Will MFs Miss the RIL Rally?

The Economic Times - - Companies: Pursuit Of Profit - Ashutosh R Shyam & Jwalit Vyas

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.

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