RIL’s net penalty impact at $1.15bn, say analysts

Citi, HSBC say amount seems to be excessive

The Mukesh Ambani-led Reliance Industries (RIL) might have to shell out $1.15 billion as net value of the $1.55 billion penalty that the government imposed on it on Friday.

“The $1.55 billion imposed by the government is admittedly a gross number, which should be $1.15 billion net to RIL, in our view,” said Saurabh Handa, analyst with Citi Research in a November 6 report.

The government slapped the penalty on RIL for drawing Oil and Natural Gas Corporation’s share of natural gas in the Krishna-Godavari basin. The letter was sent to RIL on Thursday to pay the penalty amount.

RIL in its media statement issued on Friday said it would issue an arbitration notice to the government. The company said it would invoke the dispute resolution mechanism in the production-sharing contract. “RIL remains convinced of being able to fully justify and vindicate its position that the government’s claim is not sustainable. The contractor’s liability has not been established by any process known to law and the quantification of the purported claim is without any basis and arbitrary,” it said.

The $1.55-billion (~10,338 crore) penalty is also higher than the annual oil& gas segment revenue of the company. Besides, it would erode nearly one-third of the profit of ~27,630 crore which RIL made in 2015-16.

The Citi analyst in his report further said the penalty almost equals the total revenues earned from the sale of these gas volumes without allowing operating expenditure and capital expenditure to be deducted. “Even without getting into the merits and justification of the government’s action, the calculation itself in our view appears flawed and the resultant penalty appears grossly exaggerated,” the report said. The brokerage had earlier estimated the penalty at $0.25 billion.

Kumar Anish, analyst with HSBC Global Research, in his November 7 report said the penalty lacked commercial, technical and contractual justification. “The KG-D6 consortium has just about managed to achieve a payback of its expenditure in FY16 – 15 years after the first expenditure and seven years after first revenue from the KG-D6 block. Taking the time value of money into account, the present value of all expenditure exceeds the present value of all revenue from the block,” he said. “Therefore, no case of a windfall gain can be made out, in our view. In fact, there is no profit from the block in present value terms, either,” he added.

Even while the two foreign brokerage firms termed the penalty to be on the higher side, various other analysts expect the company to be able to absorb it. Analysts expect the penalty to be legally contested further, leaving less room for any immediate impact. In the long run, they said, $1.55 billion worth of penalty might not hit RIL hard with an annual total income of ~2.58 lakh crore reported in the last financial year.