UPDATE 1-Reliance rallies on bonus plan, headwinds remain

* Stock up 2.4 pct on 1:1 bonus plan, but off day's high

* Bonus could be a move to support stock price-analyst

* Legal dispute, weak margins weigh on fundamentals

NEW DELHI, Oct 8 (Reuters) - Shares in Reliance Industries Ltd (RELI.BO) rose as much as 5.2 percent on Thursday morning, a day after the Indian energy giant announced a surprise bonus share issue but concerns remain over falling refining margins and a pending legal dispute.

Reliance, which the market values at more than $70 billion, proposed late on Wednesday to issue one bonus share issue for every held, a move seen soothing investors following the stock's recent underperformance to the market. [ID:nDEL405630]

The stock had fallen nearly 4 percent at Wednesday's close since it raised $660 million from treasury share sale announced on Sept 17, while the broader market has risen 0.8 percent.

"It is an act of playing to the gallery with little fundamental change for the stock," V.K. Sharma, head of research at Anagram Capital said.

"They still have a lot of treasury stock, which they might want to sell in future. This looks to me more as a move to support the price," he said.

Reliance's chief financial officer, Alok Agarwal, said on Wednesday the current treasury stock was valued at 400 billion rupees ($8.6 billion).

At 0551 GMT, shares in Reliance, which has nearly 14 percent weight in the main BSE index .BSESN, were trading 2.4 percent up at 2,150 rupees after hitting 2,209, in a Mumbai market that was up 0.2 percent.

The stock is up about 75 percent so far this year, almost in line with the broader market's performance.

HEADWINDS AHEAD

Reliance, headed by billionaire Mukesh Ambani, and Reliance Natural Resources (RENR.BO) that is controlled by estranged younger brother Anil, are battling over a gas-supply deal agreed upon when the Reliance empire was split between the two in 2005. The case will be heard in the Supreme Court on Oct. 20.

CFO Agarwal said on Wednesday the company was on track with the production ramp-up for its KG D6 oil and gas fields off India's east coast, and has the financial flexibility to make further investments.

Still, lower refining and petrochemical margins could offset higher production and lead to a "weak" performance for the company during the September quarter, brokerage CLSA said in its earnings preview published earlier this month.

Reliance is yet to give a date for its quarterly results.

The company released on Wednesday restated results for the 2008/09 year ended March 31 to reflect the absorption of its Reliance Petroleum unit with effect from April 1, 2008.

Net profit for the year was 152.96 billion rupees ($3.3 billion) and net turnover stood at 1.5 trillion rupees. ($1=46.3 rupees) (Reporting by Devidutta Tripathy; Editing by Ranjit Gangadharan)