The Telegraph
Wednesday , September 1 , 2010
Since 1st March, 1999
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Reliance scrip bears EIH brunt

Mumbai, Aug. 31: Reliance Industries tumbled over 3 per cent to Rs 918.85 after investors dumped the stock and several brokerages railed against its surprise move to pick up a 14.12 per cent stake in East India Hotels Ltd (EIH), signalling their dismay over the group’s foray into unrelated sectors.

On the BSE, the RIL stock fell to a new monthly low of Rs 915.10 in intra-day trades.

The RIL stock — the top-weighted blue-chip in the sensex — has been an under-performer with investors sore over the delay in the ramp-up of gas production from the Dhirubhai-6 field in the Krishna-Godavari basin.

Credit Suisse said in a report that RIL’s investment in EIH raised serious questions about cash utilisation and whether it was better to have returned it to shareholders.

RIL has one of the biggest cash chests valued at over Rs 26,000 crore.

“If RIL ups its stake and buys more, the acquisition can become more expensive. Alternatively, this may be a financial investment that RIL hopes to exit profitably. Irrespective, this raises questions on whether this cash was better returned to RIL shareholders, and if RIL is running out of core oil and gas/petrochem opportunities. The latter, if true, will dent our thesis of continued RIL earning per share growth on the back of new capital expenditure, leading to stock upside,” Credit Suisse analysts Sanjay Mookim and Saurabh Mishra said.

The brokerage added that irrespective of what RIL did with its investment, it was betting on a major improvement in the operating performance of EIH. The analysts said their positive outlook on RIL was based on expectations of continued growth even as the company defined the use of its large cash. The group has entered into broadband wireless, sports and entertainment management and the hospitality sector in eight months.

“Unfortunately, investments such as the broadband venture and now this don’t help the thesis. While the current investment is relatively small, it may also indicate a lack of core oil and gas growth opportunities. If this persists, it can cause further lacklustre stock performance,” they warned.

Avadhoot Sabnis of RBS said the stake purchase called into question existing investment opportunities available to RIL in its core business.

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