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Reliance Industries (RELI.BO) Rs853.50
Equity Research
Back to fundamentals for RIL after CAG report; PAC examines next
News
The report by the Comptroller and Auditor General of India (CAG) on the D-6
block of Reliance Industries (RIL) was tabled in the parliament on Sept 8. While
the report reiterated that RIL violated terms of its production sharing contract
(PSC) for D-6, it stopped short of questioning the validity of the increase in D-6
capex from US$2.4bn to US$8.8bn between 2004 and 2006. In addition, the
tone of the report seemed critical of the oil ministry and upstream regulator
(DGH) due to their oversight on issues such as high-value procurement by RIL
and non-confirmation with provision of relinquishing 25% of the contract area
of the block after each phase of exploration.
Analysis
We note that the report, although seemingly critical of RIL’s conduct, did
not question the higher capex in D-6, which we believe is a key controversy
in the project, but only questioned why its gas volume have dipped despite
the high capex. This reduces a major uncertainty for RIL, in our view.
Moreover, the report has led to divided views on the issue of noncompliance between RIL, the oil ministry, and the DGH, effectively
reducing some risk for RIL, in our view. While the report called for stringent
auditing of project costs, strict compliance with PSC terms, and review of
the capex recovery clause in the PSC being open to misuse, it did not
indicate any punitive measures for RIL. However, CAG has asked the oil
ministry to review some procurement contracts and determine if RIL
should have relinquished acreage under PSC.
Implications
The CAG report takes away one overhang on the stock in the near term, in
our view. The Public Accounts Committee (PAC) stated it will now look into
the report and decide on a future course of action. Going forward, we
believe RIL’s stock performance should return to fundamentals with a focus
on refining/chemical cycles, D-6 ramp-up, new drivers for growth, and
incremental returns from deploying surplus cash. Maintain Neutral rating;
our target price is unchanged.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries (RELI.BO) Rs853.50
Equity Research
Back to fundamentals for RIL after CAG report; PAC examines next
News
The report by the Comptroller and Auditor General of India (CAG) on the D-6
block of Reliance Industries (RIL) was tabled in the parliament on Sept 8. While
the report reiterated that RIL violated terms of its production sharing contract
(PSC) for D-6, it stopped short of questioning the validity of the increase in D-6
capex from US$2.4bn to US$8.8bn between 2004 and 2006. In addition, the
tone of the report seemed critical of the oil ministry and upstream regulator
(DGH) due to their oversight on issues such as high-value procurement by RIL
and non-confirmation with provision of relinquishing 25% of the contract area
of the block after each phase of exploration.
Analysis
We note that the report, although seemingly critical of RIL’s conduct, did
not question the higher capex in D-6, which we believe is a key controversy
in the project, but only questioned why its gas volume have dipped despite
the high capex. This reduces a major uncertainty for RIL, in our view.
Moreover, the report has led to divided views on the issue of noncompliance between RIL, the oil ministry, and the DGH, effectively
reducing some risk for RIL, in our view. While the report called for stringent
auditing of project costs, strict compliance with PSC terms, and review of
the capex recovery clause in the PSC being open to misuse, it did not
indicate any punitive measures for RIL. However, CAG has asked the oil
ministry to review some procurement contracts and determine if RIL
should have relinquished acreage under PSC.
Implications
The CAG report takes away one overhang on the stock in the near term, in
our view. The Public Accounts Committee (PAC) stated it will now look into
the report and decide on a future course of action. Going forward, we
believe RIL’s stock performance should return to fundamentals with a focus
on refining/chemical cycles, D-6 ramp-up, new drivers for growth, and
incremental returns from deploying surplus cash. Maintain Neutral rating;
our target price is unchanged.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
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