No raging bull unless RIL, L&T bounce back

CNBC-TV18’s Executive Editor, Udayan Mukherjee – I will talk about two stocks, which are, benchmarks Reliance Industries and Larsen and Toubro. For L&T it might be a valuation issue, which is happening. For Reliance I think maybe the ownership issue. Because what was going on in 2007, as the new money got into the market when we sucked in USD 17 billion, Reliance became a big Indiabull proxy. So it’s like you want to buy the Nifty or to buy Reliance Industries, liquid does as well if not better than the Nifty you can buy as much as of it as you want you can sell as much as of it as you want without disturbing it too much, gives you good exits. 

It was an easy stock for brokerages to sell as well which is why you got those reports of blue sky targets of Rs 5,000 or Rs 6,000 or Rs 10,000 I don’t remember the number but it was very lofty. It became a big India thing to own if you were getting into India. What you are seeing right now is not necessarily any big fundamental concern on Reliance, I know brokerages have written about contracting refining margins etc. But I don’t think those are the reasons. It’s the whole India ownership which is unwinding right now so USD 17 billion came in, Reliance went to Rs 3,500-4,000. Now USD 6 billion have gone out and Reliance is ground down to Rs 2000. Essentially it’s that which is playing out on Reliance as some of the people liquidate their positions, which they created in the throws of the bull market in 2007.  

L&T is more of a valuation adjustment, which is going on because people believe that genuinely margins will contract particularly as interest rates go up and raw materials don’t cool down. At Rs 2,400, L&T is still trading at pure 24-times current years expected earnings of Rs 100 odd. If you consider the investments that they have and do sum of parts, I think it still boils down to something like a 20 PE multiple. In the current market environment at a 20 PE multiple with interest rates going up, can it contract a bit more I would imagine it can or contract even more though it’s halved, almost half from it’s recent highs. If Reliance and L&T at some point don’t recover and lead, in my mind I am clear that is no raging bull market in India if these two stocks don’t participate.

As long as they correct, the Nifty is going to be under pressure and at some point when they start recovering, you will be hopeful again.