Reliance Petro: Outperformer

RPL has gained 33 per cent in September and 60 per cent in October to hit a high of Rs 269 on November 2

Most analysts put the fair value of Reliance Petroleum at Rs 160-170. And if Reliance Industries (RIL) has offloaded 4 per cent of its 75 per cent stake in the company at a price of Rs 223, it could be an added reason to believe so.

Looking at it another way, the cost of the refinery is about Rs 27,000 crore, whereas RPL's market cap is nudging Rs 92,000 crore. And the refinery is likely to be commissioned only in April 2009.

RPL has been a stunning outperformer in the market, gaining 33 per cent in September and 60 per cent in October to hit a high of Rs 269 on November 2.

The stock lost 2 per cent on Monday to close at Rs 204 and from the looks of it, one wonders how many institutional investors have bought the stock that RIL sold over the past 10 days.

Indeed, the high valuation of RPL could well deter Chevron from increasing its 5 per cent stake to 29 per cent.

Chevron has an option to raise its stake to 29 per cent by July 2009 by buying 24 per cent from RIL at a 5 per cent discount to the prevailing market price.

If Chevron does buy the stake entirely from RIL, it means the latter's holding will come down to 47 per cent. But it's unlikely that RIL would want to hold less than 51 per cent in RPL.

If the RPL stock price stays at similar levels, the tab for Chevron would be a steep Rs 22,500 crore for the additional 24 per cent stake.

That is almost equal to the cost of the refinery. If Chevron does not exercise its option, RIL can buy back the 5 per cent stake at Rs 60 per share.

In that case, its stake will once again go up to 76 per cent. So, having sold a 4 per cent stake at about Rs 223, RIL can re-instate its holding at Rs 60 per share. That's if Chevron stays away.

For RIL, the sale will fetch a net one-time gain of Rs 3,840 crore and should add about Rs 960 crore to the fair valuation of RIL's, assuming the fair value of RPL to be about Rs 170 a share.

This is a small figure relative to the market capitalisation of RIL of about Rs 4,40,000 crore. RIL's earnings will fall marginally in FY09-10 because RIL now holds only 71 per cent of RPL.

However, the cash from the sale can be used to fund a project or an acquisition.