Next year, they might not pay more than Rs. 6.5 per share (unless they increase profits a lot), so income remains the same.

The company made Rs. 105 per share last year which, after the bonus issue will be Rs. 52.5 per share; the current share price at Rs. 2100 discounts past earnings 20 times, and I expect a post bonus price of about 1050 to 1100 per share. The word 'bonus' is very positive to hear, but like most things in the financial world, things aren't as great as they sound.

RIL sources said Trevira saw losses amounting to millions of dollars in 2008, especially after the slump in global demand

Reliance Industries Ltd (RIL), the largest polyester fibre and yarn maker in the world, today said its sick German subsidiary Trevira GmbH has filed for insolvency proceedings with a restructuring plan due to its deep financial crisis.

Trevira has filed an application with the Augsburg Court in the State of Bavaria, Germany for insolvency, RIL informed the stock exchanges today.

RIL had elevated Elke Bauerle, chief restructuring officer for Trevira, as its managing director on May 25. She had joined Trevira from Schultze & Braun, a leading law-firm specialised in restructuring, replacing Hemant Sharma, who was heading the company since RIL’s acquisition in September 2004.

The ¤323-million (approximately Rs 2,170 crore) turnover Trevira, a leading producer of high-end specialised polyester yarn and fibre and a well-known brand in Europe, suffered heavy losses last year due to the slowdown in Europe, especially in the automobile sector.

Trevira supplies 27 per cent of its 120,000-tonne-per-annum production of fibres and filament yarn to the automotive sector and 30 per cent to home textile manufacturers. Rising raw material costs and high spends on energy also affected the performance of the company, said sources.

RIL Q3 Profits would've been lower by 1177 cr. if forex calculations reflected AS11, which Reliance has steadfastly refused to follow. That's like 1/3rd the net profit of the quarter. Candidate, surely, to add into the SoS, but I'll wait till tomorrow - after all, results were announced post trading hours so it wouldn't be fair.

Overall, quite disappointing and this must do horrible things to the Nifty EPS. We have been at 228 or so all of 2008, and starting 2009 we are going to see earnings drop - not one estimate I've seen includes that possibility, yet. The times, they are a-changing.

The stock was flat today at 1,135.