Gas price hike: RIL's EPS to go up by 7-8% says Jal Irani

With the Cabinet Committee for Economic Affairs (CCEA) approving the proposal to hike the natural gas price to USD 8.4 per mmbtu from April 1, 2014, Jal Irani, MD - Oil & Gas Research, Macquarie Group says the government could gain USD 69 billion from this hike. One may also see an investment of USD 100 billion in explorations, he adds.

While, ONGC and Oil India would be larger beneficiaries of this hike, Reliance Industries ' earnings per share (EPS) would also go up by 7-8% and that of ONGC and OIl India would be significantly higher. Also read: Gas price hike will get thumbs up from market: Prayesh Jain Below is the verbatim transcript of his interview on CNBC-TV18 Q: CCEA has approved the proposal to hike gas price hike by USD 8.4 per mmbtu and that the Rangarajan formula has been accepted for the next five years and of course there will be a quarterly revision of these prices, your first thoughts. A: I would say that this is very much in line with expectations. It doesn’t matter if it hasn’t happened instantly as long as it is reasonably.  USD 8.4 per mmbtu is a perfectly good price and from April 1 is perfectly good as well. As I had mentioned earlier USD 4 per mmbtu increase essentially enhances India's recoverable reserves by about 32 trillion cubic feet (tcf) which effectively doubles India's recoverable gas reserves. We expect that the governments take on  profit share, taxes, etc would be somewhere in the region of USD 69 billion. So, these are huge numbers. Q: Those are huge numbers and that could be the government's argument of trying to sell this idea because there has been stiff opposition from even within its own colleagues in the Cabinet on this particular decision. So, you are saying the profit to government could be as high as USD 69 billion? A: Yes that is correct. It doesn’t all happen overnight. It does require putting significant investments and in fact to attain this sort of numbers one needs to put in about USD 100 billion of investment there as well. USD 100 billion of investments does trigger capital expenditure fairly straight away and to that extent different parts of economy recovering ahead of enhanced gas production kicking in. Q: In terms of impact four companies like Reliance Industries, Oil and Natural Gas Corporation (ONGC) in the short-term as far as the EPS is concerned what would you anticipate? A: Reliance Industries’ EPS in FY15 would go up by about 7-8 percent. ONGC and Oil India, the sensitivity is a lot larger about 35-40 percent. However, I would suspect that part of that could get shaved-off by the government taking a bit of their share in the form subsidy which they rightfully also are justified to do so because on the nomination blocks, which is where nearly 100 percent of ONGC and Oil India's production comes from there is no profit share to the government. So, ONGC and Oil India will be the largest beneficiaries followed by Reliance.