RELIANCE INDUSTRIES LTD. – Downside Limited…..Court Verdict to decide Upside Potential
RIL’s ongoing litigation with RNRL and NTPC for supply of 40 mmscmd volumes of gas at US$2.34/mmbtu could have a major impact on its valuation. The worst-case scenario for RIL would be if it would have to supply RNRL gas at a price of US$2.34/mmbtu and also the Government will continue to charge its levies at the price of $4.2/mmbtu, which would be a double blow on the earnings of RIL. This would have a negative impact of around 5-8% on RIL’s FY12 EPS. The stock has corrected significantly (more than Rs. 100/share) post the speculation over the outcome of the case. We thus believe the market participants have already priced in the negative outcome and any correction beyond the current level offers a strong investment opportunity.
If the Court verdict goes in favor of RIL, we give the Company a 1 year price target of Rs.1190/share. Any verdict against RIL, will make our target price reduced by 10% to Rs.1070/share. However, we feel, at a range of Rs.960-980, the stock offers a perfect long term buy.
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