British Petroleum is all set to take over 30 per cent stake in 23 oil and gas blocks of Reliance Industries. The deal would fetch Reliance Industries an aggregate of $7.2 billion.
The petroleum majors have entered into a 50-50 joint venture for sourcing and marketing of gas. The joint venture is also aimed to create infrastructure for gas transportation.
In an interview with CNBC-TV18, Deven Choksey, MD, KR Choksey Shares and Securities says, the deal is adding a good amount of visibility on the valuation front for Reliance Industries.
However, he advices short-term trader to exit RIL around Rs 1,010-1,030 level.
The market, he says, is quite cautious and the participation is missing. According to him, the crises in the Gulf could make investors nervous going forward.
Below is the verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee.
CNBC-TV18: How do you think Reliance opens this morning?
Deven Choksey: I think the expectations are going to be on a positive side. If fresh money is not coming into the market, probably you may not see a sustained upside into the stock. But certainly there should be some amount of short covering happening. I am not too sure on this particular aspect as to how much fresh money would come because a) the stock is comparatively over owned, b) it is valued equally well, and it is not cheap, even though the correction has taken place in the price.
This particular deal is quite exciting deal because it is adding a good amount of visibility on the valuation front for this company. Even if one factors into account the $7.5 billion that they are taking as payment in ‘11-12, I think this is translating into Rs 60 per share. If you translate 60 per cent of Reliance’s share into account, probably what you are seeing is another Rs 180 per share, given that 60 per cent share that Reliance would hold into this 23 blocks. So, totally about Rs 240 per share kind of a visibility is coming in, as far as valuation goes. That could possibly lead to some amount of short squeezing, as far as the market is concerned because stock is expected to have some amount of rerating going forward.
CNBC-TV18: How nervous is the mood this morning because of what happened across West Asia and in Asia now?
Deven Choksey: Overall, the market is quite cautious. The participation is missing into this market. Asia move definitely is going to be dampener this morning, which otherwise could have been little better morning today because of the Reliance’s deal.
I think the crises in the Gulf possibly is likely to result into kind of a snowballing effect at some point of time because of situation those countries are passing through, wherein the wealth is concentrated in the hands of few and it is resulting into substantial amount of political turbulences. So, that could possibly result into a good amount of crises. At the same time, it could make investors nervous going forward. So, this is something which is going to affect us. It will not allow the market to move up with straight fetches which otherwise would have happened.
At the same time, it is quite possible that Reliance being heavyweight stock and short squeezing taking place, if the stock starts moving up, along with that, the index could start looking up. And that could be used by some of the players on the FII side to exit out of the other portfolios that they have been maintaining. So, it is going to be a tricky kind of a situation in which one will see how these people swing their mood and operating into the market.
CNBC-TV18: In oil and gas space, how would you approach Cairn where fortunes are obviously impacted very well, if crude appreciates as much as it has, but the stock is hung in a limbo because of the deal not going through?
Deven Choksey: It’s true. I think on one side you are seeing higher crude oil prices and benefit going into the exploration companies like Cairn. But on the other side the deal is hanging on the head. In my viewpoint, the crude oil prices, I am not too sure whether it will sustain at this level. I think it is all largely because of the crises which is happening around the Gulf. If that crisis has some kind of a solution then possibly crude oil prices could also come down.
Having said that, probably we are not expecting it to go below $85 per barrel, it would probably stay in the $85 to USD 100 per barrel kind of a range or $15 range as far as the crude oil prices are concerned. So, one is not too sure whether one would take a bet on crude oil as far as Cairn is concerned.
The larger issue remains about Cairn as to how this particular deal goes through. If the government decides other way, in all likelihood as we sense it, probably this particular price would be difficult to hold in my viewpoint, unless the crude oil price remains substantially on higher side.
CNBC-TV18: Just for a near-term trader, would you look to exit Reliance at Rs 1,000 this morning?
Deven Choksey: Yes, around Rs 1,010-1,030 level is a level, at which this stock possibly meets the kind of valuation criteria, even under this deal. So, to a certain extent, I would like to exit if I am holding a trading position. But I also have full sense that going forward you could have possibly many positive news emerging. The BHP’s acquisition of shale gas assets yesterday in USA is suggesting that going forward such kind of activity could happen with Reliance because they have collected the cash or collecting the cash in next financial year. They would possibly put more money into the shale gas assets, which has got larger amount of footprint, at the same, it is offering the kind of little longer visibility.
So, to a greater extent, the money would possibly go into shale gas business from the Reliance’s side. If such kind of positive newsflows are triggering and giving the valuation, that possibly could mean that Reliance stock would remain in the positive news side. But for near-term trader, this price tag could be used as an opportunity to exit and buy at lower levels, if market gives opportunity again.
CNBC-TV18: What do you think, is this a turnaround in Reliance sentiment nothing else?
Deven Choksey: I think people would not short this particular counter further, at least on this front because you are having the cash in the balance sheet now coming in with this particular deal. At the same time, if you look at international market prices of the gas, they are showing the tendency to go upwards. If you consider that in India the additional expansion which is taking place for Reliance and if they are putting in additional 40 mmcmd or 60 mmcmd kind of a production, that could find slightly better price than $4.2 per mmbtu. Should that become the case then the stock possibly results into rerating. So, these are some of the possibilities on the upside.
On downside, the market has factored everything. Unless people will see the kind of sell off happening because of the over ownership in this counter, I do not see too much of downside happening in the stock. Maybe one can look forward to positive news going forward either on the shale gas acquisition side or from the point of view of getting better price on the domestic front for the D6 on expanded capacities. That could possibly rerate the stock going forward.
CNBC-TV18: Any call on Mahindra Satyam?
Deven Choksey: What all of us are expecting is that at some point of time the company should start showing the kind of margin improvement, which hasn’t been seen. Of course the kind of downfall is arrested, but at the same time the margin improvement has to take place. Along with that, after this US suit is settled, probably they should be in a better position to win some of the clients globally. And that could possibly give the stock kind of a visibility going forward.
For coming one-two quarter, which most of the analysts would look at, I think things are not improving as significantly vis-à-vis that you find more amount of opportunities into some of the frontline stocks like Infosys, TCS and otherwise some of the mid tier companies like HCL Tech where the visibility remains to be relatively clear compared to Mahindra Satyam. Once they show the kind of growth traction or the margin improvement into the performance in subsequent quarters, possibly this stock would hold the prospects of rerating. But till that time, I would think it would drag in this particular range of 10-20 points from here.
CNBC-TV18: What do you do at Rs 995 on Reliance?
Deven Choksey: I think somewhere around Rs 1,010-1,030 is a level at which I would exit the trading position in this particular stock. I wouldn’t add fresh because unless new money comes in, it doesn’t bring the confidence to add fresh into this particular counter. So, I would think we will safely wait for some more time to buy further into this stock.
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