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Reliance: Giving it's all

May 20, 2002

Saturday's announcement by the Cabinet Committee on Disinvestments (CCD) must have yielded a sigh of relief from several participants. Privatisation of Indian Petrochemicals Corporation Ltd. (IPCL) had been hanging over the past three years with stock price plummeting after the first attempt fell through leading to many burning their fingers. Reliance group, now represented by Reliance Petroinvestments, which was leading the pack in the 1999, has emerged as the winning bidder for IPCL. It seems, the media, as maybe the group, is relieved to have ended the losing streak on the divestment field. The group, as like others, were completely out bid by Indian Oil Corporation (IOC) for acquiring petroleum marketer, Indo-Burmah Petroleum (IBP) and narrowly missed the finishing line for international long distance service provider, Videsh Sanchar Nigam Ltd. (VSNL). However, all is now passe'.

Winner's Curse?
No. of shares nos m 249
Stake acquired by RIL 26.0%
Acquisition price Rs m 14,910
Shares acquired nos m 65
Acquisition price/share Rs 230
CMP Rs 134
NAV/share Rs 150
Second highest bid** Rs 128
Premium to CMP 71.8%
Premium to NAV 54.0%
Premium to second highest bid 79.9%
Cost of open offer Rs m 11,506
Reliance group bid Rs 14.9 bn for the Government's 26% stake, which works out to a per share price of Rs 230. Comparatively, IOC and Nirma, the second highest and lowest bidder, put in a per share bid of Rs 128 and Rs 110 respectively. Prior to divestment, the media carried several stories on aggressive bidding for IPCL. Reportedly, IOC was expected to have been leading the race at some point. However, numbers suggest otherwise. The media has a lot to thank Reliance, as had they not bid as aggressively, the media would likely have been made to eat back their words.

Having said that, the aggressive bid by Reliance is likely to have been triggered by the two losses. The IOC bid for IBP could have been playing on its mind. Participation of public sector units (PSUs) in the disinvestment programme has upped the ante for acquiring Government assets. Consequently, the programme is yielding attractive collections. One cannot help thinking that the strategy of PSUs bidding aggressively, at start, is likely to have been for establishing a trend.

Shareholding pattern
Shares Outstanding* 249.1
Government holding 84.7
Reliance group 64.8
Free float (40%) 99.6
Maximum open offer (@20%) 49.8
* shares in m
Arbitrage Opportunity?
IPCL
buy back % of free float* 50.0%
Open offer price 231.0
CMP** 134.0
Premium to CMP 72.4%
Realisation from open offer 115.5
Break-even price (BEP) 37.0
FY03E EPS 5.8
P/E Ratio on BEP 6.4
*Assuming all non-strategic shareholders tender in their shares
**Current market price

Reliance Industries Ltd. is the largest petrochemical producer in the country with not many players in the field. The IPCL acquisition is going to increase the dominance of Reliance group in the petrochemical business. The acquisition is likely to yield benefits of scale - leading to global competitiveness. Synergy - IPCL has both naphta and gas crackers, the feedstock will be sourced from the group, as Reliance produces naphtha at the Jamnagar refinery and is involved in oil & gas exploration and production. This is likely to yield integration benefits. Also, the group will be better positioned for sourcing other raw material inputs. Having said that, the higher bid could be supported by monopoly pricing in the domestic market. The Government, especially the Monopolies and Restrictive Trade Practices (MRTPA) wing, will have to be vigilant to ensure the group does not take undue advantage of its position. A weapon in hands of the Government is import duties, which currently are at 30% and 20% for polymers and polyesters and their intermediates.

The group has no doubt paid a premium for acquiring the Government's 26% stake. We estimate the group to have free cash flows of Rs 47.5 bn in 2002. On enterprise value based on EBITDA (EV/EBITDA of 6.5x), the fair price is an estimated Rs 115. Comparative valuations and other financials of the deal have been provided. Reliance Petroinvestments will have to make an open offer for an additional minimum 20% stake. With the high premium offered, we believe all non-strategic shareholders are likely to exercise their option.

IPCL stock was trading at Rs 134 at close on Friday. Based on FY03 earnings, we believe the post buyback price is likely to be Rs 60 based on RIL valuations. Consequently, the stock could be higher by 9% in today's trading at Rs 146, which we believe is the break-even price for the arbitrage in IPCL.

IPCL: Current Status
CMP Rs 134
No. of shares nos 249
Net sales* Rs m 44,946
EBITDA* Rs m 7,907
PAT* Rs m 744
OPM % 17.6%
NPM % 1.7%
EPS Rs 3.0
BVPS Rs 126
Mkt cap Rs m 33,373
Enterprise value Rs m 54,663
P/E x 44.9
Price/book value x 1.1
Mkt cap / sales x 0.7
EV / EBITDA x 6.9
* annualised figs.
Sum of part valuation*
IPCL
Naphtha cracker (Baroda) MT 130,000
Replacement cost / MT Rs 21,825
Value of naphta cracker Rs m 2,837
Gas cracker (Gandhar + Nagothane) MT 700,000
Replacement cost / MT Rs 32,010
Value of gas cracker Rs m 22,407
Downstream capacity MT 1,202,900
Replacement cost / MT Rs 38,800
Value of downstream plants Rs m 46,673
Replacement cost of assets 71,917
Add
Investments** Rs m 1,294
Total asset value Rs m 73,211
Less
Debt Rs m 35,475
Net asset value Rs m 37,736
No. of shares m 249
NAV / per share Rs 152
* All figs. are estimates
** Gujarat Chemical Port Terminal Co. Ltd.
& JV with GE Plastics

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