RPL suffers biggest fall on CLSA downgrade

Reliance Petroleum (RPL) had the biggest fall since its listing on Tuesday on concerns that current valuations may no longer be sustainable. Foreign funds are said to have sold heavily, in turn prompting a sale by local traders who had accumulated long positions at the counter.

The Mukesh Ambani-promoted company, which is building one of the world's largest refineries, had added more than a third to its market capitalisation last week, more than half of which got eroded in the process. RPL shares ended the day at Rs 220, down 18% over the previous close.

Market participants said a report by foreign broking house CLSA, downgrading its rating on the stock, provided the ammunition to bears, who have been waiting for an opportunity all along.

RPL share prices had an unprecedented rally last week on market talk that Chevron, its American partner (that already owns 5% in the company), will soon exercise its option to buy an extra stake in the company and that the refinery will go on stream earlier than previously assumed.

Later Chevron issued a statement saying it has time till July 2009 to decide whether to raise its stake and any decision to invest will depend on whether it agrees with Reliance Industries on 'commercial issues' and 'economics of the investment' at that time, Chevron said. CLSA on Tuesday said RPL now trades at an asset value of $4,129 per complex barrels per day, a price that it calculates is 2.4 times that of its peers in the US.

"While such a premium recognises its superior earnings potential because of lower capital costs and taxes, even on earnings-based multiples, RPL appears fully priced relative to its peer group," said CLSA's Somashankar Sinha in the report. The risk-reward being unfavourable, he said it was time for investors to cut exposure to the stock.

His 12-month target for the stock is Rs 195. Vinay Jaising of Morgan Stanley has a target of Rs 204 on the stock. Brokers also said that the build-up of positions in the derivatives segment had reached the permissible limit and hence no new positions were allowed in the stock in the F&O segment.