THE loss of one-fourth of the market value of Reliance Natural Resources (RNRL) on Friday may not be the end yet, after an adverse Supreme Court ruling on its gas dispute with Reliance Industries (RIL).
The stock may be headed towards a bottomless pit given that it has no assured revenue stream and that whatever value it derived was on expectation of gas from RIL at a price lesser than what others were paying. The Anil Ambani-controlled company had always said that gas from RIL’s Krishna-Godavari basin will be the primary source of its value. RNRL’s market capitalisation, which never had any linkage with its earnings or asset base, is set to take a further hit.
“The gas supply contract with Reliance Industries is our company’s primary asset and contributes most of its value, affecting the very basis for its creation,” Anil Ambani had said. The Supreme Court on Friday said that RNRL cannot claim gas at a price lower than the government-set price, based on a secret MoU between Mukesh Ambani and Anil Ambani in 2005. Hence, in a way, the judgement has denied RNRL its mainstay. So, the current market capitalisation of Rs 8,370 crore is hard to justify even after a 25% fall in its market value. The current price-to-earnings multiple, or P/E, works out to 114.6 and price-to-book-value nearly five times. It is, therefore, no wonder that despite the stock being traded on the derivatives segment with high volumes, most brokerages don’t cover it.
RNRL was floated to source and supply fuels — natural gas or coal —to the power plants of the Anil Ambani Group companies, Reliance Power and Reliance Infrastructure. The company’s net profit for the 12 months ended December 2009 rose 3% to Rs 73 crore. Out of that, Rs 31.6 crore came from sale offtake in Reliance Cementation — a subsidiary, that is set up to build cement plants. RNRL has obtained four coal-bed-methane blocks and holds stake in an onshore oil block. It is conducting research on the three petroleum exploration licences it obtained in 2007. A wholly-owned subsidiary plans to lay a gas pipeline between Kakinada and Dadri and distribute gas in cities. All these projects are still in a nascent stage and it won’t be prudent to attach any value to them.
Another growing concern for the company, if it does not make meaningful progress in establishing its businesses, are its $300-million FCCBs due for conversion in around 18 months from now. In the absence of a business, the holders may not be eager to convert them. Even if it happens for some unknown reason, the equity dilution will be as high as 32% which will dilute whatever little earnings the company has. The conversion scheduled for October 2011 may lead to an issue of 52.6 crore shares. RNRL will not struggle to pay as it has Rs 1,550 crore of cash balance with another Rs 570 crore in mutual fund investments, some from the funds raised by issuing 12 crore equity shares and 29 crore warrants to promoters.
With the cornerstone pulled, it may not be long before the edifice collapses, unless a new one comes in place at the earliest, something which appears rather difficult in the near future.
The stock may be headed towards a bottomless pit given that it has no assured revenue stream and that whatever value it derived was on expectation of gas from RIL at a price lesser than what others were paying. The Anil Ambani-controlled company had always said that gas from RIL’s Krishna-Godavari basin will be the primary source of its value. RNRL’s market capitalisation, which never had any linkage with its earnings or asset base, is set to take a further hit.
“The gas supply contract with Reliance Industries is our company’s primary asset and contributes most of its value, affecting the very basis for its creation,” Anil Ambani had said. The Supreme Court on Friday said that RNRL cannot claim gas at a price lower than the government-set price, based on a secret MoU between Mukesh Ambani and Anil Ambani in 2005. Hence, in a way, the judgement has denied RNRL its mainstay. So, the current market capitalisation of Rs 8,370 crore is hard to justify even after a 25% fall in its market value. The current price-to-earnings multiple, or P/E, works out to 114.6 and price-to-book-value nearly five times. It is, therefore, no wonder that despite the stock being traded on the derivatives segment with high volumes, most brokerages don’t cover it.
RNRL was floated to source and supply fuels — natural gas or coal —to the power plants of the Anil Ambani Group companies, Reliance Power and Reliance Infrastructure. The company’s net profit for the 12 months ended December 2009 rose 3% to Rs 73 crore. Out of that, Rs 31.6 crore came from sale offtake in Reliance Cementation — a subsidiary, that is set up to build cement plants. RNRL has obtained four coal-bed-methane blocks and holds stake in an onshore oil block. It is conducting research on the three petroleum exploration licences it obtained in 2007. A wholly-owned subsidiary plans to lay a gas pipeline between Kakinada and Dadri and distribute gas in cities. All these projects are still in a nascent stage and it won’t be prudent to attach any value to them.
Another growing concern for the company, if it does not make meaningful progress in establishing its businesses, are its $300-million FCCBs due for conversion in around 18 months from now. In the absence of a business, the holders may not be eager to convert them. Even if it happens for some unknown reason, the equity dilution will be as high as 32% which will dilute whatever little earnings the company has. The conversion scheduled for October 2011 may lead to an issue of 52.6 crore shares. RNRL will not struggle to pay as it has Rs 1,550 crore of cash balance with another Rs 570 crore in mutual fund investments, some from the funds raised by issuing 12 crore equity shares and 29 crore warrants to promoters.
With the cornerstone pulled, it may not be long before the edifice collapses, unless a new one comes in place at the earliest, something which appears rather difficult in the near future.
No comments:
Post a Comment