Gas pricing nod: RIL spearheads mkt rally

Written by fe Bureau | Mumbai | Updated: Dec 21 2013, 10:47am hrs
The Reliance Industries (RIL) share spearheaded the gains of Indian benchmark indices on Friday, a day after the government allowed it to charge higher gas prices from April 2014. The RIL stock clocked in its biggest daily gain in nearly seven months as the uncertainty around its ability to increase gas prices was removed after a cabinet node to a gas pricing suggestion made by the Rangarajan committee.

After trading in green for most part of the trading session, the RIL share gained momentum towards the end of the market hours and closed at R893.65, up R39.10, or 4.6%, its highest gain since May 27, 2013. The stock closed at its highest level in six weeks as the trading volume on the BSE jumped more than 2.5 times to 1.75 lakh shares.

On Thursday, the Cabinet Committee of Economic Affairs (CCEA) allowed RIL to charge $8.4 per mmbtu compared to the current pricing of $4.2/ mmbtu for the gas it sells from its KG-D6 block starting April 2014. The decision implemented an earlier approval of the formula suggested by the Rangarajan Committee in December 2012. However, RIL has been asked to offer $135 million of bank guarantee every quarter for the incremental revenues until gas hoarding charges against the company are settled.

Market experts hailed the decision as a major policy boost for the Exploration and Production (E&P) sector and a key positive for RIL, which is under arbitration to counter the governments stand that non-drilling of committed wells led to a more than 80% fall in the output in the KG-D6 basket to about 45 mmscmd.

According to an analysis by Kotak Institutional Equities, gas pricing of $8 per mmbtu could lead to an EPS (earnings per share) of R67.4 for fiscal 2014-15 if the production from the flagship basin stayed at 15mmscmd.

In a research note, Macquarie securities observed that while the developments are positive for the overall gas E&P sector, RIL is the biggest beneficiary as the outcome removes an overhang slated on the production ramp-ups of about 15 mmscmd at the key D1-D3 fields of the KG-D6 block. The brokerage house has termed RIL as its top pick in the sector with an outperform rating and a one-year target price of Rs 1,110.

As per Goldman Sachs, which maintains a buy rating on the RIL stock with a 12-month target price of Rs 1,170, the gas pricing decision would allow the market to focus on the companys strong medium-term earnings growth prospects.

However, not all analysts seem enthused by the pricing decision as most earnings expectations for fiscal 2014-15 have started building in higher gas prices given that the pricing recommendation was approved by the Cabinet in June 2013. Also, they continue to remain cautious on the lower margins of companys downstream or refining operations. Notwithstanding the potential boost to the E&P segment valuation via higher-than-expected price increase (and, thus, the boost to the exploration option value), downstream capacity additions in next three years and the resultant earnings expansion over FY15-17E are key monitorables, said IDFC in a research note.