Reliance Industries Ltd’s (RIL’s) shares have fallen by 22.5% since the Bombay high court’s judgement related to the company’s gas supply to Reliance Natural Resources Ltd (RNRL). And thanks to its 11.6% weight in the Nifty index, RIL has been largely instrumental in dragging down the market by 12% from its mid-June peak.
The company has had a large part to play in the 8% fall in the market after the Budget as well, with its shares having dropped by 10% owing to unfavourable tax proposals.
The major worry is on the availability of tax benefits on gas produced in the Krishna Godavari basin D6 Block. The street has been estimating that the tax holiday under section 80IB of the Income-tax Act will be applicable for D6 gas production. The budget, however, outlines that the benefit will be available for blocks licensed under Nelp-8. Unless the finance ministry comes out with a clarification that blocks licensed under earlier rounds would also qualify for the tax holiday, RIL’s tax burden will go up materially.
According to analysts at two institutional brokerages, the denial of 80IB for the company’s D6 gas production would mean that the company would come outside the purview of minimum alternate tax (MAT), as its taxable profit would be higher than book profit used to calculate MAT. If the 80IB tax incentive is made available, then MAT would apply, but even then the budget proposal of raising the MAT rate from 11.2% to 16.8% will hit RIL’s tax outgo. Either way, RIL will be hit. Of course, the company will be better off paying MAT, even at the increased rate, rather than pay higher than anticipated taxes on its D6 gas production. The uncertainty about the 80IB proposal has irked the markets more than the increase in the MAT rate.
The unfavourable high court judgement in the RNRL case had led to a downward revision in analysts’ valuation of the KG D6 Block. The 80IB proposal could now bring it down further. According to Citigroup Research: “In a worst case, if RIL’s D6 gas production is not eligible for tax benefits, D6 NAV could be impacted by (around) Rs 40-50.” NAV in this context is net asset value per share.
Soon after the high court judgement Citi’s oil and gas analysts had noted, “We estimate that our NAV of RIL’s E&P business would be reduced to Rs467/share from Rs521 earlier (a drop of Rs54). If gas to NTPC is also sold at lower prices, we estimate the NAV to drop to Rs452 (a drop of Rs69).”
While the final outcome of both the RNRL dispute and the 80IB issue is yet to be seen, the markets seem to have taken the view that Reliance has been dealt with two major blows in quick succession.
What’s more, this comes at a time when the outlook for the core refining and petrochemical business is still bleak. On the positive side, its exploration and production portfolio has been expanding and, according to Merrill Lynch, the company has large unexplored prospective acreage and therefore has a large reserve accretion potential. But again, much of this upside is captured in analysts’ valuation estimates of the E&P portfolio.
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