Switched on my mobile this morning after a few days of tackling a tough Viral…thank you guys for all your “get well” wishes…they worked

Listened to the live broadcast on stock channels of Mukesh Ambani at the 36th AGM of RIL this morning in Mumbai rolled out the roadmap ahead for his Group…this are a few interesting bytes that really caught my ear

• Now with the rescinding of the Non Compete Agreement with brother,Anil Ambani’s (ADA) Group, Mukesh Ambani’s RIL Group will enter the Power Industry in a very big way…a blueprint is being prepared….what is amusing however is that despite discovering and drilling Gas from the KG Basin,RIL will not execute any gas based project till 2022…so it’s going to be coal based,hydel,nuclear and alternative energies projects….ironically it is supplying this Gas to Other Fertiliser and Power Plants as directed by the Government…even to ADA Group Power Plants when they are ready to accept and if the Government directs then
• Organised Retail has earned Revenues of Rs 4500 crs in 2009/10….in just Five Years it will jump ten fold to Rs 45000 crs !…..keeping in mind that RIL is the first Indian Company to cross Rs 200000 crs turnover this year,this would be a great contributor 

Anything BIG to earn and HIGH growth rates forecast,then rely on RIL to enter that sector….Petrochemicals,Petroleum,Retail,Infrastructure….nowTelecom,Pharma,Healthcare,Power,Education.

What next ?

How about Information Technology …RIL can take a look at the three World Tech Giants,Google,Apple and Microsoft……have a look at this Comparative Table I’ve prepared…RIL against Peers and these three Tech Giants…I’ve used todays ref rate US $ =Rs 46.14 for translating RIL’s Share Price of Rs 1055 and Market Cap of Rs 345135 crs…However RIL Financials are as sourced from RIL’s website (imputed rate used by them is US $ =Rs 44.64)…for the other Global Giants,the figures are sourced from the NYSE/Nasdaq 

KEY COMPARATIVE STATISTICS : RIL v/s Global Peers and Global Tech Giants

Clearly the Tech Giants rule the Exchanges in terms of Valuation and even Market Caps…High Multiples,High Profits and Profit Margins,Low or No Debt,Rising Revenues with new product launches have worked wonders for the three Tech Giants

RIL always thinks BIG…..Organic Growth in Technology Sector will take ages…But with a Market Cap of relatively lower US $ 75 b and the fact that 1/3rd of Capital Employed is through Debt even Inorganic Growth looks difficult for RIL to take over a major World Giant among it’s peers and even the Tech sector if it wants to enter it….what does look interesting is the Infotel playout it has just started with a near US $ 4 b layout…I’ve got their presentation on this and shall be examining it closely sometime soon

So are RIL’s Best Years Ahead as Mukesh Ambani assured shareholders today ?….With strong proven large scale project implementation capabilities RIL surely is excited about the opportunities opening up in India and even overseas…RIL is already a Giant in India in it’s Operations…With It’s Expansion Plans in Petrochemicals,it’s new big scale forays in diversified fields,it hopes to be reckoned as a Global Giant

It’s Best Years may certainly be ahead,but the above table shows it’s got a hell of a lot of catching up to do with Global Giants

Oh ! it’s near BP’s mkt cap only because BP share Price has crashed following the Gulf of Mexico Oil Rig Explosion that is throwing out ,latest upward estimates of 40000 to 60000 barrels of oil into the Sea and is yet to be capped…. seen to be the biggest economic disaster USA is facing….Interestingly President Obama has managed to extract a promise of an initial US $ 20 billion in an escrow account from BP for settling claims and damages for this continuing disaster….if you look at the table,that’s just one year’s sacrifice of PAT for BP….I’m sure there will be more extracted

So should RIL be in your Portfolio ?……and with what weightage?…Simple answer is “Yes”…and the weightage should be atleast 10% of the Equities you hold…..Like Larsen & Toubro and State Bank of India,RIL remains a strong proxy for the India Story…Who Knows ! remember the late 1980s and the BOB Fiscal fiasco when RIL had made a serious and aggressive and hostile bid for Larsen & Toubro only to be thwarted…with Larsen’s market cap under US $ 24 b today,RIL may just relaunch this ambition !…it has never liked losing !….OH ! I just love it when my mind meanders !

