Tuesday, June 16, 2009


Quick Comment – What’s new: In the RIL-RNRL case, the Mumbai High Court has given a judgment upholding the plea of RNRL on getting assured gas supplies from RIL at US$2.34/mmbtu. The court has also asked the two counter parties to come up with an agreement over supplies within a month, based on Bloomberg.

What could happen? We believe this decision will be
challenged at the Supreme Court. RIL is already producing close to 25 mmscmd of gas and contracted to 37 mmscmd of customers and selling to power plants as well as fertilizer plants at US$4.2/mmbtu. Some of the power plants include ADAG group (Samalkot plant in Andhra Pradesh) and we believe these agreements will
not be hampered though there is clause in the agreements which suggests the deal is subject to court approval of the RIL-RNRL case.

Our utility team believes that RNRL or its affiliate
companies will take close to at least 2 years to build a power plant (gas based); similar for NTPC’s expansion plans in Gandhar and Kavas. Hence, in our earnings we have assumed US$4.2/mmbtu for RIL’s gas F2010 and F2011. Thereafter we have assumed US$2.52/mmbtu (average of US$2.34 to be sold to RNRL and US$2.7 to be sold to NTPC) for 40 mmscmd of gas which would go to RNRL and NTPC in our earnings; so the current judgment makes no impact to our earnings even if this does go to the supreme court and it gives the same judgment. The quantum of revenue impact due to lower
gas price equates a US$1bn a year effective F2012.

We would use any volatility in the stock to enter RIL –
which has outperformed SENSEX by 23% YTD. Our understanding is RNRL cannot use the gas to trade and has to be the consumer of the gas (or its affiliate company) and hence the two year assumption in our earnings is real. However if the supreme court rules for a higher gas price of US$4.2/mmbtu for the NTPC/RNRL gas we would
have to raise our earnings by 15-20% and target price by approximately Rs380/share in the long term, all else equal.

To see full report: RIL-RNRL