Downside priced into RIL shares
Downside priced into RIL shares
While the court order on Monday will likely be contested in the Supreme Court, the likelihood that a large chunk of the company’s gas will be sold at a lower rate ($2.34/mBtu) has risen considerably.
Analysts estimates of what this means for Reliance investors (on a discounted cash flow basis) have varied. CNBC-TV18 reported that Kotak Securities Ltd’s estimate of the likely loss is Rs100 per Reliance share, while that of CLSA Research ranges between Rs165 and Rs225 per share. Angel Broking Ltd’s estimate ranges between Rs63 and Rs160 per share.
There is still no clarity on what stand the government will take, especially in terms of its profit sharing agreement with Reliance. The worst-case scenario, of course, would be if the company has to sell gas to RNRL and NTPC Ltd (half of its production) at the discounted rate, but pays royalty based on the government-approved rate of $4.20/mBtu. According to Angel Broking, this would result in a reduction of 53.6% in its valuation of the KG-D6 block. But, as pointed out earlier, the sharp fall in Reliance shares on Monday seems to have factored in most of this and there may be little downside regardless of what stand the government takes.
Thankfully for Reliance’s investors, the company has had exploration success at sites other than KG-D6, and its exploration and production portfolio now contributes to a large chunk of its total valuation. This part of the business also partly negates the cyclical nature of the refining and petrochemical businesses.
At a time when the outlook for the refining and petrochemical businesses is not that strong, the exploration and production segment is holding the company in good stead, although the court order on gas supply to RNRL has come as a dampener for Reliance investors.
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