RIL- RNRL SPAT (ANGEL BROKING)

Risky proposition
A lot has been written, interpreted and analyzed about the spat between RIL and RNRL from
RIL’s perspective, while the RNRL angle has been given a miss. Here we once again focus on the RIL-RNRL imbroglio, but discuss and present an impact analysis for RNRL.

RNRL's business model
RNRL's main business is likely to be sourcing gas from RIL and supplying the same to the group’s gas-based power generation projects. That apart, the RNRL-led Consortium has also won 4 blocks under CBM-III and is the second largest player in terms of CBM acreage in India. It has an acreage of 3,251 sq km. The company has also won a block in Mizoram under the NELP-VI round. Applications have also been submitted to MoPNG and PNGRB for grant of authorisation to RNRL to set up a city gas distribution network in Mumbai, Delhi and in the National Capital Region (NCR). Currently, RNRL is engaged in coal supply for which it has entered into freight contracts for transportation of coal from Korba to the Dahanu Thermal power station.

Outcome of the RIL-RNRL spat - Critical to business model of RNRL
RNRL’s business model revolves around sourcing natural gas from RIL. RNRL has an
agreement with RIL for sourcing gas from the latter’s block in the KG-Basin. This is based on
the Gas Supply Master Agreement (GSMA). Thus, GSMA represents potentially all the
company's assets.

As RNRL is currently active only in one business area, viz. management of fuel services for
affiliate companies, outcome of the court ruling is likely to be the critical variable impacting its
stock price. Pending the outcome, we have carried out a scenario analysis to gauge the likely
impact of the outcome of the legal tussle on RNRL's stock price.

Scenario I - RNRL loses the court case
If the outcome is not in favour of RNRL, the stock could see a significant correction on the
bourses. We believe that the market is currently ascribing significant value to the RNRL stock
in anticipation of a positive outcome of the court case. This is visible from the premium valuation
the stock is fetching in terms of P/E and P/BV.

Scenario II - RNRL wins the court case
In the event of RNRL emerging victorious from the legal battle, the stock would react positively.
However, the stance on the Marketing Margins allowed to be charged as well as timing of the gas
flows would determine the stock price movement. We have arrived at four scenarios on this front. We have assumed the required rate of return from investment/discount rate at 14.0% for calculation of value of the company’s gas business.

Conclusion
As is apparent from the Scenario Analysis, RNRL's future is not only dependent on the outcome of the legal tussle with RIL, but also on uncertainties regarding matters such as the level of Marketing Margins allowed to be charged and likely compensation for opportunity loss (in event of winning the case), which would impact its Fair Value.

To see full report: RNRL