Kotak downgrades RIL to sell

Kotak warns global monetary stimulus measures are unlikely to result in any material impact on Reliance's core businesses

 Domestic brokerage Kotak Securities has downgraded Reliance Industries (RIL) to sell recommendation attributing lack of reason for stock’s recent run up, it gained 10.3% in the last five trading sessions. The RIL stock was trading at Rs 835.75, down 2.27 per cent on the Bombay Stock Exchange at around 2 pm today.

“Global central banks’ unconventional monetary interventions are unlikely to result in any material positive impact on RIL’s core businesses,” said the report from the brokerage. Reliance Industries is India’s largest refiner whose earning depends on conversion margins. It is not a company which would gain from commodity play.

Recent global developments in the form of announcements of unconventional monetary interventions by the ECB and the US Fed will help stabilize bond markets in the Euro zone’s peripheral economies or reduce yields / costs in the US mortgage market. At the best it can provide a modest boost to economic activity.

The exploration and production (E&P) business contributes modestly to RIL’s profit now without the gas business whose prices are capped up to 2013-14. “RIL has negligible exposure to pure commodities. RIL’s margin will depend on fundamental supply and demand for various products in the chemical chain and in refining,” said the report. As per the brokerage's estimates, company's pre tax profit is expected to decline to Rs 25,319.8 crore at the end of the current financial year from Rs 31,826 crore in the last financial year. The contribution from the upstream business in this is expected to come down to Rs 3,192.9 crore in 2012-13 from Rs 5,297 crore in the previous year.

The brokerage does not see any material impact of the recent actions of global central banks on global economic growth and on supply-demand balance. Global GDP is  likely to be anemic for the next 2-3 years, as per its estimates.

The global refining supply-demand  balance is expected to deteriorate over the next two to three years due to large capacity additions in the Middle East and Asia. Refining margins have declined over the past few weeks with the re start of refineries that had undertaken maintenance turnarounds in July – August. Chemical margins also continue to be subdued.