Monday, June 14, 2010

Sell RIL above 1100

Reliance Industries, which has just acquired pan-India spectrum for wireless broadband services, expects its latest bet to pay for itself within three years from operation. A senior RIL official, Mr Manoj Modi, said this on Saturday, at a presentation for analysts in Mumbai. He pegged the total investment into the broadband venture at $5 billion. He also denied any intention of purchasing any of the existing 2G telecom players. RIL’s CFO Mr Alok Agarwal was also present at the meeting.

On Friday, RIL took everyone by surprise when it announced a Rs 4,800 crore bid to acquire a 95 per cent stake in Infotel Broadband. Infotel was the surprise winner of the broadband auction that had concluded hours earlier. The company will be following an “asset light” approach in its latest business — meaning it may go for external partners for infrastructure, applications etc.

RIL sees the broadband business as the next big opportunity in the telecom sector. In its presentation on Sunday, RIL says that broadband business in India is at the same stage today that mobile telephony was in 1995 – in terms of consumer spread. Penetration of broadband is less than 1 per cent, compared to 130 million subscribers in China. The company feels growth is likely to happen through wireless telephony — rather than fixed line wireless phones. The company expects subscriber figures to grow over 100 per cent per annum for the first few years. Data accounts for a large share of revenues for telecom firms globally, but the share is less than 10 per cent for top Indian telecom firms such as Bharti and Vodafone.

Infotel is the second major acquisition by RIL in the recent past. In April, RIL had acquired a stake in the US natural gas company for $1.7 billion. Last year, it was in the running for LyondellBasell, a global petrochemicals giant. In the past few quarters, expectations that Reliance will go for takeovers and acquisitions have risen.

Our Analysis :

RIL has been struggling to get past the 1100 mark and have a weekly close above that. We feel the telecom buy is a long term strategy and broad band will take time to grow unlike the mobile telephony. With intense competition the margins will be under squeeze. Advise investors with brave heart to short above 1100 keeping a stop loss of 1125, as a steep fall awaits the counter which could bring it down to sub 1k levels in the short term.

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