RIL: Fair value

RIL's current share price of Rs 730 already reflects the "sum-of-parts" valuation of all businesses

Reliance Industries' (RIL) holdings in its energy, financial services and telecom subsidiaries have been unlocked in the most equitable way.

A shareholder with 100 shares in Reliance Industries will end up with 7 shares of Reliance Energy and 5 shares of Reliance Capital, which is very close to what he held indirectly via RIL's 47 per cent stake in the two listed subsidiaries.

The other two unlisted subsidiaries, Reliance Communications Ventures and Global Fuel Management Services, will have a shareholding pattern (100 for 100 shares) that is identical to that of RIL's current holding pattern.

Needless to say, there would be an "unlocking" taking place with the de-merger, since RIL investors would soon be able to trade in the core refining and petrochemicals business separately, apart from the energy, financial services and telecom businesses.

But there may not be much "unlocking" in terms of value because of the de-merger, since RIL's current share price of Rs 730 already reflects the "sum-of-parts" valuation of all businesses. Investments in the energy, financial services and telecom subsidiaries are cumulatively worth roughly Rs 200 a RIL share.

This is based on current share prices of Reliance Energy and Reliance Capital and the price at which RIL's preference shares in Reliance Infocomm were converted into equity.

Besides, RIL's valuation also includes the value of the KG basin gas reserves and the oil and gas fields in Panna-Mukta and Tapti, besides the value of its holding in IPCL and its debt financing of Reliance Infocomm. Cumulatively, these amount to about Rs 115 a share.

This puts the core refining and petrochemicals business market valuation at about Rs 415 per share (current price of Rs 730 less Rs 200 and Rs 115). With the company's net debt at Rs 95 per share, the enterprise value of the refining and petrochemicals business is Rs 510 per share.

Reliance reported an operating EBITDA of Rs 12,800 crore or Rs 92 per share last fiscal, which gives the refining and petrochemicals business a EV/EBITDA valuation of over 5.5 times on a trailing basis.

Analysts estimate the company's EBITDA to grow to roughly Rs 15,000 crore in FY07, which gives the core business a forward valuation of 4.7 times on an EV/EBITDA basis.

It's important to note that Reliance has had a terrific run on both the refining and petrochemicals front, of late. Refining margins last quarter were $11.4/barrel, over 50 per cent higher on a year-on-year basis, and the highest in over 12 quarters.

On the petrochemicals front, both polymer and polyester prices peaked last fiscal. Given that the core businesses are relatively close to their peaks, an EV/EBITDA valuation of around five times makes sense, simply because earnings can not be expected to grow at a fast pace from current levels.

At the same time, it's not that the settlement between the promoters and the resultant unlocking hasn't created value for investors. Reliance Industries' share price has risen by over 36 per cent since news of the settlement reached the markets. The current price, however, reflects the fair value based on sum-of-the-parts valuation.

HT Media

Media stocks are currently popular among investors and they have run up considerably over the past few two months. For instance, Deccan Chronicle has gained about 38 per cent compared with a 15 per cent gain in the broader market.

Mid- Day Multimedia too has also gained about 16 per cent. HT Media will ride the crest of this investor interest, shown by the fact that the issue had already been subscribed within minutes on the first day of the IPO.

HT Media's income from operation was Rs 624.5 crore (a comparison with the previous year is not possible) in FY05, and operating profit Rs 74.7 crore, with an operating profit margin of 11.96 per cent.

However, the worst for the company in terms of the price war in the key New Delhi market with its nearest competitor has shown signs of coming to an end, with both players recently raising their cover prices.

It is understood that HT Media's circulation has fallen marginally as a result in the capital "" daily circulation in New Delhi city was 715, 000, as per the ABC survey carried out between July and December 2004. The impact of reduced circulation was, however, offset by an enhancement of its advertisement rates in May 2005.

Like other print media companies, a key concern for HT Media remains the rising cost of inputs such as newsprint and the resulting impact on margins. For instance, raw material consumed as a percentage of income from operations accounted for 45.92 per cent in FY 05.

Also, the spate of newspapers being launched in metro markets such as Mumbai has the potential to limit the company's circulation and resulting advertising revenue.

Senior company management, however, highlighted their national presence and the loyalty they have enjoyed over the years in several cities across the city. Analysts say the newspaper has already got a daily circulation of about 2 lakh copies in Mumbai, which is a good start.

The offer's valuation has been widely viewed as high, especially at the higher end of the price band. But investors are keen on getting an exposure to the nationwide media space, especially in the current bull market.

With contributions from Mobis Philipose and Amriteshwar Mathur