Nomura Cuts RIL Rating to ‘Neutral’

Nomura Equity Research downgraded its rating on Reliance Industries (RIL) to 'neutral' from 'buy', citing a drop in refining margins and concerns over a decline in production from D6 of the company's KG basin — the company's only gas-producing block. 

"The KG-D6 declines continue, but no alignment is emerging to control and also bring new fields on line," said Nomura's analysts Anil Sharma and Ravi Adukia, who authored the report. "With RIL seeking arbitration (on the government's plan to limit cost recovery), theE&P impasse has exacerbated. The arbitration process could be long, and in the interim, new work may halt," they said. 
The broking firm cut its EPS estimates for Reliance by up to 17% over the next two financial years ending March 31 while slashing its price target on the stock to . 870 from . 1,060. Reliance shares fell 3% to . 755.45 on Friday, while the Sensex declined 1.7% 
Reliance Industries initiated arbitration proceedings against the government to ensure it is able to fully recover costs of developing the KG-D6 block, a recent company release said. Analysts said that an arbitration process would be an 'overhang' on the stock, which has fallen 29% so far in 2011 compared to the 21% drop in the Sensex. 
Nomura has trimmed its gross refining margins (GRM) — the difference between crude prices and value of petroleum products — estimate for Reliance by 15.8% in 2011-12 and by 12% in 2012-13. 
"With likely weak winter gasoline demand and low naphtha feedstock demand, margin weakness may continue for the entire winter," the Nomura analysts said.