A Calculated move from RIL

A CALCULATED MOVE BY RIL



Reliance Industries Ltd. (RIL), holding company of Reliance Petroleum Ltd. (RPL), has sold about 4.01% stake of RPL, being 18.04 crores equity shares, for Rs.4,023 crores, at an average price of Rs.223 per share. This has reduced stake of RIL in the RPL from 75% to 70.99%.



The share price of RPL has witnessed a lot of volatility, especially in F&Osegment, in the current month series of November, when share price fell from Rs.295 to now at Rs.215. The scrip RPL, was also under ban, till Friday, in F&O, due to Market Wide Limit having crossed 95%. But now, from today, the scrip has resumed trading again in F&O. This was also first instance when a scrip of NIFTY 50, came under ban in F&O segment.



The market report indicates that about 12 crore shares are in open interest in future segment, apart from additional open interests for Put and Call, in options segments at various rates for three months. While taking a feel of retail investors’ position, majority of them are long on the scrip, and since the scrip was under ban, they kept continuing with open position, even after paying mark to market losses and incremental margins, imposed due to higher volatility. Conversely, informed circle is reported to be short in the counter, for matching open interest.



Initially, short positions seems to have been created by the informed circles, at the higher levels of Rs.275 plus, obviously, finding these price levels as unrealistic, and subsequently, actual sell has been triggered by RIL in cash market, thus realizing an average of Rs.223 per share. This has resulted in reverse arbitrage, till last week, when cash segment ruled higher than F&O. This also indicates paucity of floating stock.



Shareholding pattern of RPL is as under :--

1)RIL--337.50 cr shares being 75%--Rs.3,375 crores

2) Chevron--22.50 cr. shares being 5%---Rs.225 crores

3) Public--90.00 cr. shares being 20%--Rs.900 crores




Total


450.00 cr. shares being 100%--Rs.4,500 crores

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RIL has acquired its 75% stake as under :--

1) 270 cr. shares at par---Rs.2,700 crores

2) 67.5 cr. shares at Rs.60 per share---Rs.4,050 crores
total shares 337.50Crores---- Value Rs 6750Crores.





RIL has almost realized its cost of Rs.4,050 crores for subscribing 67.50 shares, in April 2006, at Rs.60 per share. Since, investments sold are based on FIFO (first in first out) basis, shares having subscribed at par were presumed to have been sold, on which long term capital gain of Rs.3,842 crores, has been earned by RIL, which is tax free.



So, effective cost of 71% stake in RPL, for 319.46 crores shares are Rs.2,727 crores, translating into, cost per share at Rs.8.54 . The market value of this is close to Rs.67,000 crores.



One may recall, that Chairman of RIL, Mukesh Ambani, in company’s 33rd AGM held in October in Mumbai, had stated that the company would be capitalizing on the investments held, including that of RPL. Nobody, could predict this move, likely to be taken by RIL at a future date.


Now what could be likely move and developments, post this minority stake sale: -



1) The control of RIL on RPL is not affected as this is a minor dilution, and 71% stake is quite reasonable, in the mega refinery, which would vastly improve the consolidated results of RIL.



2) RIL would have an other income of Rs.3,842 crores, in quarter ending December 07, which would give an extra EPS of Rs.26.50, on enhanced equity of Rs.1,453 crores, post IPCL merger.





3) RIL has been able to mop up close to Rs.4,000 crores (tax free) when it needs funds, for its capex programme at K G Basin.



4) RIL may further decide to offload .99% stake, being 4.46 crore share, and realize close to Rs.1,000 crores, and keeping its stake in RPL at 70%.





5) Chevron, presently has 5% stake in RPL, with an option to raise it to 29% by June 09, post commencement of refinery. The preferential allotment can only be made, based on SEBI formula, which would be at Rs.200 plus, (presuming market price to remain above Rs.200). At this rate, Chevron may not be interested in raising its stake to 29% as it would need close to Rs.30,000 crores. Hence, Chevron, would opt to offload its 5% stake in favour of RIL, at Rs.60 per share, as per the terms of the share subscription Agreement.



6) On happening this event, RIL would be able to raise its stake, back to 75%, at a cost of just Rs.1,350 crores.





7) The informed circles, having initiated shorts in F&O at an average of Rs.275 per share, are repored to have made a gain of Rs.1,000 crore plus.



Now, let’s take a call, how share price of RPL is likely to behave, in coming times.



1) As majority of retail investors are long, they would opt to roll over their positions in December series, as bullish outlook on the stock, continues, for various reasons (no need to elaborate them).



2) Informed circle, holding short position of close to 10 crore shares, may not be interested in rolling over, as market perception has changed positive, on the stock. But, in this case, they may be interested to see a lower rate, on closing day, (Thursday 29th November) to enable them to have a better close out.





3) Since, no more, delivery based selling is expected on the counter, weakness may not be seen from beginning of December F&O series



4) If informed circle, tries to bring down the price on closing day, lot of interested buying may be seen, below Rs.200 per share, from investment and arbitrage view point.



In nutshell, this was a calculated move, by RIL, whereby, huge cost has been recovered, coupled with retaining majority and respectable stake. Also, the market (cash and F&O) is in full control of the management, which would take direction, on the next move of the management, as that will have far reaching consequences.

Chintan,
While reading your post, I am reminded about a few paragraphs from the book Reminiscences of a stock operator by Edwin Lefevre. At one place the stock operator says, he is manipulating the stock price and takes it up. After that manipulation he informs us that an enormous amount of stock can be distributed among the public on the way down and then on the way up. In the entire operation, in the end manipulator will be the net seller and the foolish public will be the buyer. If any member is yet to read this classic book, I sincerely urge them to do it now before it is too late. I am still getting messages stating that target for RPL is above Rs. 400/-. I highly appreciate the wisdom of the stock operator in that book.

http://www.esnips.com/doc/d97e0264-4...stock_operator

you can find the book here

regards
Suresh Kumar