RNRL case win to benefit Rel Power too: Tulsian

The Bombay High Court ruled in favour of Reliance Natural Resources Limited in its battle against Reliance Industries . The High Court has upheld the maintainability of RNRL’s plea and said that RNRL would get an assured supply of 28 million cubic meters of gas from Reliance Industries at USD 2.34 per mmbtu.

Commenting on the verdict, SP Tulsian of sptulsian.com said that the judgment would lead to Reliance Industries to suffer losses to the tune of Rs 3,600 crore. Tulsian however said he did not expect RNRL to be allowed to trade in the interim period till the Dadri project was created and added that more than RNRL, Reliance Power would benefit. "There would be increased profitability for Reliance Power but that is obviously once the power projects goes on stream."

Here is a verbatim transcript of the exclusive interview with SP Tulsian on CNBC-TV18. Also watch the accompanying video.

Q: Is the price damage on Reliance done because some brokerages have a more bearish target of close to Rs 250 getting shaved off the current market price of Reliance?

A: I don’t agree with that view because if you factor in news which has come in today, hypothetically if I say maybe tomorrow or one week down the line if we a have an announcement from Reliance Industries that they are moving an appeal to the Supreme Court, which is expected so on that day you may see a recovery of Rs 50-100.

So, on net basis if you want to take call damage, it should not be and cannot be or is not likely to be more than Rs 150. So this will more swing on the news base for the next one week or so. Obviously, the statement will come from the company at any point of time because they are not going to leave it at that point accepting this outcome as the final judgement.

So, one should not give too much credence to all this report saying that Rs 250 is the erosion in the value of Reliance Industries. Definitely, as we have discussed in terms of the erosion of the earning per share (EPS) after deducting the tax liability could be anywhere between Rs 18-19. It is simple arithmetic calculation, calculating the quantity with USD 1.86 per mmbtu then you work out the profit or less realisation from the supply agreement.

Q: Can RNRL legally trade the gas which it gets at that price and if yes, what margin could they get from such trading?
A: Again this is a folly on part of the market that as you said cannot trade. When the separation or settlement happened between the brothers in June 2005 there was no company in existence, no plans crystallized with the ADAG Group in which the power generation capacity could get created but the group wanted to secure the right on the Krishna-Godavari (K-G) basin gas to be procured or to be produced by Reliance Industries Ltd. At that time, this shell company or this front was created and now eventually even if I take this as a final judgement, RNRL is not going to supply the gas at RPower at USD 4.20 per mmbtu or maybe at the market price which is ruling presently at USD 5 per mmbtu. If I take the Panna-Mukta-Tapti Gas rate that will not be the profit which we will ultimately see in RNRL, maybe a margin of about 10-15 cents could accrue to RNRL and that will eventually drive the profitability.  Because ultimately the manufacturing operations or the business of its own has to come in RNRL which has been announced by them that they are setting up a cement plant going for coal bed methane, going for oil exploration blocks etc and that will ultimately  give the price target or direction to the share price.

Q: What happens in the interim which is what I want to know? If they cannot use the gas today and they cannot trade between now and when operationally any facilities come up for utilization of this gas, is there some kind of take or pay arrangement from Reliance where if they do not take it, they pay. What happens to the interim few years where the gas cannot be productively used by RNRL?
A: Taking the practical time schedule or time frame for creating the capacity at Dadri, which in my view should at least take four years time and we know that the life of K-G basin is 17 years. Even Mukul Rohatgi (RNRL Counsel) said he has to read the operative part or reference of that coming into the judegement but even if one applies common sense, there won’t be a take or pay for this interim period by RNRL to RIL because obviously they cannot get penalized for that kind of quantity.

Coming to whether they will be allowed to go for trading, selling to the third party right, that again is totally ruled out.

Lastly, if I presume that RPower have been setting up 4,000 MW plant in Shahpur near Maharashtra and they make a plea that this gas should be allowed or should be permitted to be used that for the Shahpur plant, which is quite possible or likely. So, there has to be a lull for this interim period of 3-4 years till sizeable capacity of power generation is made by RPower.

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