What Explains the Recent Rise in Reliance Naval’s Stock?

Some experts believe that the recent share price rise of the bruised Anil Ambani company is being driven by speculators, rather than an expectation of change in the company's fortunes.

New Delhi: The share price of Reliance Naval and Engineering Ltd, a company that is part of the Anil Dhirubai Ambani Group, has made a spectacular rise in the last two months, even though shipyard firm continues to post losses and face an acute cash crunch. 

The stock traded at Rs 7.25 today (November 26) on the National Stock Exchange, having closed at a low of 95 paise on September 9, 2019. 

Market reports estimate that the scrip advanced around 995% during that period, having hit a record low of 70 paise during trading hours on September 11.

Overall, however, the company’s shares are down nearly 45% so far this year – it traded at Rs 16.55 on December 14, 2018.

While the younger Ambani brother has hoped that a turnaround in his empire’s fortunes will come on the back of his bet on India’s defence industry, Reliance Naval has struggled to make the impact that its military and civilian aircraft ventures like Reliance Aerostructure have had.

The company has reported losses for over ten consecutive quarters, while consolidated gross debt stood at Rs 10,916.15 crore as of March 31, 2019. 

Also Read: Is Reliance Naval Engineering Sinking?

During FY’19, it reported aggregate revenue of about Rs 184.63 crore against Rs 413.84 crore in the previous year and incurred a loss of Rs 10,481.04 crore compared with a loss of Rs 956.08 crore in the previous year.

In April 2018, the company blamed a “downtrend in the shipbuilding globally” and took a gentle stab at the Make in India push for India’s defence sector, noting that the process of awarding government contracts “has been deferred in respect of many large orders for a variety of reasons”.

All of these factors put together, the company says, have resulted in “temporary financial constraints on the company, losses in the operations, erosion of net worth and calling back of loans by secured lenders”.

“The company is participating in several business opportunities both in and outside India. We are hopeful to get business in the coming years,” the company had said then as part of its quarterly results notification.

In its FY’19 annual report, the company reiterated that it was facing an acute cash crunch flow due to a lack of new orders and delays in existing ones. 

“The company is also facing several challenges which are impacting its operations. There is an acute cash flow crunch as the expected Debt Resolution is yet to be actualized. This is impacting the progress of the existing projects leading to extended timelines and thereby leading to erosion of confidence amongst clients,” the company said in its 2019 annual report. “This lack of new orders has led to the significant reduction in the company’s current level of operations as compared to its capacity.”

In 2018,  IDBI Bank had filed an application to take the company to the insolvency and bankruptcy courts.

Speculative moment in stock?

Equity experts and brokers, however, say the recent rise in share price is most likely being driven by market speculators rather than any major change of expectations regarding the company’s fortune.

“This could be a purely speculative move by certain market operators with a vested interest as there is no change in fundamentals of the company, which is reeling under various troubles,” Arun Kejriwal, director at KRIS, an investment advisory firm in Mumbai, told Bloomberg.

Also Read: Reliance Communications Lenders Reject Resignation of Anil Ambani, Four Directors

 “It is quite easy to create such triggers on shares as prices are too low.”

In September 2019, media reports indicated that Reliance Naval may be heading for bankruptcy as no new repayment plan has been submitted by the company after lenders led by IDBI Bank Ltd rejected an earlier offer in July 2019.