>RIL-RNRL case: RIL gains ground

■ Supreme Court decision in favor of RIL in the ratio 2:1
Today, the Supreme Court of India ruled in favor of Reliance Industries (RIL) in the 2:1 ratio, in the RIL-RNRL (Reliance Natural Resources) case. Chief Justice and Judge Sathasivam has favoured RIL, while Judge Reddy expressed dissent to the other two judges. Following is the summary of the court decision:
• MoU is not legally binding as it does not fall under the corporate domain. Production Sharing Contract (PSC) and Gas Utilisation Policy (GUP) override any other contractual agreements.

• The government has the power to determine both valuation and price of gas. It also states that EGOM has set the price of gas, which must be followed.

• Directs RIL and RNRL to renegotiate within six weeks and finalise contract in eight weeks, keeping in mind: (a) the terms of PSC; (b) GUP; (c) EGOM decision on pricing; and (d) the family MoU as reference.

■ Our take: Pricing may be at USD 4.2/mmbtu; quantum not known
We always understood that the PSC provided marketing freedom for hydrocarbons. But the court directive indicates marketing freedom subject to Government of India (GoI) approval/PSC for price, quantum, and tenure. While the court has directed a negotiation between RIL and RNRL, it has also asked them to follow PSC, GUP, and EGOM decision. This may leave little room for flexibility on pricing beyond the EGOM rate. Hence, it is likely that RNRL may contract gas at USD 4.2/mmbtu. Gas allocation to the power sector will continue to get priority in line with GUP. Quantum of gas supply to RNRL is unclear and may be negotiated. If 40 mmscmd gas is supplied to RNRL and NTPC, then: (1) It will not leave incremental gas from domestic fields; (2) this will create shortage of natural gas; and (3) increases LNG demand in India; may increase
gas demand from Petronet LNG.

■ Outlook and valuations: Verdict positive; upgrade to ‘BUY’
The court verdict has no impact on our estimates and we maintain SOTP at INR 1,197/share. Risks are lower pricing on the RIL-NTPC case. At CMP of INR 1,033, RIL is trading at 14.7x FY11E and 11.5x FY12E our consolidated estimates. We upgrade stock to a ‘BUY’, as overhang may be over and on positive E&P/refining outlook. We rate it ‘SO’ on relative return basis.

To read the full report: RIL - RNRL