Amazing things happen in bull markets. Some defy conventional analysis, sometimes even logic and reason and, certainly, gravity. What has been going on with some of the Reliance group stocks over the last few weeks is stunning, even baffling. It is difficult to explain it all, as sometimes stock prices move first and reasons follow.
Let us take Reliance Petroleum. The stock shot up 65 per cent in eight trading sessions to touch a high of Rs 295 on Thursday. At that price it had a market cap of Rs 1,32,000 crore. That is equal to the market caps of Indian Oil, Hindustan Petroleum, Bharat Petroleum, Mangalore Refinery, Bongaigaon, Chennai Petro and Gail. Basically, the entire listed oil and gas sector in India if you leave the upstream companies ONGC and Cairn out. Forget that, since comparisons are odious. If Reliance Petroleum goes on, without a hitch, to deliver $2 billion profits in 2010, it trades at 16 times that number today, already. The experts did not see this coming. Goldman Sachs has a one-year price target of Rs 160 on Reliance Petroleum, Deutsche of Rs 140, Citigroup Rs 170 and UBS Rs 198. One of three things is happening here.
One, spurred on by the spurt in crude oil to $95, the market could be re-rating the refining sector completely, assuming significantly higher refining margins for the next many years. Two, there is talk of Chevron pumping in billions of dollars into Reliance Petroleum to up its stake, unconfirmed thus far. Three, operators and speculators have gone wild and are ramping the stock up way beyond fundamental value. I do not know the answer myself, but am leaving these thoughts on the table for you.
Reliance Natural Resources is perhaps even more baffling. The stock is up 55 per cent in eight sessions to Thursday's high of Rs 149. That gives it a market cap of Rs 18,500 core, or $4.5 billion. At least Reliance Petroleum has visibility of strong profits 2010 onwards, Reliance Natural Resources is essentially a shell or pass through, with negligible revenues today. If you tell people that, they will tell you that there is a lot of group restructuring that is about to happen and the promoter will put some businesses into Reliance Natural Resources to create value. Maybe that is the way it will pan out, yet to ascribe such a lofty valuation to a stock on a mere whim seems like a big leap.
I mention only two stocks here but there are other stocks in the group that have had equally exciting, if somewhat inexplicable run-ups. The market could be right and people perhaps know more about these stocks than I do; I only hope things finally pan out as investors think they will. Maybe I am faint-hearted but sure am getting a touch of vertigo when I look at some of these stocks.
(Writer is the Executive Editor, CNBC-TV18)