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Setback to Reliance Industries in Gas Case

June 16, 2009

The Bombay High Court today gave its judgment on the RIL-RNRL dispute on KG gas and directed RIL to supply 28 mmscmd to RNRL for 17 years at a price of US$2.34/mmbtu. This is lower than the gas price realization of US$4.2/mmbtu as per our current estimates.

Following this decision, this E&P value could reduce to Rs544/share assuming that RIL begins its supply of 28mmscmd of gas FY11E onwards (which is clearly a worst-case scenario given ADAG’s non-readiness of power plants to intake gas). The FY11E EPS could decline to Rs151 in this case from our base case of Rs165. If 12 mmscmd gas to NTPC is also sold at US$2.3/mmbtu, then E&P valuation reduces to Rs465 and EPS to Rs145

Based on this judgment, we estimate that our NAV of RIL’s E&P business would be reduced to Rs467/share from Rs521 earlier. If gas to NTPC is also sold at lower prices, we estimate the NAV to drop to Rs452.

RIL is expected to report an EPS of Rs 136 for Fy10 and Rs 165 for FY11.

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