RIL: Positive surprise

The markets have given a thumbs-up to the Supreme Court ruling in the Reliance Industries Limited (RIL) – Reliance Natural Resources (RNRL) gas row. The stock has appreciated by over 4 per cent post the verdict to Rs 1,046 levels in noon deals.

The verdict, which directed both the companies to re-negotiate the terms of agreement within a period of six weeks, seems to be in contrast to the Bombay High court judgment given on 15th June 2009. It had earlier asked RIL to supply 28 mmscmd of gas from its KG-D6 wells at $2.34 for a period of 17 years from the commissioning of Reliance Power’s gas-based power plant.

“The verdict seems to be in favour of Reliance Industries as the Supreme Court has clearly stated that the gas belongs to the government and directed renegotiation the terms,” stated Divyesh Shah, CEO, Indiabulls Securities.

The Court has observed that the pricing of the gas should be within the guiding principles of the EGOM and Production Sharing Contract (PSC) will over-ride all other agreements.

“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 cash flows. We note that cash flows would be negatively impacted by $700 million per annum for selling 28mmscmd of gas at $2.34/mmbtu as against $4.2/mmbtu,” states Ambit Research.

RIL currently produces around 60mmscmd of gas from its KG-D6 well and a further scale up to 80 mmscmd depends on GAIL’s HVJ pipeline, which reports suggest, is not possible till October 2010. However, with uncertainty on the case outcome out of the way, analysts believe that company’s fundamentals would be back in focus that can trigger a further upmove in the counter.