Budget 2009-10 has reopened the controversy over the definition of ‘mineral oil’, clarity on which will determine if Reliance Industries (RIL) and other exploration companies such as Niko Resources and Cairn India get to keep billions of dollars in profit.
While presenting the Budget on Monday, finance minister Pranab Mukherjee said ‘mineral oil’, the production of which is given a tax holiday for the first seven years, includes natural gas but only for the upcoming exploration rounds.
Bank of America-Merrill Lynch analysts Vidyadhar Ginde and Himanshu Bindal estimate the hit to RIL fair value of another Rs 275 a share (15% of current share price) if the company does not get tax holiday for gas production..
The impact on RIL’s FY10-FY11 earnings per share (EPS) would be another 12-13% without the tax holiday, Ginde and Bindal said in a note on Wednesday.
A year ago, in a case filed at the Gujarat High Court, the income tax department had challenged a local Income Tax Appellate Tribunal’s ruling that the term ‘mineral oil’ included natural gas. Finance ministry officials maintain that the case is sub-judice and a final decision is yet to be taken by the court.
Some on the street had expected the Budget to clarify if ‘mineral oil’ included gas for the fields already in production, such as RIL-Niko’s.
The Mukesh Ambani firm stands to lose thousands of crores in taxes if the ruling goes against Niko Resources, its 10% partner in the KG-6 basin. RIL-Niko has identified total gas resources of 11 trillion cubic feet (tcf) in the block, worth around $45 billion. These will be extracted over a period of 8-10 years, with peak production from the second to the eighth year. At current prices, the gas will generate profits of around Rs 15,000 crore for RIL.
Analysts also raised concerns over the increase in minimum alternate tax (MAT) levels for companies from 10% to 15%.
“The Budget also clarified that the seven-year income tax holiday under Section 80IB (9) will be block-wise and not field-wise as assumed by us. This means a Rs 25 per share cut in price objective (target price) of RIL. The MAT rate cut means further cut in (target price) to Rs 1,806 a share and 4-5% cut in FY10-FY11E earnings per share,” Merrill’s Ginde and Bindal.
Meanwhile, Ambit Capital on Tuesday said the beaten-down RIL is ripe for a technical bounceback.
Gaurav Mehta and Ashish Shroff of the brokerage said since June 12, while Reliance has come off by around 22%, Nifty is lower by just about 10%. “RIL, after witnessing weak rolls in June expiry, has hardly seen action in open interest despite severe price correction.
This is a clear sign that ... no fresh action on the short side is visible in the counter. Our statistical model indicates good levels to prefer long RIL over Nifty,” Mehta and Shroff said.
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