Plan to unlock value: Street

The Dalal Street feels that the demerger scheme announced by Anil Ambani today will unlock the hidden value in the Reliance stock.

But the bigger reason for cheer was the mega investment plans announced by Reliance Industries Chairman Mukesh Ambani. Greater transparency and clearer focus would mean that shareholders would realise better value for their holdings eventually, said analysts.

Based on estimates of some analysts, the value of the de-merged entities, which includes Reliance Energy, Reliance Infocomm and Reliance Capital, should be in the range of Rs 200 to Rs 250 per share.

This is based on the current market price of Reliance Capital and Reliance Energy and a valuation of about Rs 28,000 crore for the Infocomm business.

Based on the current price of Rs 713, this will leave a residual value of Rs 463 to Rs 513 for the RIL share. Given analysts estimate of earnings per share (EPS) of about Rs 62 for 2005-06, the stock, based on the residual price, will trade at a valuation of 7.5 to 8.2 times of earnings "" quite attractive going by the multiples enjoyed by stocks promising similar growth.

On a more academic note, various empirical studies globally have shown that companies with focused businesses tend to enjoy better valuation compared with diversified conglomerates.

Ever since the controversy erupted between the Ambani brothers, several analysts and fund managers have maintained that the battle between the two would ultimately lead to greater transparency.

"The de-merger will bring about greater liquidity in the market and unlock value for the shareholder," says S Varatharajan, oil analyst, Motilal Oswal.

Some analysts also feel that the division may not necessarily mean better value. "As long as the size of the cake is the same, it does not quite matter how many parts you cut it into," says an analyst with a leading broking firm.

However, what keeps their faith in the stock are the prospects for the company's main business. RIL's refining business has been doing exceptionally well driven by rising regional refining margins. Its petrochem business is also on the upswing.

Dhimant Shah, portfolio manager, ASK Raymond James Securities, says that at the current level, the stock holds promise.

"Reliance still continues to have the potential to benefit from its oil refinery business, which contributes 55-60 per cent of its revenues. In the petrochemical sector, however, the company may face competition from new capacities being set up in West Asia," he says.

The demerger formula announced by Anil Ambani is pretty much in the same proportion as RIL's shareholding in the group companies. Considering RIL's equity base of 1,223 million shares (excluding the treasury shares), its shareholding in Reliance Capital should mean 4.95 shares for every 100 shares of Reliance and 7.3 shares for every 100 shares of Reliance Energy.