Cheers !   

I’ve no bias… but feel sad for Anil Ambani…. I’m with him on this one….. Supreme Court gave a split verdict today in the RIL v/s RNRL Gas Pricing embroglio in favour of RIL

So now 2.34 is out and 4.20 is in !… One perspective is that RIL and the Government have done a 4.20 on this one!

In 2005 when the Reliance Group was split between the Ambani Brothers a MOU was signed between the brothers and blessed by their Mother too… It prescribed that RNRL would be supplied 28 million mmbtu gas  daily by RIL at a price of US $ 2.34/mmbtu….. Anil agreed to the split valuations which included this arrangement too…. He went ahead and got his company RNRL to enter into an agreement with his ambitious baby, Reliance Power, to in turn supply this Gas from RIL for the upcoming 7.4 GW Dadri Power Plant which is slated to be the biggest Gas based Power Plant in Asia

RNRL went to court as RIL refused to honour this MOU citing that Gas was the National Property and they were merely Contractors and the Government owned the Gas and reserved the right to allocate this Gas and also approve the Pricing for this…. The New Pricing Benchmark became US $ 4.20/mmbtu

High Court ruled in favour of RNRL and said that the MOU should be honoured…. RIL went to the Apex Court, the Supreme Court….. Today the three judge bench gave a 2-1 Verdict in favour of RIL and the Government, overruling the High Court Order…. their view is that

• This Gas is a National Resource and the Government is the Owner
• The Production Sharing Contract (PSC) between RIL and the Government supersedes all other agreements, including the MOU between the brothers
• The MOU itself is not a legally binding document, but can be used for inspiration in future negotiations for gas supply between RIL and RNRL… These negotiations must be concluded inside six weeks and the Company law Board should be approached to approve the same

Feel Sad that RNRL and Anil lost out here…. simply because I feel strongly as below

• This issue must be viewed with the mindset of ‘Substance over Form’… just like auditors are trained to do… also it should be viewed,like the Painter Hussain controversy, with a mindset of looking at the ‘intention’ behind creating this controversy
• The MOU was created in 2005 with this Price of US $ 2.34/mmbtu which was the benchmark then as it was a NTPC tender price….. Why was no noise created then ! ?…. Even if the MOU was secret, the price was not!…. Clearly as the Price of Gas began rising, RIL attempted to wriggle out of this committment to supply gas to RNRL at US $ 2.34/mmtu
• It was only in October 2007 that the Empowered Group of Ministers (EGOM) had arrived at a Formula for Gas Pricing
• Mukesh Ambani could easily have honoured this MOU committment… it was blessed by the Mother… and in Mother India, the word of Mother is that of God !.… apparently the boiling intensity of emotions with his brother, Anil Ambani, prompted him to decide not to supply the gas at all….. So RIL chose to default citing that Government was the authority on allocation and pricing of Gas…. clearly government machinery was being misused and the government merely became a front… moot question arises… was the Government playing favourites or truly had the National Interest in mind !?.… the answer will stare at you in the face when you search history and discover that a top RIL executive was arrested because he was caught with confidential government documents…. apparently he was drafting/suggesting/amending a Union Cabinet Meeting Agenda for a Meeting to be held!…. also the current Petroleum Minister and the late Dhirubhai Ambani were great friends from their youth…. read the banned ‘Prince of Polyester’ by Hamish Mcdonald to gauge how close!…. Anil Ambani has already emotionally made these accusations and had rightly questioned as to why the Government has not withdrawn the PSC with RIL if they felt that it has been violated by the MOU !

