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Sunday, November 4, 2007

Reliance Petroleum Limited (RPL) - A Speculators Den

Recently I came across an article published in "Hindu Business Line" dated Nov 1st' 2007 with title "Reliance Petro beats M-Cap of all refiners put together" (www.thehindubusinessline.com/ 2007/11/01/ stories/2007110152540100.htm). The article actually surprised me and prompted me to look at the reasons for Investors (rather Speculators) giving such huge valuation to an company which is about to be operational in mid of 2008.

Eventually, I was not able to figure out the reason, for a stock which can be currently either Operated by the promoter itself or driven high by a broker under the influence of the promoter. I really don't have anything against the promoters, infact I respect their business model to a great extent and really value what reliance has added in fueling the Indian Economy.

The company has been given a valuation almost around 2.5 times (at the time of writing this article) to that of India's largest refinery Indian Oil Corporation (IOC). Is this Justified?. Let me further compare both IOC and RPL fundamentally and see if such huge valuation of RPL is justified

1) RPL is going to be operational with 29 million metric tonne per anum (MMTPA) during mid of 2008 as compared to IOC's existing refining capacity along with it's group companies of 60.2 MMTPA (47.35 MMTPA on a standalone basis).

2) IOC as a company is involved in manufacturing of well established Oil products like Lubricants, LPG, Industrial Fuels etc as compared to none of RPL to date.

3) RPL's earning visibility is a black box until operational as against IOC's sales turnover of US $5.1 billion.

Who's Buying RPL?

Based, on the latest shareholding pattern of Sept' 07 the mutual fund's were net sellers on RPL (Compared to Jun'07). Their holding decreased to 28.1 million shares from 44.4 million shares.

FII's pared exposure to RPL shares. Their holding was reduced from 137 million shares to 102 million shares.

Similar is the case with Financial Institution, which currently holds around 132 million shares as compared to 162 million previous quarter.

Insurance companies shed around 8 million shares from it's portfolio.

Having all Institutions being net sellers, I examined the details further on who actually is making RPL stock to touch higher levels every alternate day..

There were 400 shareholders added to those holding greater than one lakh in share capital. Their holding increased from 32.3 million shares to 49.4 million shares. Now surely this additional 400 investors are either brokers or HNI's manipulating the prices of RPL. Say at a average price of Rs. 150/- per stock the Investor has to invest atleast 1.5 million rupees to buy excess of one lakh in share capital which surely cannot be a retail investor.

What's in it for reliance?

This is purely my imaginary guess that the company may be planing to sell some shares to Institutions and want better valuation to pocket.. Or maybe brokers want to make huge profit. who knows?. Indian markets in many cases have been a black box and it is the insider's who gets benefited from these stocks. It is very late before the news reaches the retail investor.

Maybe the stock may hit new highs in the days to come and can even be another Unitech or Jai Corp in place, but my advise to retail investors is to invest with caution. Invest only if you are an Investor with high risk profile.

To finish, RPL's current valuation is almost 4 times it's total project cost without even a single penny generated. Who will get such a high valuation?

Posted by Srivatsan at 7:43 PM

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2 comments:

Sriki said...

Good research!!

November 7, 2007 at 10:40 AM
Kp said...

very good research.
i wonder from wher did u get this data?
actually my sixth sense about RPL scrip is exactly same as its reflected in ur post.
gr8 work.
keep it up
-kp

May 17, 2008 at 8:35 AM

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Understanding Short Term Trading

Before I begin, this blog is not for intraday traders. My definition of short term implies duration of around 2 to 3 months.

Short Term stock picking is no rocket science, but rather a visual interpretation of technical charts. A basic moving average on a time frame chart will show the direction of the securities movement.

Moving averages is a mathematical results calculated by averaging a number of past data points. Moving averages (MA) in it's basic form is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. Once the value of MA has been calculated, they are plotted onto a chart and then connected to create a moving average line. Typical moving averages used for short term trading are 50 MA and 100 MA.

Types of Moving Averages

1) Simple Moving Average (SMA)

SMA is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. The usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. Critics argue that the most recent data is more significant than the older data and should have a greater influence on the final result.

2) Exponential Moving Average (EMA)

EMA overcomes the limits of SMA, where more weight is given to the recent prices in an attempt to make it more responsive to new information. When calculating the first point of the EMA, we may notice that there is no value available to use as the previous EMA. This small problem can be solved by starting the calculation with a simple moving average and continuing on with calculating the EMA.

The primary functions of a moving average is to identify trends and reversals, measure the strength of an asset's momentum and determine potential areas where an asset will find support or resistance. Moving averages are lagging indicator, which means they do not predict new trend, but confirm trends once they have been established.

A stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a downtrend. Many traders will only consider holding a long position in an asset when the price is trading above a moving average.

In general, short-term momentum can be gauged by looking at moving averages that focus on time periods of 50 days or less. Looking at moving averages that are created with a period of 50 to 100 days is generally regarded as a good measure of medium-term momentum. Finally, any moving average that uses 100 days or more in the calculation can be used as a measure of long-term momentum.

Support, resistence and stoploss can be infered by referring the closet MA below or above the market price. The other factor that is used in short term momentum is the trading volume. The moving averages along with the trading volume can provide a better insight to short term movement.

Markets are moved by their largest participants - I believe this is the single most important principle in short-term trading. Accordingly, I track the presence of large traders by determining how much volume is in the market and how that compares to average. Because volume correlates very highly with volatility, the market's relative volume helps you determine the amount of movement likely at any given time frame--and it helps you handicap the odds of trending vs. remaining slow and range bound.