The Hindu Business Line : Reliance: Restructuring set to unlock value

THE RESTRUCTURING moves initiated by Reliance Industries to exit the capital, energy and telecom businesses have the potential to unlock value and thus appear favourable to shareholders.

The shareholders are now well-placed to cash in on the investments that Reliance Industries has made in these businesses over the years. We thus maintain our bullish stance on the Reliance Industries stock and take a positive view of the expansion plans in the oil and petrochemicals business announced by Mr Mukesh Ambani the past week. We had recommended a buy at Rs 600 when the contours of the settlement were first outlined.

Mr Anil Ambani

With its oil refining and petrochemicals business benefiting from a bullish price trend and raking in the gains, financing the expansion plans should hardly be a problem. In contrast to the trends of the 1980s and the early 1990s, the company has not tapped the equity market for several years now; this gives it the flexibility to raise equity, if needed, to bankroll a part of its expansion plans. At a price-earnings multiple of about ten times its FY-06 earnings, the stock is attractively valued.

The value of investments transferred to the four new entities will be about Rs 200 per share. The four firms to be listed by Reliance Industries are likely to eventually be absorbed by Reliance Capital, Reliance Energy, Reliance Communication and Global Fuel Management, all owned by the Anil Ambani group. Even after the investments are vested in the four new companies (see Table), the Reliance Industries stock price may not decline substantially to adjust for the transfer.

We believe the Reliance Industries stock is attracting investment support for the value gains linked to its strong position in the oil refining and petrochemicals business and not for its investment portfolio. The latter — especially investments in the telecom business — may have been a good reason to support a recommendation, on paper, to buy the stock though it would not be a key decision driver. Any value unlocked by an IPO for its telecom business would have been the icing on the cake. Here is why we take this view:

Reliance has always invested huge sums of money in group companies. If they were related to its core businesses, such companies were merged with RIL. Examples are Reliance Petrochemicals, Reliance Polyethylene, Reliance Polypropylene and Reliance Petroleum. These mergers also led to a marginal expansion of equity relative to the assets acquired. Reliance Industries has not adopted the merger route for investments in non-core businesses.

If not for the split in assets between the Ambani brothers, the investments in Reliance Energy and Reliance Capital would have remained just on the balance-sheet. The dividend inflows would not have been adequate to compensate for the resources deployed. And shareholders would have benefited only marginally from such investments. Now, they will get shares that will enable them to cash in on the value of such investments.

The telecom business is valued at Rs 25,000-35,000 crore, on a conservative basis. But there was no certainty that the shareholders would benefit at all from the 45-per cent stake that Reliance Industries held in the telecom business. Dividend flows would have been meagre for several years. The manner in which the ownership pattern was changed, especially the lack of transparency, could have affected investor confidence about the likely benefits from the telecom business.

And if not for the split, a part of the IPO of Reliance Communication would have been reserved for Reliance Industries' shareholders. But that would have entitled them only to a small share in the equity. It would not have been anywhere near the degree of participation they will now enjoy.

Shares in telecom: Shareholders are eventually to get one share in Reliance Communication for every share held in Reliance Industries. The benefit of Reliance Industries' investment in the telecom business is now being distributed to the shareholders.

Reliance Communication is the holding company for investments in mobile phone services, an across-the-county telecom network and an international telecom network. Reliance Industries' investment translates into a value of about Rs 125 per share. But when Reliance Communication is listed, it is likely to be valued substantially higher. This is where the shareholders of Reliance Industries are likely to derive the maximum benefit from the restructuring exercise.

Listed entities: In an interesting move, Reliance Industries plans to list the four new companies in which it would vest its investments in businesses that are now in the Anil Ambani fold. This decision appears to have been driven by tax and stamp duty-related factors as well as the move to make the exercise shareholder-friendly.

As the IPO of the communication business could take time, the listing of Reliance Communication Ventures would create liquidity for Reliance Industries' huge investment in the telecom business.

As the former would hold about 65 per cent of the equity of the telecom business, its stock would also emerge as a proxy till the Anil Ambani group-owned Reliance Communication is listed.

Price discovery in the telecom business through this proxy may be partial till the IPO plans are finalised. A high degree of investor interest is expected in Reliance Communication Ventures and it could trade at a considerable premium to book value.

The other listed entities created by Reliance Industries are likely to trade close to the underlying investment value. Based on the market price and the indicated swap ratio, Reliance Capital Ventures and Reliance Energy Ventures may trade at around Rs 20 and Rs 45 respectively.

Nothing is known about the nature of investments that Global Fuel Management Ventures holds; any price that its stock fetches would be a bonus in the near term.

Over a three-five year period, its valuation may get linked to its operations as an intermediary for gas supplies by Reliance Industries to Reliance Energy.

As the restructuring terms announced by Reliance Industries are to be implemented effective September 1, its stock would attract enhanced investor interest as a pure play in the oil and petrochemicals sectors.

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