So what will happen now….. RNRL has already lost significant value on the Stock Exchanges today…dropping from Rs 70 levels towrds Rs 50…. RIL has regained lost ground and is up marginally at Rs 1040 levels

If Anil Ambani had agreed to the Reliance Group Split in 2005 based on the Valuations on supply of 28 million mmbtu/day at a Gas Pricing of US $ 2.34/mmbtu, he is entitled to now feel aggrreived like all his shareholders too….. Clearly he should seek adequate compensation from RIL on behalf of all his shareholders…. one way is that the brothers agree to sell RNRL to RIL at price levels near Rs 100…. because the split may have then been done at a more favourable and liberal ratio for ADAG Companies… in simple words, shareholders of RIL would have received more shares in ADAG Companies in the split than they actually did if this Gas Supply and Pricing was not to be considered

There clearly is a huge vacuum in Independent Thinking… Expert after Expert on all Channels today are simply parroting similar views…. in favour of RIL Share Price and sounding the death knell for ADAG Companies

Mark my word, Anil has his father’s courage and aggression in him…. he will rise again… just pray he creates a right set of people around him, than he has now, in all his business

As I end this Blog, just heard a very gracious Anil Ambani stating that he will abide by the Supreme Court Decision and not file a review petition… he was all praise for the SC for upholding the formation of the MOU and stating that the MOU can be an inspiration for looking at the scheme of arrangement and renegotiating…. he thanked his wife, Tina and both his sons, Anmol and Anshul, for the support… thanked his 11 million shareholder body, the largest in the world, his over 150000 employees and the media too

Anil Ambani looks forward to an expeditious renegotiation with RIL

However RIL is voicing doubts over the availability of gas itself to supply to RNRL…. creates doubts on whether any renegotiation will take place, as directed by the Supreme Court today, between RIL and RNRL…. What will RIL negotiate !? if they continue to assert that they don’t have any gas to supply to RNRL !… as Government is directing the allocation to specific companies in the priority sectors of Fertilisers and Power

Clearly RIL and Mukesh Ambani wants  to sever the umbilical cord with ADAG Companies and Anil Ambani permanently…. perhaps Anil and his Companies would be better off this way !

So where does all this leave us on the Share Price performance of RIL and ADAG Companies

RIL will register an EPS of over Rs 80 FY 12 on full Gas production … at 15 multiple that’s a Share Price at Rs 1200 levels… its’s currently at Rs 1040… so there appears little downside from here

Re Power is struggling to stay above Rs 140…. With a  question mark on Gas supplies from RIL and New Pricing, it would be advisable to reduce exposure

On RNRL at Rs 53 levels, I’m a bit of a contrarion here….. I don’t think it is, as joked, “Rahe Na Rahe Ltd”!…. It’s more than just a Trading Company in Gas… With ex Gujarat Ambuja Cement CFO, Ajit Singhvi,on board as Vice Chairman and diversification plans on the anvil, I would review it strongly to seek more clarity  on the business model and impact of changing dynamics…. in simple words, if you’re holding RNRL, defer a decision to sell out at current levels… unless you’re a conservative investor… in which case RNRL should never have been in your portfolio, unless you’re an original Allottee in the Reliance Group 2005 Demerger by lieu of your shareholding in RIL

Also, if you are not in sync with Anil Ambani’s business aggression, ambition, acumen, management coterie, risk assuming abilities and strategies he adopts to scale up and move ahead then it’s wise to not marry any ADAG Companies.. and if you have, then exit the marriage asap

On a Macro front,Sensex dropped @ 240 points to close @ 16750 levels and Nifty dropped below 5000, only to recover to barely close over it… Greece is bigger then Greece!

Reliance surprised all yesterday with a post market bonus declaration of 1:1….It last gave a bonus in 1997…and before that in 1983 and 1980

Dhirubhai Ambani,the Founder was the dramatic architect for all these bonus issues…but he passed away in 2002……Investors were like Children in those days…and the father was Dhirubhai !….his bonus announcements were always dramatic…like breaking an AGM to have a board meeting to discuss Bonus and coming back to announce a 1:1 Bonus…all pre planned

But yesterday’s Bonus was clearly less preplanned….and Investors are no longer Children…and Mukesh Ambani is surely not the father !

And I was truly amused to hear the reason why Mukesh declared this Bonus….To reward Shareholders for this Value Creation of over a lakh Crores in assets and the completion of setting up of two major projects….gas and the new refinery….Bonus is declared from Free Reserves created by Operational Profits …Reliance has enough of these…but not from the two new projects yet !….even brother Anil rewarded,if you can ,I daresay, call it that,! shareholders of Reliance Power with a 3:5 Bonus last year,within months of the IPO…even before the Company has commissioned even one power project !…the bonus was to bring down the holding cost from the obscene IPO Pricing of Rs 427.50 to Rs 270 ! It’s quoted at Rs 160 right now…so now both brothers have ‘rewarded’ with bonus after creating the assets !  

