Daily Brief Energy/Materials: Sam A Aluminum, Gold, Reliance Industries, Vedanta Resources and more

• KRX has amended the stock selection methodology for the KOSPI2 INDEX and KOSDQ150 INDEX and added ‘Expert Judgement’ as a criteria.
• The qualitative and quantitative criteria and the detailed filtering standards will be described in the manual but will NOT be publicly disclosed.
• There is no change from using full market cap to free float market cap in stock selection, so the stocks that could be added/deleted will be broadly same as forecasts.

• Rising geopolitical tensions have driven gold prices 9% higher over the last 2 weeks. Risk of escalation provides further upside to gold prices. 
• Gold is trading at a key psychological price level of $2,000/oz with a bullish momentum. Previous rallies were rejected from the price level of $2,100/oz.
• Consumption is expected to rise in India and China due to higher seasonal consumption in India and fading domestic premium in China. But, higher prices remain a drag.

We view Reliance Industries (RIL) as “Low Risk” on the LARA scale. This is driven by the company’s: [1] large scale, leading position and diversified business portfolio; [2] strong track record of execution; as well as [3] modest credit metrics (Net Debt/EBITDA of c. 1x) and sound liquidity. There is a strong diversification effect from RIL’s three key segments (Oil to Chemicals, Digital Services and Retail), each of which is a market leader. The company raised substantial capital in FY 2020-21, FY 2021-22 and FY 2022-23 from partial stake sales of its key segments at very high valuations, resulting in a strong cash position.This will help RIL to grow and fund the persistent negative FCF. The key credit constraint is India’s rating, as the company is already rated one notch higher than the sovereign.

Our Credit Bias on RIL is “Stable”, as the company’s strong fundamentals and positive momentum in operations should partially offset the weaker outlook on India’s sovereign rating.

Controversies are “Immaterial”. While RIL is subject to controversies and lawsuits (given that it is one of the largest conglomerates in India), the disputes are mainly commercial in nature instead of ESG-related. A former director of Dhirubhai Ambani Hospital reported various instances of financial irregularities, mismanagement and corporate governance failures at the hospital. RIL and Chairman Ambani were fined in 2007 for alleged manipulative trading in shares of related companies. RIL operates in the oil & gas industry, which is subject to scrutiny from environmental agencies, given the effects of fossil-fuel drilling on greenhouse gas (GHG) emissions and biodiversity in particular (the company has not reported any such incidents). There is also global pressure to move towards greener energy and reduce GHG emissions. RIL is focused on building a gas-based portfolio, which is cleaner than oil. We deem the ESG Impact on Credit as “Neutral”.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• Vedanta Resources