RIL: Cheaper gas a disappointment

Unless the ruling is overturned and RIL gets more for its gas, earnings will be lower than estimated earlier.

The Street had been expecting a more favourable verdict for Reliance Industries Ltd (RIL) in its case against RNRL, for the supply of gas to the latter.

However, according to the High Court ruling, RIL will now have to supply 28 million cubic metres (mmscmd) of gas to RNRL at $2.34 per unit rather than at $4.2 per unit as was widely anticipated. The stock came off by 7.5 per cent on Monday 2,180 with most industry watchers feeling that the oil and gas major may have to supply 12 mmscmd of gas to power generation firm NTPC too at the same price, although the agreement between RIL and the public sector firm, was an entirely different one.

Most analysts had factored in a selling price of $4.2 per unit for the 40 mmscmd in their earnings estimates and, post the court’s ruling, will need to revise these. While the company’s earnings may not be hit immediately because neither RNRL nor NTPC

May utilise the gas at least for another year till their power plants are constructed, the lower price realisation could shave off around Rs 20 from RIL’s earnings per share of an estimated Rs 170-172 in 2010-11. RIL, of course, has the option to appeal to the Supreme Court.

However, even after the correction in the share price, analysts believe the stock may not outperform the market in the near future because the outlook for refining margins isn’t too bright.

Analysts say gross refining margins could at best be in the region of $5-6 per barrel in the current year. Moreover, prospects for the petrochemicals business too aren’t expected to look up until next year, they point out.