Reliance announces RPL Amalgamation into RIL Ratio at 16:1…What should RPL and RIL Shareholders do?

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

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