Reliance Industries: Oil's not well

With little clarity on whether gas produced in blocks allotted under NELP I-VII will be eligible for a tax holiday, and an increase in rate of minimum alternate tax to 17 per cent, the Reliance Industries stock has lost 8.4 per cent in the past two trading sessions. The Union Budget for 2009-10 has a provision allowing for a seven year tax holiday under section 80IB(9) for gas produced from blocks auctioned under NELP VIII.

However, it's not clear whether the tax holiday will be allowed for the seven previous rounds of NELP. Since RIL's D6 block is a NELP I block, it's possible it will not be eligible for a tax break. Assuming RIL doesn't get a tax exemption for its gas and factoring in lower refining margins and a higher MAT, the hit to RIL's earnings, analysts estimate, could be around 12 per cent in the current year and around 14 per cent in the next two years.

RIL is expected to turn in revenues of around Rs 1.6-1.7 lakh crore (Rs 1.6-1.7 trillion) in the current year and net profits in the region of Rs 18,000 crore (Rs 180 billion), translating into an earnings per share of just under Rs 113. While the stock currently trades at Rs 1,885, Kotak Securities has a put a 12-month fair value to the stock of Rs 1,600.

The increase in the MAT rate will also hurt the earnings of Cairn India, another exploration and production player, by about 6-8 per cent each in 2009-10 and 2010-11, estimate analysts. Cairn's bottom line will get a big boost once it starts production at its Rajasthan oil block and the company's net profit in 2010-11 is expected to be in the region of Rs 4,000 crore (Rs 40 billion), translating into an earnings per share of just over Rs 21.

The Cairn stock lost 4.7 per cent on Monday after the budget announcement though on Tuesday it was steady at around Rs 220. At this level the stock trades at just over 10 times estimated 2010-11 earnings.