Thursday, May 13, 2010

RNRL: A big mistake

I believe there are 2 sides of the same coin..

1. RNRL has reached a realistic pricing.

2. Stocks have been influenced by sentiment more than fundamentals.

As seen earlier, Anil's IPO: RNRL was over priced right from the beginning piggy backing the Ambani brand name. However, over the past few months the stock has corrected and adjusted to new levels reaching a fair valuation. Despite the low levels, investors have continued to pose faith in the company expecting the Dadri project to come through.

However, the SC (Supreme Court) verdict in favor of RIL has largely shattered investor confidence in RNRL. The SC has fixed RIL’s gas sale price to RNRL at $4.20/mmbtu way above the family MoU price of $2.34/mmbtu. This has exerted additional cost pressure on the company adding to its existing woes of poor past performance owed to delayed project implementations.

On a broad level, RNRL share pricing has been largely based on the Ambani brand and on expectations of successful implementation of the undertaken projects. However, the SC verdict has shattered the investor confidence leading to huge sell offs across board. Looking at RNRL from an investor’s point of view, it is fair to state that the stock is overrated, overpriced and should correct further.

However, looking at the other side of the coin; it is safe to state that majority of the stocks in the market are ruled by market sentiment and a bit by fundamentals. For example, Jubilant Foodworks is a classic example of it with market cap expected to soon surpass the parent firm Dominos. Keeping the market sentiment theory in mind, market men added fuel to the already falling price of the RNRL stock.

Hence, we can safely conclude that RNRL has been continuously witnessing a bad phase. Not only has it been beaten down by weak fundamentals but also poor investor confidence.

Though you may own the stock and have sympathy for the younger Ambani, one cannot deny Mukesh’s ability to tweak the system to bend rules to cater to his business interests. Adding to his kitty are strong financials and buoyant investor sentiments. The SC has announced the verdict for gas price fixation, “Gas is national property and no family MoU can be placed higher than national interest”. Therefore, for the time being Anil will continue to face the brunt of the situation with investors losing money on the stock. So i believe either hold the stock till the fundamentals improve or sell your stock and consolidate your position.

*(RIL and RNRL have been involved in a legal battle over the gas supply of 28 million units in the coming 17 years at $2.34/mmbtu to RNRL from the gas fields of Krishna-Godavari basin)