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Reliance: Creating a colossus - Views on News from Equitymaster
 
 
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  • Mar 2, 2002

    Reliance: Creating a colossus

    The first day of March in 2002 was in no terms ordinary. While a bandh had been called by a communal party in protest against communal uprising in Gujarat, investors -- maybe having the day off -- decided to shop on the bourses resulting in a hundred point rise on the BSE. But minisculing all that has been the amalgamation announcement from the Ambani group.

    The amalgamated picture

    (Rs m) 3QFY01 3QFY02 Change 9mFY01 9mFY02 Change
    Net sales*** 148,570 131,280 -11.6% 407,090 418,940 2.9%
    Other Income 1,220 2,020 65.6% 3,590 5,700 58.8%
    Expenditure 126,890 107,820 -15.0% 346,560 359,530 3.7%
    Operating Profit (EBDIT) 21,680 23,460 8.2% 60,530 59,410 -1.9%
    Operating Profit Margin (%) 14.6% 17.9%   14.9% 14.2%  
    Interest 5,650 4,640 -17.9% 16,520 14,650 -11.3%
    Depreciation 5,660 6,420 13.4% 16,100 18,670 16.0%
    Profit before Tax 11,590 14,420 24.4% 31,500 31,790 0.9%
    Extraordinary items - 3,580   - 4,180  
    Tax 670 530 -20.9% 1,830 1,860 1.6%
    Profit after Tax/(Loss) 10,920 17,470 60.0% 29,670 34,110 15.0%
    Net profit margin (%) 7.4% 13.3%   7.3% 8.1%  
    No. of Shares**   1673.47     1673.47  
    Diluted Earnings per share*   41.76     27.18  
    * annualised ** assumed amalgamation ratio 1:8 ***Not considering inter-company sales

    As per the announcement, boards of the two Ambani flagship companies, Reliance Industries Ltd. (RIL) and Reliance Petroleum Ltd. (RPL) with meet on March 3, 2002 to consider the amalgamation of RPL with RIL. The amalgamation will be subject to approval from shareholders of the two companies and the Mumbai High Court. Speculation will be rife on the proposed amalgamation ratio. The scrip are likely to witness increased trading volumes in the fresh week ahead.

    The financial story

    RIL RPL
    CMP Rs 322.6 28.6
    Sales Rs m 222,613.3 339,960.0
    EBITDA Rs m 45,906.7 33,307.0
    PAT Rs m 28,560.0 16,920.0
    OPM % 20.6% 9.8%
    NPM % 12.8% 5.0%
    EPS Rs 27.1 3.3
    BVPS Rs 140.1 16.7
    Shares o/s Nos 1,053.8 5,202.0
    Mkt. Cap Rs m 339,889.3 148,777.2
    EV Rs m 440,240.9 223,272.0
    P/E x 11.9 8.8
    CMP/BVPS x 2.3 1.7
    EV/EBITDA x 9.6 6.7
    RoNW % 18.0% 16.8%
    RoA % 8.9% 7.4%


    We undertook a small exercise to gauge what the megamoth will look like. The income statement does not consider inter-company sales. Therefore, actual reported sales for the new entity is likely to be lower. Sale of crude oil to RPL is estimated to have been Rs 3,964 m in FY01 representing 2% of RIL's gross sales. On the other hand, RPL, besides supplying fuel to RIL's power plants, also sells naphtha to the company for its core petrochemical business. The amalgamation could result in lower central and state indirect taxes. RPL is exempt from sales tax for 14 years. That said, operating profits are not likely to be affected. Therefore, aggregation at the bottomline is likely to be more accurate.

    The swap ratio for the amalgamation is likely to be in the range of 8 - 11 shares of RPL for every 1 share of RIL. The final ratio will depend on whether the companies look at book value or market value of assets. In case the two companies choose to give higher weightage to market values, the ratio will move in favour of RIL and vice versa in case companies look at book values.

     

     

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