Mumbai: The Bombay High Court’s decision to lift the stay on the sale of gas produced from Reliance Industries’ KG D6 block is likely to double the company’s net profit in two years.

In its interim order on January 30, 2009, the court allowed the company to sell the gas produced at RIL’s largest field off India’s east coast at $4.2 per unit till the HC’s final order, which is due by the middle of next month.

Short of any compensation to Anil Ambani promoted Reliance Natural Resources (RNRL) or the state-owned National Thermal Power Corporation (NTPC), the decision will allow the company to generate incremental profits of around $3.2 billion (Rs 15,500 crore) per year by the end of the next calendar year.

This year, the company is expected to post a net profit of around Rs 15,000 crore from its current operations. It posted a
profit of Rs 11,733 crore for the nine months to December 2008.

“The market is yet to take in the impact of the decision,” said a stock analyst for a foreign bank who tracks RIL. The company’s stock fell 3% on the Bombay Stock Exchange the day after the court order. It closed at Rs 1307.50 on Wednesday.

For example, Deutsche Bank’s target for RIL’s FY11 net profit is just Rs 20,000 crore. Similarly, CLSA has put a target of around Rs 24,300 crore. However, most analyst reports value RIL’s D6 gas at $3.3 per unit.

RNRL and NTPC are both waging legal battles against RIL to get a combined 40 million metric standard cubic metres per day (mmscmd) of gas at $2.34 per unit, the price offered by RIL five years ago. This seems to have led most analysts to take a conservative view on RIL’s earnings and assume that out of the total production of 80 mmscmd, 40 mmscmd will go at $2.34 per unit and the remaining at $4.2 per unit, leading to a blended valuation of around $3.3 per unit.

If the gas is valued at $4.2, the company’s profit will exceed Rs 30,000 crore in two years.

“I think people are waiting for the final high court judgement,” added another stock analyst, again requesting anonymity owing to his firm’s policies.

However, the court, in the final days of the arguments, had said there was no question of RNRL taking physical delivery of its entitlement of 28 mmscmd before it set up its gas-based power plants. RNRL, too, in its sworn statements, said it would take at least three years to set up its plants. Thus, even if RNRL wins the case, RIL would be able to sell 68 mmscmd gas at $4.2 for at least three years, on the back of the interim order last week.

The remaining 12 mmscmd, demanded by NTPC at $2.34 per unit, would be available for RIL to sell at $4.2 till the RIL-NTPC case is resolved. However, even if RIL is forced to sell 12 mmscmd to NTPC at $2.34 per unit, it would still be able to earn close to $3 billion (Rs 14,600 crore) per year as tax-free profits.

Moreover, the gas reserves in the D6 block could also be much more than RIL’s estimates. According to its partner Niko Resource’s annual report for the year 2006, the total reserves in the block are 35 trillion cubic feet, over three times RIL’s estimate of 11 trillion cubic feet.

source: DnaIndia

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