Bloomberg News

Reliance Options Near One-Year Low Before Earnings Report

July 19, 2012

The cost of options to protect against declines in Reliance Industries Ltd. (RIL) fell to near the lowest level in a year before India’s second-largest company reports earnings tomorrow amid speculation the shares already reflect a slowdown in profit growth.

Implied volatility, the key gauge of options prices, for 30-day contracts closest to the Reliance stock price, was 21.73 at 4:28 p.m. in Mumbai, down 45 percent from this year’s high of 39.74, data compiled by Bloomberg show. That’s close to the level of 21.70 reached on May 31, the lowest since June 2011.

Earnings for Reliance have missed analysts’ forecasts for the last six quarters. That helped reduce the valuation for the shares to 10.2 times profit in May, the lowest reading since March 2009, data compiled by Bloomberg show.

“The stock has been battered too much because of falling gas output and refining margins,” T.S. Harihar, co-head of institutional derivatives at ICICI Securities Ltd., said by telephone from Mumbai.

Reliance will report a net income of 43.85 billion rupees ($791 million) for the June quarter, compared with 56.6 billion a year earlier, according to the median estimate of 25 analysts surveyed by Bloomberg. That would be the most since the three months ended in December.

Reliance shares have risen 5 percent this year, lagging the 12 percent gain in the benchmark BSE India Sensitive Index, as the Mumbai-based company struggled to reverse a decline in natural-gas output from India’s biggest field. Output at the company’s KG-D6 deepwater block, which holds India’s largest reserves, slumped 14 percent last quarter to 35 million cubic meters a day, the company said in April.

Gas Production

Operating profit declined 5 percent to 228 billion rupees in the year ended March 31, the first drop since 2003, as gas production slid. Production peaked at about 60 million cubic meters a day in June 2010 and has declined since then because of technical difficulties, according to Reliance.

Oil-refining margins narrowed to $7.60 a barrel on average in the March quarter from $9.20 a year earlier. The company’s refining complex comprise two adjacent plants that can turn a total 1.24 million barrels into fuels daily. Crude-processing brought 70 percent of total revenue in the year ended March.

Reliance’s shares rose 1.7 percent to 727.8 rupees at the close in Mumbai, ending two days of losses. The stock has the second-highest weighting of 8.8 percent on the Sensex, which gained 0.6 percent.

The India VIX, which gauges the cost of buying protection against losses in the S&P CNX Nifty Index, slumped 6.1 percent to 16.4, the lowest level in almost two years. The measure has plunged 40 percent since May 23.

To contact the reporters on this story: Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net; Cecile Vannucci in Amsterdam at cvannucci1@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net


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