>RELIANCE INDUSTRIES (ICICI SECURITIES)

GASPING FOR AIR

The Bombay High Court has asked Reliance Industries (RIL) to sell 28mmscmd gas to Reliance Natural Resources (RNRL) at US$2.34/mmbtu, 44% lower price than the fixed price by the Government. The Court has also ordered the two parties to explore a fresh agreement within a month for gas sale from RILcontrolled Krishna-Godavari (KG) basin to RNRL. But it is unclear if RIL will start supply of gas to RNRL immediately given that the latter’s Dadri power plant is non functional; It is also not clear as to who would get marketing margins on the sale of the gas. In this context, the Government stand on profit sharing is the key variable. Based on these changes, revival in the global economy and utilisation of KG Gas in Jamnagar refinery, we revise RIL’s fair value to Rs1,756/share. Future E&P finds in KG-D3, D4, D9, NEC-25, GS-offshore and Cambay Basin could add further value. Maintain HOLD.

■ Big boost to RNRL. The favourable decision will be a boost for Anil Dhirubhai Ambani Group led by Mr Anil Ambani as supply assurance and gas pricing would allow the company to start the Dadri project, which was delayed due to the ongoing court case. Though Reliance Power may have to find additional funding source for the Dadri project, we believe investors and debtors might find the project alluring given the attractive gas pricing and supply assurance.

■ Negative for RIL; Government stand, the key variable. The Bombay High Court decision is a huge negative for RIL – the stock sharply fell today. RIL will be affected Rs39-171/share (under various scenarios) by the decision. And, the Government stand on profit sharing is the key variable. Though we have assumed that the Government will calculate its share at the actual selling price, but as per the production sharing contract the Government could choose the higher of the market determined selling price or the actual effective sale price; this would be another blow for RIL shareholders.

■ Fair value at Rs1,756. We value RIL’s extant business, including Reliance Petroleum (RPL) refinery at Rs1,020/share, retail at Rs36/share, gas marketing at Rs42/share, E&P at Rs798/share and special economic zone at Rs9/share. As the current market price is 24% above our fair value, we advice profit booking at current levels. Though our fair value is 19% below the market price, we maintain HOLD as regional peers are trading at a premium to valuations ascribed by us to RIL and the exposure to quality E&P asset portfolio would provide further upside.

To see full report: RIL