Long-time Reliance Industries bear turns bullish with a 'buy' recommendation

MUMBAI: Not many outside the Street seem to have noticed when a well-known, long-time bear turned bullish and issued a ‘buy’ recommendation on Reliance Industries ( RIL), India’s most valuable company.

As if to ensure that his August 29 change of stance did not go unnoticed, veteran analyst Sanjeev Prasad and his team of analysts at Kotak Institutional Equities reiterated his buy call on the RIL stock on September 22. That is a first since mid-2008, when Prasad in a contrarian streak put a sell call on the RIL stock and stuck to his guns for about three years.

Prasad was not available to comment for this story as he was travelling. His swim against the tide, at least with respect to his views on RIL, is legendary among analysts. Prasad, executive director and cohead of the broking firm has been tracking the Reliance stock since 1998. His views on the bellwether stock were closely followed by the Street and recent events relating to the movement of the scrip have vindicated his views.

To be sure, fundamentally, nothing much has changed in Prasad’s view on the stock except that the stock has been de-rated so much that it is available for a price cheaper than the stock valuation arrived at by Prasad and his team comprising Gundeep Singh and Tarun Lakhotia. Part of the reason that Kotak analysts see a buy opportunity is because the Street is not ascribing any value to RIL’s oil and gas reserves, because of the lack of information available and regulatory overhangs.

Kotak analysts now contend that this assumption by investors is “overly pessimistic”. On August 29, Prasad and his team put the buy call with a price target of Rs 1,045 a share when RIL was trading at Rs 755 a share. Since then, on September 22, he revised the target price to Rs 1,000. On Friday, RIL shares gained 4.5% to close at Rs 801.45 on the Bombay Stock Exchange.

When Prasad downgraded the stock from ‘add’ to ‘reduce’ in November 2008, the reason he cited was RIL’s “high exposure to the global commodity business” and “the deterioration in global supply-demand balance” in its oil re-cheapfining and petro-chemicals business. In Kotak Institutional Equities parlance, ‘add’ means the stock has a 0-10% upside potential in the following 12 months, while ‘reduce’ means a 0-10% downside.

It was rather brave to stick his neck out, as Prasad in as early as November 2008 had deemed a target price of Rs 662 a share when his peers from broking firms such as Macquarie and Credit Suisse had recommended targets in the range of Rs 955 to Rs 984 a piece. For his consistent bearish view on the stock and for calling out RIL’s management's reluctance to disclose certain operational and financial data did come at a price. At RIL’s analysts conference calls and meets the Kotak team was conspicuously absent.

They would have lost a lot of business due to this stand but Uday Kotak has always maintained that the research should remain independent from external influences, a person familiar with the matter said. After Kotak Institutional Equities changed its stance, among the 19-odd broking firms - foreign and domestic - that issued an investment recommendation on RIL stock in September, there is now just one that is still bearish on the stock. On September 21, Elara Capital’s Alok Deshpande recommended that clients reduce their holding of the stock with a target price of Rs 900 a share.