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
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    Breaking News ! ….RIL and RPL Boards to Meet on March 2,2009 to consider and recommend that RPL amalgamates into RIL!

    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 read more