CLSA sees RIL rebound on a tamer CAG report

Can it get any worse for the shares of Reliance Industries (RIL) or is the index heavyweight primed for a turnaround? 

The company has lost a trillion in market capitalisation so far in 2011 but brokerage CLSA Asia-Pacific Markets on Thursday stuck its neck out.

In a note to clients titled ‘Relief imminent’, analysts Somshankar Sinha and Vikash Jain gave a buy call based on the reply of upstream regulator Director General of Hydrocarbons to the Comptroller and Auditor General,  vindicating RIL’s  actions and ‘absolving it from alleged wrongdoing.” 

The CAG had in its draft report alleged that RIL indulged in gold plating of capital costs in developing the KG D6 field. 

The analysts expect the final CAG report to be “much milder,” which should be a trigger for the shares.

“The stock is now within 6% of our implied bear-case value. We have cut our target from Rs1,050 to Rs960 after resetting to lower downstream-peer multiples, but stress that the risk-reward is attractive,” the duo wrote on Thursday.

“On the controversial issue of non-relinquishment of parts of the block, DGH corrected CAG, stating that two dimension (2D) study covered the entire block and three-dimension (3D) seismic covered a large part to establish the possibility of continuous hydrocarbon presence, which warranted the postponement of relinquishment till further evaluation,” the report said.