>End game for the RIL-RNRL saga in sight? Revisiting the scenarios

■ Court case outcome likely expected in next few days

According to Reuters, the final verdict on the Reliance Industries (RIL) vs. Reliance Natural Resources (RNRL, not covered) gas dispute is expected in the next few days, prompting us to revisit the possible scenarios and their impact on RIL, RNRL, as well as Reliance Power (RPWL) and Reliance Infrastructure (RELI). We have currently built in a midpoint gas price of US$3.27 for the gas supply from RIL to RNRL from FY12E onward as our base case and have assumed that the government would extract its share of D-6 revenues at its directed gas price of US$4.2/mmBtu from RIL.

■ Favorable result for RIL – anything better than previous judgment While we have assumed a midpoint price of the disputed gas volumes, recent stock movements suggest the Street is largely pricing in a repeat of the previous court judgment, in which RIL was asked to start selling gas immediately at US$2.34/mmBtu. Therefore, 1) not having to supply gas to RNRL, or 2) at a gas price of US$4.2/mmBtu, or 3) supply cheap gas only upon completion of RPWL’s power plants would all be positive for the stock, in our view. Gas price of US$4.2/mmBtu implies upside of Rs17/sh for RIL’s D-6 valuations. Assuming no gas supplies to RNRL and hence to RPWL’s gasbased plants, we estimate RPWL to have downside of about 50% from current market price. Though RELI would be indirectly impacted owing to its 45% stake in RPWL, we believe this is already reflected in RELI’s share price.

■ Favorable result for RNRL – immediate gas as at US$2.34/mmBtu: Assuming RNRL wins a direct verdict and RIL has to start supplying gas to it immediately at US$2.34/mmBtu, we estimate a negative impact of Rs40/sh to RIL – D-6 valuation impact of Rs20/sh and E&P exploration impact of Rs20/sh. We estimate RIL’s FY11 EPS would decline by 7.5%. For RPWL, we estimate upside of 16% vs. 38% for RELI from current levels, as we believe some benefit of cheap gas is already reflected in RPWL’s share price. However, a verdict in RNRL’s favor would create uncertainty over RIL’s existing gas sales agreements with power companies like NTPC, Lanco Infratech, GVK and GMR.

■ Buy RIL (on CL) and RELI, Sell RPWL for potential court outcome

With market’s low expectation on positive outcome for RIL, we think the stock would benefit from removal of court case overhang. We continue to prefer RELI over RPWL given its infrastructure/power exposure and inexpensive valuations.

To read the full report: RIL-RNRL