Reliance Valuation Story

Facts:

The settlement between the Ambani brothers will see the effect of Reliance Industries Limited segregating the business of power, financial and telecommunication into three different companies to be formed.

Current Holdings:

Reliance Industries Limited (RIL) holds 47.2% in Reliance Capital Limited (RCL) and 46.5% in Reliance Energy Limited (REL) and approx 46% in Reliance Infocom( post conversion of Rs 8100 crores of preference shares at agreed price of Rs 32 per share).
Details of the Scheme:

As per the Demerger details announced, stakes in these three different business will go to three different Special Purpose Vehicle’s (SPV) formed for the purpose.Subsequently SPV’s will be merged with relevant operating company post hive off so that RIL shareholders have shares in the operating companies directly.It is still unclear from the available details whether shareholding by SPV in operating company will be cancelled (or not) resulting in further dilution? In my view the same will be cancelled.
In this process, the impact on reserves and loans of RIL is yet to be determined. Further, there exists certain uncertainty with regard to reorganisation of share capital RIL.

In my opinion, RIL capital will be maintained as it is without any reorganisation in terms of face value or paid up value.
In the process, reserves of RIL will come down to the extent of cost for shareholdings of SPVs, it means reduction in net worth of RIL and as a result, book value per share of RIL post restructuring to the extent of around Rs 80 to Rs 100 per share. It will adversely impact debt equity ratio depending upon amount of debt transferred to SPVs. In my opinion no debt will be likely to be transferred to SPVs.

In Reliance Energy, Reliance Capital and Global Fuel Management Services, RIL shareholders will be direct shareholders, while in Infocom; they will be indirect shareholders through their shareholding in Reliance communication venture.
So at the end of the restructuring RIL shareholder holding 100 shares today will end up holding 5 shares in Reliance Capital 7 shares in Reliance Energy 100 shares each of Global Fuel Management Services and Reliance Communication Ventures Limited and both will be listed before March 06.
And probably he will continue to have 100 shares in parent RIL without any dilution

Share Valuation Impact:

The impact of the above Demerger on the share value of RIL and the value of new shares to be issued in consideration can be analysed as follows:
7 shares of Reliance Energy @ of Rs. 625/- each
Rs. 4,375/-
5 shares of Reliance Capital @ of Rs. 460/- each
Rs. 2,300/-
100 shares of Reliance Communication Ventures valued @ of Rs. 180/- each, approximately Rs. 18,000/-
100 shares of Global Fuel Management Services Limited @ of Rs. 50/- each approximately Rs. 5,000/-
Total value of new shares to be allotted for every 100 existing shares of RIL
Rs. 29,675/-
Also the shareholder will continue to hold the shares of RIL. Eventually the share value of 100 RIL shares as on the date is Rs. 73,000/- (Rs. 730/- per share being the market quote) lesser than the value of new shares to be allotted post demerger of Rs. 29,675/-, amounting to Rs. 43,325/-.

Conclusion:

Now the issue to be addressed and analysed remains:
Whether the above share valuation of RIL is in line with the impact of the above-mentioned events?
Whether the shareholders think that the above compensation for offsetting the said businesses from RIL is at fair value?
Only time can reveal the answers to the above and till then all of us just have to wait and watch!
End Notes:

The basis of above calculations is as follows:
The projected EPS of RIL for FY 2006 is Rs. 65/- (excluding dividend income from shares of group companies transferred to SPVs) and the petrochemical industry PE is 12.44. So ideally the market value should be approximately Rs. 809 post-Demerger.

The share value of Reliance Capital and Reliance Energy is taken on the basis of approximate market quotes of 3/08/05.
The share value of Reliance Communication Ventures is taken on the basis of the proposed market capitalization of Rs. 25,000 crores divided by likely number of shares of RIL i.e. 139.35 crores shares.
The share value of Global Fuel Management Services Limited is assumed to be Rs. 50/- as there is no data available for the same.