Tuesday, January 18, 2011

What next for ADAG shares ??

Anil Ambani group companies tumbled by up to 8.45 per cent on BSE on the first day of trading after Reliance Infrastructure and RNRL agreed to abstain, as per a regulatory settlement with Sebi, from investing in listed stocks till the next year.

Shares of R-Infra plummeted by 7.84 per cent to close at Rs 735.70 on the Bombay Stock Exchange, becoming the worst performer on the 30-share benchmark. The scrip during the day had hit an year-low of Rs 714. Similarly, R-Power with whom RNRL has now merged, fell by 6.13 per cent to settle at Rs 137.90. Among other group companies, Reliance Capital declined by 6.45 per cent while RCom was down 4.77 per cent. Reliance MediaWorks witnessed a slide of 8.45 per cent on BSE.

"ADAG stocks were under immense selling pressure, stocks like Reliance Power, Reliance Capital, Reliance Comm, Reliance Infra and Reliance Media works fell sharply," IIFL Research Head Amar Ambani said.

Clearly, market men did not buy the Mr Ambani's reassurances. “Markets are obviously driven by sentiments and perceptions. Whenever there is regulatory uncertainty, markets will react strongly. For sometime now, markets have been impatient and their first reaction was to offload these shares,” said Mr Jagannadham Thunuguntla, Head- Research, SMC Global Securities.

However, not all analysts are convinced that this could be termed as ‘panic selling'. “The ADAG companies had underperformed the index. They were over-leveraged and their debt-account books were very high. The real issue is of corporate governance for which the company was punished by the markets. It will be a while before the stocks come up. Also, there is a chance that these companies will be re-rated downwards,” said an analyst on conditions of anonymity.

Analysts are of the opinion that whatever damage was to be done, has already been done. “Now it all depends on how the group will get new funding from and at valuations, since most of these companies are capital intensive companies,” added Mr Thunuguntla.

In a consent order after market closed on Friday last week, Sebi said it has settled a probe into alleged violation of regulations for foreign investment and unfair trade practices by RNRL and R-Infra after the two companies offered to abstain from investing in secondary market till December 2012. The two companies through their directors have paid a total of Rs 50 crore as settlement charges.

As part of the settlement, Anil Ambani, Chairman of both the companies, and four other directors would also not invest in listed stocks till December 2011. However, they can invest in mutual funds, primary market, buybacks and open offers. Despite Anil's clarification yesterday that his group firms settled the Sebi probe voluntarily and his claim that the regulator has not imposed any ban on its own from participation in the capital market, the group stocks fell sharply.

Our Recommendation :

We bellieve there is another 10-15% likely dip in all the ADAG shares. The negative sentiments and corporate governance issues will keep the FIIs away. Look to buy the shares on sharp declines to buy and add to your portfolio. The entry level prices are the starting point for buying the shares in a staggered manner.

Reliance Infra - 650
Reliance Capital - 450
Reliance Media - 150
Reliance Comm - 125
Reliance Power - 100

Buy near the target levels above and hold for 12-18 months for a sharp upswing.

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