Reliance Industries: Do not buy on dips

If you have listened to the crap analysts on business news channel who were recommending Reliance Industries to be bought at every dip, you have many reasons to worry now. Here are some of them:

1. Very low Gas price hike than anticipated: Analysts were almost sure that gas prices will be hiked to $8.4 per MMBTU and Reliance Industries will make a killing even though it could not fulfill its commitment of producing agreed amount of gas every year. Now the govt has finally hiked the price but far lower that what was discounted in the stock price to just $5.6 per MMBTU. 

2. No benefit of gas price hike to RIL: However small a price hike of more than 30% is positive though less positive than what was anticipated. But what's severely worrying for Reliance Industries is that govt. has denied the benefit of even this price rise to the company. It will have to continue to sell gas at the rate of $4.2 per MMBTU untill the shortfall is delivered.

3. ROI on Telecom capex: The company is on track to invest 70000 crores into telecom business and is yet to launch it's service. Considering the competitive intensity in data space and RIL's huge capex ahead of any roll-out is a big risk as far as company's overall return on Capital Employed is concerned.

4. Expensive Valuation: RIL did around INR 22500 crores in net profit or Rs. 76.50 in EPS in FY-14. Considering the fall in crude prices, no gas price hike benefit and continuous investment in telecom business thereby consuming large part of the cash on books which would affect it's other income in FY-15 and FY-16, RIL might not be able to report an EPS greater than Rs.83 and Rs.90 for FY-15 and FY-16 respectively. 

At 10 time FY-16 EPS (more than the valuation of global oil companies such as BP, Chevron and Conocophillips) the stock is fairly valued at Rs.900. Someone expecting a return of at least 12 - 15% in next 1.5 years might not want to pay a price more than Rs.780 to Rs.800 till this calendar year 2014.