Reliance ADAG srocks - falling like nine pins!

Call it Black Tuesday or Blood bath on Dalal Street but it is undeniable, no one would forget 1^st July 08 even in a hurry. It is a day that would be remembered as one of the worst days in the history of the stock market. Not because the Sensex fell by 500 points (3.71%) or Midcap Sensex fell by 245 points (4.54%) or small cap Sensex fell by 317 points (4.73%) or BSE 500 fell by 213 points (4.08%). Above all this, it would be remembered as the day when all the six stocks of the Reliance ADAG fell across the board, falling between 3% to 14%.

List of closing price of 1^st July of all the stocks with its percentage fall is given in the table annexed hereto. It may also be seen that the peak market capitalization of all these stocks, which had touched to Rs.4,93,703 crores in Jan. 08 has now come down to Rs.1,61,818 crores, in less than 6 months. An erosion of over 67%.

Obviously, with this kind of fall, investors in these stocks are greatly disappointed and are unable to take a call whether to remain invested in them now or to get out by cutting huge losses. A real Catch 22 situation for the investors.

Though the whole market has been in a tailspin, the disappointment from the ADAG stocks is more painful. Investors have always looked up the Reliance group with a lot of faith and consider it to be investor friendly but this free fall of the ADAG stocks, has today shattered this belief also. More than the market crash, it has actually been a day when faith got crushed.

Investors have now started analyzing the real worth of these stocks under a microscope. It is said that the share price of all the group companies were artificially jacked up in the month of January 08 beyond its intrinsic worth and value, and on futuristic valuations, which were based on futuristic long gestation projects. A classic example for this was Reliance Power.

No doubt, that due to bullish sentiments prevailing at that time in the market, ADAG has been successful on capitalizing the futuristic projects. But all the exercise carried out in taking the valuations to such a level were with a view to achieve two objectives. First was to make the group as the richest group of the country and second, to enable the group to come out with 5 – 6 public issues of group companies to enable them to mobilize over Rs.40,000 crores from the capital market.

Obviously, the valuations cannot sustain unless the same is supported by the financial performance and realistic projects and profitability. Even the bonus issue in Reliance Power and share buy-back in Reliance Infra by the Group, has been perceived by the market as a move to keep the share price maintained. But the plans of the group did not materialise. Truth seems to have dawned, the haze lifted and the ugly truth seems to have hit all in the face.

It is said that share buy-back scheme initiated by Reliance Infra in the month of March 08, for Rs.2,000 crores at a price not exceeding Rs.1,600 per share was solely with a view to give support to the share price. Generally, share buy-back is made by any company when it has surplus cash lying with it. But in case of Reliance Infra, which had an interest burden of over Rs.400 crores for FY 08, had also issued 43 million warrants to the promoters of the company in the past to be convertible at Rs.1,822 per share to mobilize Rs.7,835 crores. This means, the company has been in need of funds and also had borrowings in its books and yet, it went ahead and earmarked Rs.2,000 crores for share buy-back.

Also, Rs.800 crores was earmarked to buy-back in the first phase but as off today, only 20.38 lakh shares at an average rate of Rs.1,230 for Rs.250.75 crores were bought by the company. Since 09-04-08, there seems to be no buying back by the company, inspite of share price falling to Rs.700. Also, about Rs.783 crores must have been mobilized by the company, being 10% from placement of warrants to the promoters. Even this amount is not yet fully utilized. The picture which has emerged now is that market is viewing this as great liquidity crunch at the company’s level, including financial mismatch not in conformity to its plans and announcement.

Similarly, bonus issue by the Reliance Power has misfired. On ex-bonus basis, share price of Reliance Power ruled at Rs.260 and today, in a month’s time, it fell by about 50%. So instead of redressing the grievances of Reliance Power investors, it has infact damaged their interests.

Today’s fall in share price of all ADAG stocks, which has been supported with huge volumes, actually signals confidence crisis of institutional and high net worth investors. Are they sensing something which we are presently not able to ? It is also said that market has stopped factoring futuristic announcements like early commencement of Sasan Power Project, procurement of EPC contracts by Reliance Infra, signing mega deal with Big B by Reliance Big Entertainment or setting up cement plants of Rs.10,000 crores by RNRL.

If the share price of the ADAG keeps falling like this, it will betray confidence of over 4 million investors of the group and hence would also damage the age old investor friendly image of the RELIANCE Group. Reliance becoming unreliable? Never thought a day like this would also come!