Within 24 hours of the brothers Ambani deciding on a ceasefire, the stock market and Reliance pundits are out with their calculators to figure out the financial implication of ending the non-compete terms five years in advance and the loss that Anil Ambani's Reliance Natural Resources Limited would incur post the Supreme Court verdict.
They say RIL will be paying RNRL a compensation of close to Rs 9,000 crore.
That's slightly higher than RNRL's market cap of Rs 8,908 crore by Monday's closing price of Rs 54.55 per share.
When the Reliance empire was split among the two brothers in June 2005 and the total value of the ADAG computed, it included the point that RNRL would receive 28 million standard cubic metres per day (mscmd) of natural gas from Reliance Industries Limited's D6 block off the Krishna Godavari basin at $2.34 per million British thermal unit (mBtu) for 17 years. This would translate into higher returns for its power business. Also, ADAG had the right of first refusal over 40 per cent of any new discovery by RIL.
That, say Reliance group sources, was an important tenet of the family MoU of 2005.
But now, after the Supreme Court verdict, RNRL's gas procurement bill for its quota of gas over 17 years has shot up by 79.5 per cent, as it will have to now shell out an additional $1.86 per mBtu for the gas.
A simple back of the envelope calculation based on this price differential and taking the dollar at its current level of 46.98 to the rupee would translate to a Rs 53,615-crore loss on RNRL over 17 years. Annually, it comes to Rs 3,154 crore.
When contacted by Business Standard, both ADAG and RIL spokespersons refused to comment on any possible compensation payout. Even CEOs of different group companies refused to speak on the subject, saying such information, if any, was in the private domain, but market experts have already put a figure to it.
Veteran Reliance watcher and independent investment consultant S P Tulsian told Business Standard: " It is gathered that, RIL will compensate RNRL to the tune of Rs 9,000 crore keeping in account the loss that RNRL will make for procuring the gas supply at a price higher than what it was supposed to get as part of the family MoU."
Tulsian goes on to explains: " For 28 mmscmd of gas at a differential of $1.86 per mBtu (Rs 45 dollar rate) for a period of 350 days, (remaining 10-15 days are the usual annual maintenance shutdown of plant) makes RNRL lose around Rs 3,300 crore. Considering the contract was for 17 years, with one year gone by and four years to create the capacity, RNRL has 12 years to earn the differential, which amounts to Rs 40,000 crore. The same is discounted at 18 per cent, the present value works to around Rs 9,000 crore."
Brokerage house KR Choksey agrees. "Compensation seems a likely scenario although both sides have not yet officially come out with any statement on the same," said Ketan Dalal, head institutional research at the firm. Infact, right after the Supreme Court verdict, the brokerage came up with a research report pointing to an acquisition of RNRL by RIL as one likely possibility in the future.
"Since, RNRL will buy gas at $4.2 per mBtu and will have to sell at the market price, which is $4.2 per mBtu, it does not make any business sense for RNRL. We believe RIL will most likely buy ADAG's 54.8 per cent stake in RNRL and then make an open offer for 20 per cent to the public. The interest of minority shareholder's of RNRL can be preserved by merging RNRL's business with RIL's gas distribution arm and/or the coal bed methane (CBM) business. The valuation of RNRL would be mainly based on the additional cash flows that RIL would generate as a result of the differential in the pricing," said the May 10 report.
This as per Dalal will not flout the new non compete agreement under which RIL has agreed to stay away from gas based power plants till March 31, 2022, as it would only mean a transfer of ownership. RNRL has ruled out such possibilities in media interactions post the judgment. RPower's CEO J P Chalasani has gone on record saying an ambitious expansion programme for RNRL is also in place with diversification into cement and shipping.
Hemant Sahai, Managing Partner, Hemant Sahai Associates-Advocates says, the relative valuation of the two groups was done while including the availability of gas at a certain price. The power business got valued based on that. Now the value has got eroded post the judgment. "So now either both sides will have to agree on a sum or agree on the principle of compensation and then get independent valuers to do the maths or else its back to the courts."
Sahai however, says its tough to put a figure yet but the different permutations and combinations are likely to be part of the ongoing negotiations between the two sides.
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