Anil's announcement angered Mukesh (see box). But, for most analysts, it was not surprising. "Mukesh should have given those details at theAGM itself, as there's no rocket science involved. It's a simple calculation to figure out who gets what. The irony is that the RIL board was meeting two days later (Friday, August 5) to arrive at the same figures," says a Mumbai-based analyst who has tracked the Reliance group for years.
Now that we know the details, the one question everyone's asking is: will it benefit the RIL shareholders in the short term? The consensus among stockmarket experts is that the move is good for investors, as it had been done in a transparent and fair manner. None of them are, however, certain about whether it'll monetarily help the shareholders. Here's why.
Prior to the split, RIL had exposures in sectors (oil and gas exploration, refining, petrochemicals and textiles) that were integrated. But it also had stakes in group firms that operated in diverse areas such as power, telecom and financial services. Obviously, there were no synergies between the former sectors and the latter ones. "The RIL shareholder was confused. More than that, he had no option to decide whether he wanted to be exposed to such diverse, and unrelated, sectors," says a Mumbai-based analyst, who was unhappy with RIL's link with the telecom ventures.
As Anil had once remarked, this confusion led to a discounting of the RIL scrip price. Perhaps why, for a long time, RIL underperformed the Sensex. Once the split was announced on June 18, 2005, and it was clear that RIL would stick to its core, vertically-integrated segments, RIL outperformed the Sensex. "The proposed demerger will allow investors to take a call—do they wish to stay invested in oil or power or telecom? If they don't, they can sell their shares in Reliance Energy or RCVL, or even RIL," explains a source close to Anil.
But there's a flip side too. By giving up its holdings in other areas, RIL will become a plain-vanilla cyclical company that deals with commodities (like petrochemicals and petroproducts). Therefore, from now on, its fortunes will depend on the volatility of the global prices of these products. At this stage, global prices are at an all-timehigh. Most experts feel they can only go down in the near future. And as each cycle is 3-5 years, the forthcoming downside may adversely impact the RIL stock.
To take advantage of the next boom cycle, Mukesh announced ambitious plans at the agm with proposed investments of Rs 49,000 crore over the next 3-5 years. By doubling the refinery capacity, setting up a huge plant to make pure terephthallic acid, and committing over Rs 17,000 crore to exploration, RIL hopes to increase volumes and margins when the product price cycle starts its ascending path in 3-5 years' time.
What needs to be seen is whether the demerger can, as Mukesh put it, really lead to the unlocking of the RIL shareholders' value? Analysts aren't too sure. Their current sum-of-the-parts valuation (which gives a value to each of RIL's businesses, like exploration, refining, and also its stakes in group firms) is between Rs 730-801 per share. At the current market price of Rs 729, there may not be any more stamina for an upsurge.
This is in line with a report (August 4, '05) put out by Kotak Institutional Equities Research. It stated: ".... In our view, the stock price is reflecting the fair value of the core businesses and the value of the subsidiaries. Our NAV is Rs 730, implying limited value unlocking from current levels." A Mumbai-based analyst contends that once the demerger is finalised—in 3-6 months—it could lead to a discounting of the RIL scrip as the value of the subsidiaries moves out of RIL with its shareholders getting additional shares in Anil-owned firms.
So then, what about the stakes that RIL investors have in, say, Reliance Capital, Reliance Energy and RCVL? One is not too sure whether the three scrips—RCVL will get listed at a later date—will do well. Reliance Capital has already zoomed to new highs in the past one-and-a-half months. But its future depends on whether Anil can transform it into a financial powerhouse. The younger brother, after having purchased an insurance firm, is said to be scouting around for a bank to achieve this objective.
The future of Reliance Energy and GFMS (which will handle the transportation of the gas supplied for the proposed power plant) too is uncertain. A UBS report (August 3, '05) stated: "The reason for creating a separate SPV for buying and selling gas is still not clear, except creating more opacity in the gas transportation process." The report also added that RIL may not be able to supply the entire fuel requirement for the 7,480-MW unit. "To fuel this capacity, RIL needs to supply 30-35 mmscmd of gas. Separately, RIL has committed 13 mmscmd of gas toNTPC.... This means RIL has to produce a minimum 45-48 mmscmd at its peak production against RIL's official stance of 40 mmscmd of gas production." Not to forget that analysts have no clue about Reliance Infocomm. As the UBS report contended, "The management (Anil) has not given any details of q1fy06 performance of the company."
So it seems the investors will need to gauge the individual performance of the two brothers before taking a decision on which Reliance group firms' stocks to retain and hold, and which to dump.
