The Supreme Court gave its much-awaited verdict on the Reliance Industries Ltd (RIL)-Reliance Natural Resources Ltd (RNRL) legal wrangle on 7 May. A three-judge bench passed a 2:1 judgement in favour of RIL. The court ruled that the family memorandum of understanding (MoU), under which RNRL claimed cheap gas, was not binding and that the government regulation overrides the MoU.
The court has given RIL and RNRL six weeks to renegotiate the gas supply agreement in line with government regulations. The verdict quashed the Bombay high court judgement given on 15 June, which had directed RIL to supply RNRL 28 million standard cu. m per day (mscmd) of gas at $2.34 per million British thermal unit (mmBtu) for 17 years, starting the commissioning of Reliance Power Ltd’s (RPL) gas-based power plant. We had factored in a hit of Rs50 per share for the RIL stock after the Bombay high court judgment.
Graphic: Yogesh Kumar / Mint
Pending more clarity regards the renegotiations, we maintain our target price of Rs1,260 on RIL. We expect more clarity over the next six weeks regarding the details of the renegotiation.
We view the court’s verdict as favourable for RIL, while it is a negative for RNRL and RPL. The judgement has lifted the overhang from the RIL stock.
However, we do not expect RIL’s near-term financial performance to get boosted by this verdict because even if RNRL had won, the gas supplies would have commenced only after FY13.
The judgement could result in an upside of Rs35 to our target price for RIL. After the high court judgement, we had reduced our target price for RIL by Rs50.
With this favourable outcome, the risks arising from the RIL-RNRL dispute have almost dissipated for the RIL stock, though the RIL-NTPC Ltd litigation (to supply 12 mscmd at $2.34 per mmBtu) will continue to negatively affect it, albeit marginally.
Moreover, the Bombay high court is likely to take up the RIL-NTPC matter in July.
We had earlier envisaged that RNRL’s future is not only dependent on the outcome of the legal tussle with RIL, but also on uncertainties regarding matters, such as the level of marketing margins allowed to be charged.
We had advised caution to investors given the lack of clarity on RNRL’s business model. We remain sceptical on the company’s growth plans and believe that the stock could witness significant downsides from its current levels. The stock is not rated by us.
As the apex court has ruled that the government has the ultimate rights in terms of pricing of the gas, there are some concerns expressed by certain sections of the market regarding the regulation of gas pricing in India by the government.
However, we believe given the fact that the Krishna-Godavari D6 gas price of $4.2 per mmBtu was evolved after working out a formula and through a market evaluation process, the government will continue to be friendly towards private investments in the exploration and production (E&P) segment in the country.
The judgement should accelerate the monetization plan of RIL’s E&P portfolio, which would be a positive trigger for its stock. After the verdict, we believe that the company’s focus should shift towards inorganic growth given the huge cash flow likely to be generated along with low debt-equity ratio.
Thus, we expect the company’s inorganic growth plans along with discovery and monetization of its upstream portfolio to keep it on the high-growth orbit going ahead.