RIL shares drop as Morgan Stanley raises concerns

Shares of market leader Reliance Industries Ltd (RIL) today dropped on the bourses in a strong market, after global brokerage firm Morgan Stanley said that the energy major's refining margin and exploration and production volumes may fall.

The stock opened on a positive note this morning and gained nearly 1.8% to touch an intra-day high of Rs 750.60, but witnessed heavy selling in the later part of the day.

At the end of the day's trade, the scrip settled at Rs 732.05, down 0.75% on the BSE. It touched an intra-day low of Rs 728.35, down 1.24% from its last close.

In a research note, Morgan Stanley today said that two of three RIL's core divisions— refining and petrochemicals— face near-term headwinds, while, KG-D6 block volumes continue to decline.

On the other hand, Morgan Stanley said that Cairn India stood to gain by way of its "production growth and free cash flow". Shares of Cairn India rallied ahead on the bourses and settled at Rs 336.30, higher by 2.51% on the BSE.

"Cairn should benefit from three key factors: 1) increase in production due to swifter approvals; 2) improved realisation due to weakening of rupee, and 3) increasing free cash flow and attractive valuation," Morgan Stanley said in its research note.

The brokerage has downgraded the oil and gas sector due to negative outlook for refining and petrochemical margins, and higher subsidy burden due to a weaker rupee.

Noting that the 16% depreciation in the rupee against the dollar in the last six months has led to an increase in subsidy burden to $26 billion, Morgan Stanley also downgraded oil marketing companies like HPCL and BPCL.

However, HPCL shares gained 1.6%, while BPCL slipped 0.8%. Among other oil and gas sector stocks, OIL India rallied 3%, Indian Oil gained 0.4% and Gujarat State Petronet rose 4.3%, while Petronet LNG dropped 5% and Gail India slipped 3.2%.

"The path to petroleum decontrol, in our view, seems to be delayed due to upcoming elections, a high crude oil price environment, and a weaker rupee," Morgan Stanley said adding that with five state elections in February, we think the earliest a moderate price hike could come is April.