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How to trade RIL - RPL on coming Monday
The Reliance Industries board will meet on March 2 to consider merger with Reliance Petroleum. RIL, India’s largest private sector enterprise, will issue about 34-crore additional equity shares of market value of approximately Rs 11,000 crore. RIL sold 4% stake in RPL taking its stake down to 71%.
Reacting to the RIL-RPL merger news, Dipan Mehta, Member, Bombay Stock Exchange, said in an interview with CNBC - TV 18, this is what the company management has been doing over the years. â€œForming separate companies and then merging them.â€
Mehta further said that net-net it really makes no difference for the performance of either of the companies. â€œBut I think they will create a feel good effect in both the stocks,â€ he added. â€œIn times like this, even a bit of positive news would help.â€
Q: What do you expect is going to be the reception of this news on Monday? How do you expect the two shares to move?
A: I think the whole controversy about or rather analysis about the exchange ratio would start. This is what the company management has been doing over the years forming separate companies and then merging with them. Net-net makes really no difference for the performance of either of the companies.
However, I think they will create a feel good effect in both the stocks. In times like this even a little bit of positive news would help. I think by and large it would just create a positive sentiment for both the stocks. Operationally, RPL stands to gain more but then we have to understand exactly how they are going to adjust the ratio and net-net what the shareholders are going to get in RPL.
Q: So on Monday morning, you would not be advising buying in either of the shares?
A: Not really. It is a bit of a trading, one could look at trading at that point of time. A little bit of trade but nothing further than that; at least, not till all the exact details are known.
Q: The trading advantage would be for an RIL shareholder getting into RIL and trading it up?
A: I guess so. But as I said, it could fall either way. These amalgamation-consolidation and the ratios, sometimes tend to surprise the market men. Then the adjustment of prices takes place usually after the ratio because when the ratio is fixed a lot more analysis is done and not only just the weightage of the stock price but also the assets which are there in the company which may not have been fully reflected in the stock price also considered.
In the RIL case, I would look at all the other assets which the company has got, especially, the oil field and the gas fields and also other investments which they have made in some other businesses like retail, SEZ and infrastructure businesses. My sense is that RPL may be negative, RIL certainly is positive from that point of view. The ratio would not be exactly based on the stock. I think some deviation or some preferences be given to the RIL shareholders.
Q: Do you think it is a precursor to restructuring of the company getting all the refining assets into one company and then de-merging the E&P business for Reliance?
A: I think it would be great for minority shareholders point of view to consider that. But at the end of the day, we have to remember that refining businesses are the ones which are generating the cash. The capex is taking place is in the E&P business, the exploration business. Therefore, it would not make too much sense to demerge them otherwise independently the gas business, the exploration business would have to raise funds where there would be surplus in refining business. So, from a minority shareholder point of view it would help certainly and it would unlock some value which the company has did earlier when there was a split but I do not think it makes sense in a business manner.
Q: Given that this merger now is on the card irrespective of the swap ratio, would you say that given such a huge entity, likely synergies that will follow it makes at current valuation a good buy for a longer term investor, would that be your advise?
A: Yes absolutely. From long term point of view once there is clarity on the merger ratio it does make sense it will have another highest weightages, single weightages in the both the Indices and no investors, small or large would be able to avoid atleast having some weightage to it.
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