The Bonus normally reinforces the expectation of good performance into the future,though it is merely an accounting entry….may change sentiment,but not valuations 

In Reliance,the Equity now will double from Rs 1642 crs to Rs 3284 crs with just a small dent of Rs 1642 crs in reserves of over Rs 1.1 lakh crs…The Book Value will halve from Rs 700 to Rs 350…Adjusted EPS for FY 10 would be in the Rs 60-Rs 65 range.

The Share Price should open strong this morning…In fact it has opened at 4% high at Rs 2189 and is now easing….From this price the ex-bonus price adjusts to a shade below Rs 1100…that’s 16 P/E on  FY 10 EPS and 11/12 P/E on a much stronger FY 11 EPS of close to Rs 90

And this declaration of Rs 13/share as interim dividend on existing capital of Rs 1642 crs is good but it works out at just a 10% payout of projected EPS in the range of Rs 120-Rs 130 for FY 10 before adjusting for bonus

And this Bonus and Dividend declaration is clearly a tool intended to raise shareholder sentiment given the acrimonious legal issues between the two Ambani Brothers….Ironically the Gross Refining Margin has dropped to a 26 year low of just US $ 3…and is not expected to revive strongly in the nexy year…..so if it was not for the Gas Profits that will now accrue to Reliance Industries,the Profitability would have been impacted 

Investors are now mature…..A Bonus announcement should not significantly impact their outlook for Reliance Industries as Valuations do not get impacted

Wonder What brother Anil has to say about this Bonus ! ?….Wonder why no one in Media has bothered to get his View !…surely it would be interesting to hear him on this !

Cheers !    

There were 48 TV Crews at the Supreme Court this morning…..The Cameras were positioned to broadcast live sound bytes from the lawyers of RIL and RNRL

First we had a trifle agitated, Ram Jethmalani,who represented RNRL, emerging and a hectic rush to have  Mikes thrust onto him for his comments

This is what Jethmalani said,rather accused 

” The Supreme Court has not stayed the High Court Order which had favoured RNRL.The Government is a Puppet of RIL and The Oil Ministry is in the pocket of Mukesh Ambani….according to me they (RIL) cannot deal with the Gas…They (Mukesh Ambani and RIL) can go against Moral Issues and Mother’s Mandate….It is a stupid argument ( that the MOU cannot override Sovereign Interest).In a democracy and a republic there are no sovereign authorities..all authorities are bound by a court of law ” 

Then came out a beaming Harish Salve,who stood for RIL.This is his interesting sound byte

” The Supreme Court has not passed any order today.On specific mention that RIL will continue distribution of Gas as per the January 2009 Agreement,the Court stated “We are not stopping you”….The Question is that in these changed circumstances,when Gas is selling at US $ 4.20/mmbtu ,how can one buyer insist at US $ 2.34/mmbtu…the question thus arises that how can the MOU between two brothers,to strike parity between them, override the Sovereign Policy and Interests of the Government….Supreme Court is concerned with the seriousness of this Issue……It has issued Notice to RNRL as to why the Government should not be made a part of this Case…..Jethmalani’s utterances are largely for the Galleries and not for the Courts…..MOU was subject to company and government approvals,which is being ignored….If the gas is sold at US $ 2.34,it would be a double whammy as the buyer will then sell it for US $ 4.20 and pocket the difference ! ( RNRL was to supply the Gas to Reliance Power’s Dadri Plant.This Plant will take atleast 3 years to beging Operations…so if the MOU was to be honoured,it would get Gas at US $ 2.34 and will be able to sell it at current commercial rates of US  $4.20 and pocket the difference ) When cases become weak you thump the table…This (Anil Ambani’s July 15,2009 letter to the PM) is table thumping”

On a day when the Sensex has surged to 15100 over 350 points,RNRL is down 3 % a Rs 80 while RIL is up 4% past Rs 2000,just past 2 pm

Anil Ambani has shot of a letter on July 15,2009 to the Prime Minister on this Dispute clarifying that his group ADAG is is no way attemting to disrupt Gas Supplies…but the Government should act in national and Public Interest…something it is not doing currently…letter also accuses RIL and Oil Ministry of colluding

