How the Reliance gas choke will cause a huge loss to India

After a brief period, Kotak Securities has once again downgraded Reliance Industries’ rating to ‘Reduce’ from ‘Add’ earlier with a revised price target of Rs 855 as compared to Rs 915 earlier.

A downgrade wasnecessitatedon account of the decline in gas production at KG-D6 block which is unlikely to go up by 2016. Lower gas production, says Kotak, will affect Reliance’s earnings per share by 2.9 percent in financial year 2013 and 4.3 percent at 2014.

The report says that more than Reliance, lower gas production will affect India’s gas supply meaningfully. The country’s already facing a gas shortage scenario with almost all user industries asking the government to release more fuel. Lower production of gas by Reliance will affect the power sector and other non-fertiliser sectors.

Gas-based power plants’ financial condition will be under further strain as other sources of the fuel will be costlier.

The impact will also be felt by downstream gas distribution companies, who will be receiving lower gas to transport.

Lower gas availability will result in additional imports of coal and fertilisers, thus further deteriorating the current account deficit of the country.

Though India has new gas terminals being set up, the country’s inability to tie up long-term contracts for liquefied natural gas (LNG) will result in low capacity utilisation of these terminals. Companies could, of course, get into spot contracts for the fuel, which would be too costly.

Government may have to juggle the available gas supply between the power and fertiliser sector keeping in mind the subsidy it offers to either.

While investors can punish Reliance to some extent by pushing its shares lower, the punishment for the country will be much more severe as the impact will be felt over the next few quarters.

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