Morgan Stanley cuts Reliance Ind to 'underweight'

Reliance shares closed down 4.51% at Rs 818.70 on the BSE

Morgan Stanley cut its rating on Reliance Industries to ‘underweight from ‘equal-weight’, citing lack of near-term triggers, expectations for weaker refining margins and valuation.

It also cited concerns about Reliance’s investments into businesses that offer “low” return-on-equity, as well as a subdued outlook on petrochemicals in a noted on Monday.

Morgan Stanley cut its price target on the stock to Rs 703 from Rs 742. Reliance shares closed down 4.51 per cent at Rs 818.70 on the Bombay Stock Exchange (BSE).

Reliance’s key gas producing fields off the Andhra coast could be exhausted in five years, Morgan Stanley analysts said in a report.

The researchers’ findings are based on estimates by block D6 partner Niko Resources that total proved plus probable reserves at the block had decreased to 1.93 trillion cubic feet as of March 31.

Canadian Niko has a 10 per cent stake in the D6 block in the Krishna Godavari basin, while Reliance and BP, the operators, have 60 per cent and 30 per cent share respectively.

The block was expected to contribute up to a quarter of the gas supply for Asia’s third-largest economy, but its unforeseen decline in output has left India more dependent on expensive LNG imports.

The gas output from the D6 block was projected to decline to 20 million standard cubic metres a day (mscmd) in 2014-15, less than half the 60 mscmd it produced in 2010 and well below planned peak capacity of 80 mscmd.

Reliance has 10 other discoveries in the block that are yet to be developed.

It has won approvals for the pre-development work and needs further regulatory approvals for development activities, the note said.

“We currently assume that D6 production will increase to 40 mscmd of gas in 2015-16 once these discoveries are developed,” Morgan Stanley said.

The CAG had last year criticised the government as well as Reliance over development of the KG gas field, which has been beset by arguments over spending and strategy for its complex geology.

No immediate comment was available from Reliance.