Government’s stance,as asserted by the R S Pandey,the Oil Secretary ( and this clearly favours RIL) is that the Discovered Gas in the KG basin is the Property of the Government and that RIL is merely a Contractor.Therefore any MOU signed between the Ambani Brothers on this gas should be declared Null and Void as RIL has no authority to enter into this MOU.The Ambani Brothers cannot make the Gas their Private Property.The MOU ,which earlier was a private document,has now revealed that the Brothers had decided a Gas sharing ratio of 60:40 and two buyers NTPC and RNRL.The Government would have to be at the mercy of the Ambani Brothers on such an important National Resource….It would set a bad precedent and all contractors would enter into such agreements….The Government’s Production Allocation and Pricing Policy would then have no relevance….Thus acting on Legal Advice,the Government has filed an application in the court to be made a part of this case between RIL and RNRL. The Government will decide how to prioritise and allocate all the discovered Gas.It has already rolled out the priority to Fertiliser and Power Plants and RIL has already signed Gas Sales Agreements (GSAs) with several PSUs and Pvt Companies for the gas …It’s already producing 40 mmtu gas daily and is poistioned to do 80 mmtu by September 2009

The Next date of Hearing in the Supreme Court is on September 1,1009

Expect the Fireworks to continue between the warring brothers and their Groups…This Battle may have been won by RIL but the War is still on !….All this is impacting Volatility in Shares Prices of RIL and RNRL on the bourses

Two ‘Experts’, one Fundamental and the other Technical were on a Viewers Q & A show right now on UTVi…A viewers question came forth on RPL…”I have brought it at Rs 154,what should I do ?”

Both these ‘Experts’ went into detail on the merits of holding RPL for a One Year Hold !…Insipid Stuff…Guys ! RPL will not be in existence after a Year !….the RPL Price right now merely reflects a 16:1 merger ratio with Reliance Industries…RPL is Rs 125 and Reliance Industries is Rs 2000 !…That’s it !…so it’s a just a Piggy back share right now…It has to be !…what would have served the viewer well would be to explain to him that at his cost of Rs 154 in RPL ,his holding cost in Reliance Industries would be Rs 2464 …Will this Price be reached ,given the Court ruling against them in the RNRL Case ?…The downward effect of this on the EPS will be Rs 20 in FY 11…Despite this short term reaction in Reliance,it definitely will regain strength…It has a 17% weightage in the Sensex and if the Sensex has to move towards 18000 and beyond in the next year or two,it cannot be without Reliance climbing upwards towards Rs 3000 and beyond

Come On Guys in UTVi…I’ve been impressed with all of you…but you do need to vet some of your ‘Experts’ before putting them on your channel…unless ofcourse you’re being dictated by their PR exercise !

On Friday,after Markets closing,RPL and RIL announced that their Boards would meet this morning to consider and recommend the Amalgamation of RPL into RIL

I had blogged that the ratio could be 20:1 and the Amalgamation would add incremental EPS to RIL and help RIL Share Price to be maintained or enhanced

The Amalgamation Ratio has just been announced this morning at a better 16:1 and it’s already in the share prices…RIL is marginally lower at Rs 1235 and RPL is virtually unchanged at Rs 76 

RIL has been justifying this amalgamation largely for operational efficiencies and enhancement of shareholder value…They say it will be tax neutral…My blog had emphasised that clearly the Amalgamation was an effort to maintain/enhance RIL Share Price in these tough times as there would be incremental EPS accretion and a very marginal dilution of Equity

Times are tough for Global Refiners and Gross Refining Margins are abysmal…In the near term 2009/10 I don’t see any recovery

Projected EPS for FY 10 is Rs 140 for RIL post amalagamation as KG Gas and RPL is expected to l add the incremental EPS…Otherwise the EPS would have struggled to top even Rs 90 in FY 10……I have reservations on this Projections of an EPS of Rs 140

I also see a deepening Global Crisis and the Dow sinking to more Lows…In this scenario I see RIL moving below Rs 1000

