The Supreme Court verdict had a more material impact on the Reliance-Anil Dhirubhai Ambani Group (R-Adag) power companies than on the victorious Reliance Industries Ltd (RIL).
RIL’s share price was up by 3% compared with a 1.4% drop in the Nifty. But Reliance Power Ltd was down by 9%, Reliance Infrastructure Ltd by 7% and Reliance Natural Resources Ltd (RNRL) was hit the hardest, falling 24%. In the fortnight prior to the judgement, RNRL’s shares rose by about 8%. The markets appear to have been counting on a favourable judgement.
RIL gets a booster shot
RIL’s victory will allow it to sell gas at the government approved rate of $4.2 (Rs191.52) per million British thermal unit (mmBtu) instead of $2.34 per mmBtu. That will add to the overall earnings from its natural gas output. The judgement removes one key overhang for the stock, which has underperformed the market ever since the Bombay high court judgement last June.
RIL’s valuation is expected to improve only in the range of Rs25-30 per share, as per broker estimates, or about 2% of its current price. It’s interesting that after the adverse high court ruling, analysts had said that the negative impact on RIL shares would be between Rs50 and Rs100 per share (ex-bonus), if the company had to sell gas at the lower price of $2.34 per mmBtu. The upside now is said to be only about Rs25 per share, even though the assumption is that the gas will be sold at $4.2 per mmBtu.
Graphic: Paras Jain/Mint
The difference can be explained because of two major factors. Last year, analysts were assuming that gas supply to R-Adag’s Dadri plant would commence from FY12. It’s now assumed that the plant won’t begin operations before FY15 and hence the extent of impact would be relatively lower if the gas were sold at a lower price. Besides, last year it was not clear whether RIL would get a marketing margin on the gas it sold. But now it is clear that it would get a marketing margin, and this has increased the value of the gas block and simultaneously reduced the extent of the impact on the company if the gas were to be supplied at lower prices.
With this uncertainty out of the way, there is better earnings visibility for RIL. Now, the focus will shift to an improvement in its refining business outlook.
Power firms of R-Adag
RNRL was a special purpose vehicle for the gas supply arrangement between its affiliates and RIL. “Uncertainty in respect of the Gas Supply Agreement(s) with RIL may severely impact the Company’s entire operations and assets, and even leave the company with no business at all, which may seriously jeopardize, if not completely destroy, the interests of over 20 lakh Reliance shareholders, who have become shareholders of our company.” This risk factor, mentioned in the information memorandum document, is very real now. RNRL’s future is now dependent on the renegotiations between the two groups.
One of the key projects taken up by Reliance Power was the gas-based Dadri power project. Its power cost was very competitive since it was based on a gas price of $2.34 per mmBtu (excluding transportation and marketing margins). According to a report by a domestic brokerage, Reliance Power’s landed cost of fuel would go up to about $6.5 per mmBtu, assuming the base price of $4.2 per mmBtu. What impact that has on this project remains to be seen. According to analysts, compared with projects such as Sasan, the Dadri project offered higher returns and played a more crucial role in valuations. That may be the reason for the sharp fall in Reliance Power’s share price, despite Dadri being just one of the several projects in its approximately 30,000MW power project portfolio. On the positive side, its other projects are in various stages of completion and it has adequate cash, about Rs9,400 crore.
Reliance Infra has been hit because it owns a 45% stake in Reliance Power. But the firm also has its own power and infrastructure business, which are unaffected by this development.
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