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Reliance Petroleum converts FCCBs into GDRs - Views on News from Equitymaster
 
 
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  • Oct 11, 1999

    Reliance Petroleum converts FCCBs into GDRs

    According to newspaper reports, Reliance Petroleum has gone in for a 'forced conversion' of its foreign currency convertible bonds (FCCB) into global depository receipts (GDR). The conversion is to take place at a price of US$ 5 per GDR (1 GDR = 15 shares). The GDRs are to be listed at the Luxembourg Stock Exchange.

    RPL has set up the world's largest single location refinery having a capacity of 27 m tonnes per annum, at a cost of Rs 142.5 bn.

    The decision to convert the FCCBs into GDRs is likely to benefit the company in several ways:

  • It will save interest cost, amounting to approximately US$ 8 m per annum, resulting in higher profitability.
  • The inflation of debt (principal and servicing costs) due to the depreciation of the Indian rupee will be no longer valid
  • The company's debt equity ratio will improve to 0.9:1 as the debt is being converted to equity
  • Its listing on an international exchange will give it access to larger markets in sourcing funding needs in the future.

    The conversion has been effected at a price of Rs 15 per share, which is at a steep discount to the domestic price of Rs 52 per share. Thus, the existing shareholders of the company are likely to lose out as a result of this deal (equity dilution). The US$ 100 m debt and a US$ 8 m per year, are a small portion of the company's overall debt (Rs XXXX) and servicing costs (Rs XXXXX) and as a result the conversion will make no significant alteration in RPL's balance sheet structure.

    Market View:

    RPL's advantage of size, product mix and marketing ability has led the analysts to rate the stock as a 'BUY'. The product mix is in favor of light distillate, LPG and diesel, all of which have high demand growth. The company plans to market a third of its production to group companies, thus providing it with a ready market.

     

     

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