WHEN the government trains its guns on a corporate heavyweight, it's normal to expect outrage from the corner office and chaos on the stock exchange. Yet, in contrast to its customary overreaction, the market appeared to be barely stifling a yawn when rumours first surfaced on Thursday that the Central Bureau of Investigation had raided Reliance's offices across the country.
The Reliance share price barely moved. On both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), the share price fell by less than 2 per cent, to Rs 119.60 and Rs 119.50, respectively. However, volumes nearly tripled on the NSE, to 18.9 million shares, while they more than doubled on the BSE, to 12.7 million shares. This was a sign of the intensified speculation in the stock once the market had heard about the raids—some operators were keen to short-sell the stock, while others rushed in to support the price.
Analysts downplay the effect of the raids on the share price performance. "It will have no effect. The market has already factored this sort of bad news about Reliance into its share price," said a Mumbai-based fund manager for a European institutional equity investor.
The market's apparent imperturbability has a lot to do with the behaviour of the Reliance stock. In recent years, the Reliance share price hasn't always closely moved with the company's performance. It has instead been influenced much more strongly by the prevailing sentiment in the market. That's why, for example, most of the big trades in Reliance are from speculators playing off the short-term momentum in the stock, often cashing in their gains within days or even hours. These short-term movements have virtually nothing to do with the performance and prospects of the company; they have much more to do with the market's mood and with demand and supply for the stock.
Aggressive expansions have made the company India's biggest private sector firm, with a total income of Rs 13,740 crore in 1997-98 (at Rs 1,653 crore, it also makes the biggest profits). But analysts aren't exactly impressed. They reckon the global petrochemicals industry is about two years away from a recovery. And Reliance, which has been expanding essentially on volume growth rather than on better realisations, may see its profitability slipping as a result. Meanwhile, institutional investors have preferred to park their funds elsewhere.
In any case, neither the GDR market nor the domestic equity market is expected to react dramatically to the raids and their aftermath because market pros think a lot of the potential bad news in the stock was captured earlier: in a free fall from Rs 200 in April to Rs 100 in October.
Analysts also reckon this 50 per cent plunge in share prices drove out many of the more twitchy players in Reliance stock. The stock, which used to represent about 14 per cent of the market capitalisation of the benchmark BSE Sensitive Index, now accounts for only around 7 per cent, thanks to the fall in share price, as well as to the fact that ascendant Sensex heavyweights like Hindustan Lever and ITC have taken over Reliance's role of market bellwether. And add to this the fact that several FIIs have seen their strategy come undone in the face of this stock's savage speculative swings, and it becomes clear why Reliance is no longer a core holding for FIIs.
Moreover, the market may also believe that the Reliance group's legendary ability to wriggle out of potentially embarrassing situations with minimum damage to its functioning will come to its rescue yet again. "Once all the noise has died down, you could even find that the CBI has not found adequate evidence to take action," thinks one petrochemicals research analyst at an FII.
From an investor's perspective, it ultimately seems to matter little whether or not the stockmarket thinks the Ambanis are too canny to be caught hobnobbing with likes of Dawood Ibrahim and his henchmen. Some speculators may read these signals wrong and get burned, while the impact of the raids on the company's long-term investment prospects will probably be minor, if at all.
