>RELIANCE INDUSTRIES (MACQUARIE RESEARCH)

Gas dispute: Big picture perspective

Event
■ Notwithstanding the recent High Court judgement ruling in favour of RNRL, we believe the gas dispute is not over. Press reports suggest that the government believes that gas is a national asset and it may intervene in the dispute. Also, RIL has stated that it shall appeal in the Supreme Court. In our detailed series on the gas dispute, we discuss longer-term implications for
India's upstream potential in addition to potential consumers. Maintain OP.

Impact
■ Significant impact on value if worst-case materialises: The High Court ruling suggests that RIL should not only supply RNRL gas at US$2.3/mmBtu as opposed to the government approved price of US$4.2/mmBtu, but RIL should also compensate the government for the difference. Our base case assumption factors in the former which has an NPV implication of Rs39/sh for RIL. Nevertheless, if the latter worst case scenario materialises there will be significant impact of additional Rs148/sh on RIL's value. This is despite RIL’s lifting cost being very low. We believe the Rs184/sh fall in share price on the day of the judgement entirely factors in the impact of both.

■ Need for close coordination to exploit massive upstream potential. Our recent Oil Yatra (Tour) "Next Generation opportunity authenticated" India's massive upstream potential. The proposed oil & gas production from just ~4% of RIL’s KG-D6 block and Cairn’s Rajasthan block shall add 0.5% to global and equal 1/4th of Brazil or Gulf of Mexico current production. We estimate that this could add US$20bn to India's GDP, cut India's oil imports by 23% and add US$59bn NPV in government profit share and taxes. Yet this is the tip of the iceberg. Our Yatra finding suggests massive biogenic corridors not only in the rest of KG-D6, but across the east coast. We believe future contracts need to be closely coordinated between the buyers, sellers and the government otherwise misalignments such as the current one may dissuade future exploration and exploitation of India's mammoth upstream potential.

■ Core consumer sectors at risk: Currently, the power sector consumes 39% and fertilisers consume 32% of the gas produced in India. From the first 40mmscmd, the government has also allocated four-fifths to existing facilities from these two sectors (Figure 27). Moreover, latent demand suggests that the entire proposed 80mmscmd KG-D6 production would be consumed by existing facilities (Figure 21). A 40mmscmd reservation for ADA Group’s and NTPC's proposed new power facilities and an option for RNRL to source 40% additional volumes above 40mmscmd may leave little for existing facilities. We believe GMRI, LANCI, NFCL, CHMB and RCF are at risk.

Earnings and target price revision
■ No change.

Price catalyst
■ 12-month price target: Rs2,405.00 based on a Sum of Parts methodology.
■ Catalyst: New oil and gas finds and enhanced clarity on organised retail.

Action and recommendation
■ We estimate RIL’s profits, under our base case assumptions, to rise 50% in FY10E purely from volume growth, despite an assumed cyclical downturn.

To see full report: RIL