>RELIANCE INDUSTRIES LIMITED (MERRILL LYNCH)

PO cut 2%; if no tax holiday on gas, another 15% downside

■ FY10-FY11 EPS cut by 4-5%, PO by 2%; retain Underperform
In the Indian budget the minimum alternate tax (MAT) rate including surcharges is increased to 17% from 11.3%. It was also clarified that 7-year income tax holiday under Section 80IB (9) would be block wise and not field wise as assumed by us. This meant Rs25/share cut in PO of Reliance Industries (RIL). The MAT rate cut means further cut in PO to Rs1,806/share and 4-5% cut in FY10-FY11E EPS. Uncertainty on whether RIL will get 7-year income tax holiday under Section 80IB (9) for its gas production continues. The hit to RIL’s PO would be another Rs275/share (15%) and to FY10-FY11E EPS if RIL does not eventually get tax holiday on gas production. We retain Underperform on RIL.

■ No tax holiday for gas output in worst case
A new provision has been inserted to allow 7-year income tax holiday for gas production from blocks allotted under NELP VIII (launched in April 2009 and to close in August 2009). Thus the tax holiday on gas production is prospective. Whether there would be tax holiday for gas produced from blocks allotted under NELP I-VII is still uncertain. This matter is being litigated in courts. The best case is eventual court ruling in ongoing litigation or fresh litigation decides whether gas produced from NELP I-VII gets tax holiday. Thus status quo continues. In the worst case gas produced from NELP I-VII would not get tax holiday.

■ Another 12-13% cut to EPS and 15% to PO in worst case
RIL started gas production from KG D6 block (NELP I) in April 2009. We estimate hit to RIL fair value of another Rs275/share (15% of current share price) if it does not get tax holiday for gas production. Hit to RIL's FY10E-FY11E EPS would be another 12-13% if it does not get tax holiday for gas production.

To see full report: RIL