The Ambani brothers' reconciliation has led to a positive momentum for stocks belonging to both groups. In the short run, the positive impact on Anil Ambani's R-ADAG stocks will be larger because those were badly affected by the recent Supreme Court (SC) judgment. Let's see what we know.
The new non-compete agreement keeps entities controlled by Mukesh Ambani (RIL and subsidiaries) out of gas-based power generation. The agreement between Reliance RNRL and RIL will be renegotiated to be compatible with the SC order. This implies gas offtake by RNRL from KG-D6 will be linked to the price set by the government ($4.2 an mBtu instead of the earlier contracted $2.34). The time period of the RIL-RNRL agreement may be much longer than the five years for which the government set a price. There would also be quantitative clauses to ensure supply. This leaves R-Infra and R-Power reasonably well-placed. RNRL's revaluation depends on the exact terms of the contract. There may be an upside left in RNRL's stock price, even after the 20 per cent-plus surge on Monday. RCom and Reliance Capital will also see positive re-ratings. The stocks suffered a hammering on the basis of sentiment rather than fundamentals. Both stocks could outperform their respective industries until the said re-rating is complete.
In the long term, the RIL group now has a choice of potential new businesses to enter. Telecom and finance could be on the short-list. Both industries make some sense — there are growth prospects. Both are, however, highly competitive. They require large upfront investments and there are many entrenched incumbents. RIL itself should see some positive action because it had been forced to go easy on gas evacuation, while waiting for resolution of the legal dispute. It can now ramp up to full capacity in terms of evacuation, as well as focus on building the pipeline network.
That's a potentially interesting play. RGTIL – which owns the pipelines – is privately-owned. The contracts it hands out should benefit listed players like Punj Lloyd and Welspun. There is a chance RGTIL will eventually go public, since it needs to fund that network. Also, while generation is out, city gas distribution could be worth a review. RIL scaled back its grandiose plans from a 60-city distribution network to just eight. If the lack of clarity in city gas regulation is sorted out, it could scale up again. RIL, RCom, R-Infra and R-Power are all heavyweight index stocks. So, there should be a positive effect on the Nifty for a few sessions at least. But, this sort of news/sentiment-based play is very difficult to judge in terms of magnitude and duration. Previous price history is rendered irrelevant by changing fundamentals and by relief rallies. Put in disciplined stop-losses if the sentiment turns dark again.
The author is a technical and equity analyst
