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RIL Vs RNRL verdict – Implications

May 7, 2010

We believe that the verdict gives a tacit indication for selling of the gas at $4.2/mmbtu. The verdict was in contrast to the Bombay High court judgment given on 15th June ’09, which directed RIL to supply 28mmscmd of gas at $2.34 for a period of 17 years from the commissioning of RPower’s gas based power plant.

What does this mean for RIL?
As far as financial implications of the verdict are concerned, RIL would continue to sell KG-D6 gas at government approved price of $4.2/mmbtu, implying no impact on cashflows. We note that cash flows would be negatively impacted by $700mn annually for selling 28mmscmd of gas at $2.34/mmbtu viz. a viz. $4.2/mmbtu.

We believe this verdict implies a potential upside of Rs25/share for RIL. Given that there is clarity on gas volume usage and allocation, we believe, RIL is now in a better position to optimize gas output, manage its reservoir and reduce D-6 costs, in our view.

More views on Reliance Industries Ltd:
BOFA-Merrill – Raise Price Target by 9% on favorable court ruling to Rs 972. Retain UNDERPERFORM Rating on the Stock.
HSBC – Continues to use DCF to value the E&P segment and a forward PE multiple of 14x for the refining and petrochemical segment. Reiterate INR1,186 target price with Neutral Rating
JP Morgan – Price Target of Rs 1,150

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