So what should RIL and RPL Shareholders do Now….All depends on your View of Markets and Reliance in the Near and Long Term…A few strategies are advised below for those who hold both RPL and RIL in their Equity Portfolio

A BULLISH VIEW IN THE NEAR TERM ( 2009) AND LONG TERM (2011)

• Retain your holdings in RPL and RIL

A BEARISH NEAR TERM VIEW BUT A BULLISH LONG TERM VIEW

• If you are a Long Term Investor and are not going to be unnerved by short term share price volatility,you could remain a passive spectator and retain your holdings
• Alternatively you can retain your Holdings but protect yourself from any downside by buying  RPL (Lot is 3350 shares…contract size is therefore over Rs 2.5 lakhs) and RIL Puts (Lot is 300 shares…contract size is therefore nearly Rs 3.8 lakhs)…Obviously this strategy is not suitable for marginal holdings significantly below derivative contract values
• However if ,assuming You hold an intensely bearish view for the near term like I do you can adopt the following strategy…Sell off both RPL and RIL Holdings and either remain in cash for some time or sell RPL Holdings and actively use the proceeds to pay the margins by shorting RIL Futures or selling RIL Call Options

BEARISH VIEW FOR BOTH THE NEAR AND LONG TERM

• Sell off both RPL and RIL Holdings

Believe me,it is a big relief to take the Loss on Holdings than to carry the Burden of Notional loss for some time to come…so don’t hesitate too long to take that hard decision to sell because of any notional loss

Taking Protected Hedge Puts as highlighted in Green above is clearly indicated…..Just ensure the premiums that are quoted are fair and reasonable …If expensive ,then try cheaper marginal premiums that should be quoted for the out of money strike prices and try to go for deep end May 2009 contracts…if there is no depth for May contracts then go for March and April Contracts

Ambanis of Reliance have adopted this modus operandi without fail the past 25 years…They create new companies for similar business…and when they commence production,they amalgamate them into the Parent, RIL…in a sense give birth to Children and bring them back into the Parent fold

So I was not surprised at all when the Breaking News  hit that the Boards of RIL and RPL are meeting seperately on March 2,2009 to consider and recommend the amalgamation of RPL into RIL…In fact for years I have been stating that this will inevitably happen…What must have pushed RIL now is that the Margins are under pressure in both, RIL and RPL, and RIL is carrying Huge Inventory losses as it had entered into Oil Contracts at US $ 120+ per barrel in mid 2008…Oil is now crashed to just over US $ 40 per barrel…Clearly RIL sees Cashflow,Tax,Valuation,Scale and Leverage Synergies in this Amalgamation  

This Breaking News will Break RPL Shareholders…Closing Prices,adjusting for a possible fall in the price of RPL on Opening on Monday and adjusted Book Values indicate an amalgamation ratio of 1: 20

RPL Shareholders will not get to see really how much RPL really makes on the bottomline in it’s first full year of production !….This is the devious part really……Falling Gross Refining Margins would have meant a very low bottomline for RPL….With Equity at Rs 4500 crs +,it would have been seen as a loss of Group image in not being able to service the equity 

The April 2006 IPO of RPL was at Rs 60…That’s where the price will settle…It may sink even lower…Current Price is Rs 76 while RIL closed at Rs 1265

As a stand alone Refinery,RPL would have got Earnings Valuation Multiples of much below 10….and much below Overseas Peers….FY 2010 would have shown Earnings in the low range of Rs 2 to Rs 4…despite a low floating stock of under 10%,the share price would have reacted quite sharply…With the amalgamation this scenario will not play out

Long Term RPL Shareholders have been short circuited…Just think about this !…in April 2006,you invested in RPL at Rs 60…assuming the ratio is 1:20,your cost of the RIl Share would work out to Rs 1200 right now…in April 2006,RIL was Rs 825-850 at the time of the RPL IPO

So,in April 2006 if you had invested in RIL, and were yet holding the shares you would have made 50% + gains…Twice that you would have made by investing in the RPL IPO at Rs 60 and yet held the share

Also recollect that in November 2007 RIL sold 4.01% RPL Stake for Rs 4023 crs…That’s 18 cr shares at an average of over Rs 220….There is a complaint pending with SEBI for Insider Trading by RIL just before this sell off…It transpires that Ten companies associated with  RIL’s and sharing a common address sold 10.54 cr RPL shares in the Futures in November 2007  at prices of Rs 230 to Rs 290 just prior to RIL beginning to sell off a 4.01 % stake in RPL…These Ten Companies pocketed a cool Rs 1000 crs profit inside November 2007 itself by squaring up the shorts as RPL fell to Rs 160 after RIL sold this 4.01% stake…Search my blog for this suspected Insider Trading  

WHAT IS NOT RIGHT IS JUST NOT RIGHT ! PERIOD !

