The demerger of Reliance Industries Ltd (RIL), India’s largest private sector company, will lead to the formation of four new companies.
INSIGHT
The demerger of Reliance Industries Ltd (RIL), India’s largest private sector company, will lead to the formation of four new companies - Reliance Communication Ventures Ltd, Reliance Energy Ventures Ltd, Reliance Capital Ventures Ltd and Global Fuel Management Services Ltd.
According to the Anil Dhirubhai Ambani Group, which will end up owning these companies, they will be listed in the first quarter of 2006.
Between August 5, 2005, the day the Reliance board approved the demerger, and Tuesday, December 27, the stock price of the company has risen by more than Rs 140 to Rs 867.
However, even at this level, the price is below the 52-week intra-day high of Rs 900 hit in late November. Quite clearly, after some uncertainty, the market has taken note of the positive effects of the demerger.
Analysts have been estimating the collective value of the four demerged companies in the range of Rs 200-250, depending on which analyst you want to believe. At the same time, they have been putting the residual value of the Reliance stock in the range of Rs 700-800.
The target price put forward for the collective entity is thus more than Rs 900. If one assumes that the demerger will bring greater focus to the residual entities, the future potential of the two groups will probably be much greater than what this valuation suggests.
Even otherwise, the current price of the Reliance stock does not rightly value its investments in financial services, power and telecom, analysts say.
Moreover, Reliance is expected to continue to perform well even after the demerger as a fully-integrated petroleum-to-petrochemicals conglomerate. The company currently enjoys a healthy operating margin.
It can use its strong cash flows and low-debt exposure to finance further expansion, particularly into retail. The smart money bet is that even after the split, Reliance will retain its current value.
As for the Anil Ambani companies, the Rs 200-250 price seems to value the group’s market cap at just about Rs 25,000-30,000 crore. This appears conservative, given the huge multiples telecom companies are currently enjoying.
Bharti Tele-Ventures has a market cap of over Rs 60,000 plus crore. The chances are that both groups will beat analysts’ conservative expectations since demergers, by definition, are supposed unleash the animal spirits of enterprise.
Oil’s welcome windfall
The law of unintended consequences is that the actions of people in general, and governments in particular, lead to consequences that were unanticipated and unintended in the first place.
The decision of the NDA government in February, 1999, to get the public sector petroleum companies to pick up equity stakes in each other may well turn out to have a positive unintended consequence.
The logic put forward by Yashwant Sinha, the then finance minister, was that it would enable these companies to achieve greater synergies and vertical integration. What really happened was that the government disinvested small stakes to these companies, lowering its fiscal deficit in the process.
On December 2, 2005, the Union cabinet allowed them to sell these crossholdings. The ONGC board has now allowed the company to sell its equity stake in IOC and GAIL either fully or bit by bit. Its holdings in IOC and GAIL are currently valued at nearly Rs 7,000 crore.
IOC has done even better than ONGC, having picked up 9.61% in ONGC and 4.83% in GAIL. The value of these stakes as on December 27 stood at over Rs 17,000 crore. As for GAIL’s own stakes in ONGC and IOC, they currently add up to over Rs 4,000 crore. Not bad going, for a decision founded on false premises.
(Contributed by Vivek Kaul)
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