Will MFs Miss the RIL Rally?
ET Intelligence Group: Institutional funds with portfolio underweight on Reliance Industries (RIL) are making a dash for the stock as the street expects the breakeven in its telecom venture to happen earlier than anticipated after the company recently announced the dates for the commercialisation of the business. In addition to this, investors’ interest increased due to possibility of the higher dividend payout as the company will turn free-cash flow positive from the beginning of FY19.
The stock is seeing increased interest from several institutional funds that were massively underweight on it due to the under-perfor mance in the past eight years. It must be noted that FPI and domestic mutual funds are underweight on the RIL by 2% and 3.9%, respectively, compared to its weight in the Nifty. RIL has 6.32% and 6.5% weight in the MSCI India and Nifty, respectively. Most big domestic funds such as HDFC, Birla, Reliance and ICICI Pru have allocation of not more than 3% in their large funds.
Given that the stock has seen a technical break-out and reached an eight-year high level, many funds are increasing their weightage to minimise risk of under-performance. Continued buying support has helped RIL’s market capitalisation cross ₹ 4 lakh crore to become the second-most valued company after TCS.
RIL could outperform Nifty with it turning free-cash flow positive and that could result in higher dividend pay-out. RIL’s dividend payout has been nearly 15% of net profit, considerably lower than dividend payout of global peers’ such as Shell, BP, Total and Eni of nearly 47%.
Foreign brokerage Morgan Stanley said in a note that the possibility of the higher payout cannot be ruled out as a trigger based on 2016 AGM commentary of the chairman indicated capital efficiency. The company’s free-cash flow improved between FY09 and FY12, but dividend payout remained unchanged. Even including the fund deployed in the buyback, the payout touched 30%.
The company is expected to turn freecash flow positive in the first quarter of FY19 thanks to stable regional refining margins, end of its 5-year heavy capital expenditure cycle and commissioning of its two major downstream projects.