Another thing…RIL will own 75.4% of RPL after it buys out Chevron’s 5% stake….In the amalgamation this stake may be cancelled out or shown as Treasury Stock…If cancelled,then the addition in RIL Equity will barely be Rs 56 crs assuming a 1: 20 amalgamation ratio …Even otherwise it will yet be small at Rs 225 crs….RPL’s bottomline will add significant incremental EPS to RIL after the amalgamation enabling maintaining/enhancing Valuation and therefore Share Price in these Critical Times …Any RPL Loss would serve to setoff Profits of RIL and gain a Tax advantage

However under Consolidation Accounts, RPL Accounts  have to be consolidated with RIL anyway…so some of the benefits would actually be already accruing anyway…Would these multiply manifold on the amalgamation ? Or is this Amalgamation purely just to save face by not having to show RPL Accounts as a Stand Alone Entity in FY 10 as the performance is expected to be weak and this could cause havoc in the RPL Share Price !

So how should Shareholders of RIL and RPL act now to protect Value after announcement of this Amalgamation ?

Prima facie this Amalgamation will benefit RIL more than RPL…Let’s await March 2,2009 and see what terms of the proposed amalgamation  are announced….Two Stakeholders…The Government and RPL Shareholders see to be losing Value.

But an immediate intuition tells me to sell RPL immediately…atleast buy a Protected Put

For Reliance Industries’s Q 3 Profits for the Q ended December 31,2008,few estimates were over Rs 3500 crs…some were even below Rs 2700 crs and the consensus revolved around Rs 3000 crs

Despite an expected drop in Margins,Revenues and Profits to reflect challenging times,Reliance,true to form,showed a respectable profit of  Rs 3501 crs in Q 3 against Rs 3882 crs yoy,supported by an increase in Other Income from Rs 241 crs yoy to Rs 641 crs

Gross Refining Margins are US $ 10/barrel.Cash and Cash Equivalents are Rs 28500 crs.Revenues are split 37% and 63% between Petrochemicals and Refining

Reliance may fail to notch an EPS of Rs 100+ for FY 2008/9 on fully diluted equity of Rs 1580 crs as it is unlikely to notch up profits of Rs 16000 crs for the full year.Gross Refining Margins and Quantum,if any,of Hedging or Speculative Loss on Oil Price Plays holds the key for profits that will be reported  for this Q 4 

Back of the Envelope Valuation on Earnings Multiples

Unless we are confronted with a shock on Derivative Losses on Oil Price Plays,even if camouflaged as Higher Cost Inventories,the likely EPS for FY 09 would be in the Rs 90 to Rs 95 range.At Rs 1136 closing today,the multiple would be @ 12.With expectations of Krishna Godavri Basin Gas contributing to revenues and profits from FY 10 and without much equity dilution,the Forward EPS estimates for FY 10 revolve around Rs 115…Applying a Multiple range of 7-14,the Share price Range in 2009 should be Rs 800-Rs 1600 and will depend on prevailing seniment and Earnings in FY 10.For Reliance to race away back towards Rs 2000 in 2009,a better sentiment has to prevail in the Markets to facilitate a higher multiple than 14…this is unlikely to happen anytime soon

Looking at the Downside…if the Sensex,currently has gone yet again below 9000 and is at 8800 levels, seeks to sink even below 7000 sometime in 2009,then Reliance will fall in sync towards Rs 800 with forward multiple falling to 7…unless global markets get hysterical and unless Reliance shocks with some significant scam,I don’t see Reliance below Rs 800 in 2009 or above Rs 1600 for that matter.It closed at Rs 1136 today.Results came in after market hours,so expect some rally tomorrow.