Mumbai: Following the Supreme Court’s ruling upholding the government-fixed price for buying natural gas from Reliance Industries Ltd(RIL), analysts across the board are crunching numbers, reviewing their target prices and recommendations on RIL and Reliance Natural Resources Ltd, which found itself on the losing side of the legal battle.
Mint spoke with some of those analysts for their views on the verdict and its implications.
Analysts’ take on the verdict
“This is certainly a positive for RIL, negative for RNRL and for R-Power because it was depending on gas for its Dadri plant and it could have had the first right of refusal on 40% of all future discoveries by RIL. It should be negative for R-Infra too since it holds a 45% stake in R-Power,” said Deepak Pareek, sector analyst with Angel Broking Ltd, who estimates that the Friday ruling will drive up RIL shares by Rs30-Rs40 each.
“This brings clarity for RIL. It can plan better now and the management bandwidth can be fully focused on the exploration and production front now,” he said, adding that the verdict, by establishing government’s complete say over marketing of gas, could have a negative impact on future foreign investment in India’s oil and gas assets. “Companies may not be sure what sort of pricing will prevail at the end? So there is a risk in that sense.”
Another Mumbai-based analyst with a foreign brokerage who was “relieved” that the “huge sentimental overhang on RIL was finally over”, sees a 7% impact on its stock price.
But doubts remain, he said. “I’m not very clear what this renegotiation was all about? RIL in a previous earnings call had told us that they cannot deviate from government’s gas utilization policy and the users that were lined up. Even if RNRL agrees to buy at $4.2 per mBtu (million British thermal unit) how will it jump the queue?”
However, he dismissed the notion that entire memorandum of understanding (MoU) -- the elusive family pact that formed the basis of the de-merger of Reliance businesses in 2005 -- and all its terms such as the non-compete clause between the warring Ambani brothers, could be revoked. “This is not a judgment on the overall MoU. It is just on the gas part that was colliding with the provisions of the PSC (production sharing contract),” he explained.
A Mumbai-based analyst with a domestic brokerage disagreed that the verdict could adversely impact investment in Indian energy and hydrocarbon exploration sector. “I don’t see it as a blanket judgment. Cairn is allowed free pricing. It (ruling) has just voted against private agreements that are below the government price,” said this analyst.
Analysts’ take on RNRL
Most analysts are at sea on the future of RNRL that has so far traded on faith that it will one day get cheap gas from RIL -- a hope that is now all but dashed.
“RNRL was existing on this family pact. Now i don’t know what it will do unless ADAG (Anil Dhirubhai Ambani Group) finds another role for the company. It was always a bit of a black box,” said the analyst at the foreign brokerage mentioned earlier.
“If they get gas from RIL at $4.2 per mBtu, they can still make a marketing margin of $0.14 per mBtu, just as much as GAIL is making. This should mean a share price of Rs32 or so and that’s where it could settle at. They have some CBM (coal bed methane) blocks and some distribution business but without cheap gas (from RIL), there is no visibility on its future,” said Angel’s Pareek.