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Rediff.com Business Reliance demerger: What should you do?

Reliance demerger: What should you do?

Last updated on: January 17, 2006 15:48 IST

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A unique investment and trading era ends today at the Indian stock markets. Reliance Industries [ Get Quote ],India's largest private sector company, having the widest investor base in the country (over 3.1 million) and

group revenues equivalent to about 2.6 per cent of India's GDP, trades for the last day today as a consolidated

company.

As per the demerger approved by the RIL board in August last year, the

Ambani brothers -- Mukesh and Anil -- will head different businesses and five

listed companies will emerge as potential investment opportunities by March FY

2006.

Of these, Reliance Industries, Reliance Capital [ Get Quote ] and Reliance

Energy [ Get Quote ] are already listed at the exchanges and they will now get

re-valued by analysts in a new demerged business scenario. Two othercompanies will be listed by March-end.

The new structure

The new structure gives Mukesh Ambani [ Images ] complete and independent control over the oil exploration,

refining, petrochemicals and textiles businesses through a 'core' / standalone Reliance Industries and the refinery

Indian Petrochemicals Corporation [ Get Quote ]. He will also get the biotech firm Reliance Life Sciences and

Trevira, a European company manufacturing polyester fibres.

Anil Ambani [ Images ] will get control over power, communications and financial services undertakings through

four companies which come under the umbrella of the Anil Dhirubhai Ambani [ Images ] Enterprise (ADAE)

group, as part of the Reliance group.

These four companies will be Reliance Capital Ventures Ltd (to be amalgamated with listed Reliance Capital),

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Reliance Energy Ventures (to be amalgamated with Reliance Energy), Reliance Communication Ventures

(mainly including Reliance Infocomm and Reliance Telecom) and Global Fuel Management Services (for gas-

based energy undertakings).

What happens tomorrow?

The Bombay Stock Exchange [ Images ] and the National Stock Exchange will hold a special one-hour trading

session on Wednesday, January 18, from 8.00-9.00 a.m. to facilitate price discovery of the post-demerger

price for Reliance Industries Ltd.

Only Reliance Industries will be traded in this session, without circuit filters, while the unlisted companies will be

listed in coming months.

While the special trading session is on, it will not affect the overall market or Sensex / Nifty.

The closing price for Reliance Industries after the special trading session will be used to determine the opening

level of indices (and a new RIL weightage in the indices) at 10.00 a.m. on Wednesday. The volume weighted

average price of RIL during this above session will be used for adjustment to the base market capitalisation of

the respective indices.

What does the RIL shareholder get?

The Reliance shareholder will continue to hold the same number of shares he holds today. In addition, he would

receive additional shares of the new demerged entities, as per the demerger ratio.

All RIL shareholders will be issued shares of the demerged companies in a 1:1 ratio. So if a shareholder holds

100 Reliance Industries shares he would get:

100 shares of Reliance Communications [ Get Quote ] Ventures Ltd, 100 shares of Reliance Energy Ventures

Ltd (REVL), 100 shares of Reliance Capital Ventures Ltd (RECL) and 100 shares of Global Fuel Management

Services Ltd.

With REVL being amalgamation with Reliance Energy and RECL with Reliance Capital -- following a board

decision -- RIL shareholders will thus receive shares of REL and Reliance Capital based on an earlier approved

independent swap ratio.

The ratio approved is 7.5 shares of Reliance Energy for 100 shares of REVL held and 5 shares of Reliance

Capital for 100 shares of RECL held.

What could be Reliance's value? Should one hold it?

The key issue that investors should remember is that we will look at a 'new' core Reliance Industries, which has

its expertise in oil and gas exploration. Risks would be lower as some 'unrelated' business undertakings will be

demerged.

Oil exploration should emerge as a key growth driver for Reliance Industries. RIL's development plan

for the Krishna-Godavari D6 block has been approved and a mining lease for 20 years granted

effective March 2005.

The demand for petrochemicals is likely to remain robust in the next couple of years from India and

China, while supplies could be tight. The scenario for petrochemical companies will be bright in the

coming year.

The refinery business is set for growth, as operating margins are also expected to improve in coming

quarters.

Some analysts say there will be unlocking of value and if an RIL shareholder holds these shares, he will continue

to receive benefits in terms of growth from unrelated Reliance Capital, Energy and Infocomm businesses

anyway.

Where could the Reliance price go?

It would be wrong to speculate the exact level or range for the stock, but most analysts see the December-end

third quarter financial earnings as a blip, which has been accounted for.

The closure of the Jamnagar refinery was planned and expected. Even if the Reliance stock trades volatile on

Wednesday and slips lower, its short-term valuation is expected to be strong with some analysts keeping a Rs

1,000 target price (based on core strengths discussed earlier). More benefits will accrue when other demerged

stocks are listed.

Looking at the technical charts, Reliance has corrected over the last eight trading sessions indicating an oversold


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situation on the daily chart. The medium- to long-term trend is very clearly up. Strong support comes in at Rs

866 indicating a rather limited downside from here.

Resistance comes in at Rs 887 and Rs 902 levels. The overall picture remains positive indicating the

continuation of its long-term uptrend.

Most domestic fund houses and research firms continue to place an 'outperformer' investor rating for Reliance.

The Reliance stock has 12 per cent weightage in Sensex, the 30-share sensitive index of the Bombay Stock

Exchange.

Salil Panchal/ Morpheus Inc. in Mumbai

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