Unleashing value

Restructuring rids the Reliance group of the conglomerate discount factor

The settlement of ownership issues at Reliance seems to be broadly in line with what the markets have been expecting, which means that Reliance stocks should continue to outperform the market in the near term.

Reports that the ownership issues were near resolution have already led to a considerable re-rating for Reliance stocks this month. The flagship company, Reliance Industries, saw a 12.3 per cent increase in its stock price this month, compared to a mere 2.85 per cent rise in the Sensex.

Prior to that rise, the Reliance stock was down about two per cent since news of the ownership dispute came out last November, despite the Sensex rising by 11.5 per cent during the period.

Similarly, Reliance Energy has risen 14.5 per cent this month. Prior to that, it had fallen 17.8 per cent.

Needless to say, the fact that much of the uncertainty is over should bring investors back to the Reliance counter. The effect the ownership dispute had on institutional investors is important to note here.

FIIs have cut their Reliance exposure to 21.55 per cent as of March, compared with 22.85 per cent as on September 2004. Similarly, mutual funds now hold 1.7 per cent of Reliance Industries, compared to 1.8 per cent in September 2004.

Barring any unforeseen complications, things now should be much more transparent for a Reliance Industries shareholder, especially since its strategic investments in ventures such as Infocomm would now be out of its books.

Analysts point out that a lack of transparency related to these investments had affected Reliance's overall valuation. Besides, the company was viewed as a holding company which also led to a discount in valuations.

Not only would this change, but the fact that Reliance Industries would be left with mainly the oil and gas business also means that a greater portion of the strong cash flow from this business could be paid out as dividend.

Plus, of course, the synergies between the oil and gas and the refineries and petrochemicals business remains intact.

On the other hand, the possible listing of Infocomm would unlock the value of the telecom business, which has never been fully reflected in RIL's valuation.

While this broadly sums up the positives from the settlement, there is still a fair bit of uncertainty of how the various businesses would be transferred.

Infocomm, for instance, has received over Rs 12,000 crore worth funds from Reliance Industries, mostly in the form of debt. It's not clear whether this debt would continue to remain in Reliance Industries' books.

However, if the holding company structure is adopted, as expected, with investors getting one share of both the parent and the holding company, then minority interests will be protected.

Among other issues, Reliance Energy still depends on RIL for gas supply for its Dadri project, and it remains to be seen what arrangement the two companies will have for this deal.

Further, it's still not clear what will happen to companies such as Reliance Utilities and Reliance Port Trust since they are unlisted.

With contributions from Mobis Philipose and Amriteshwar Mathur