Skip to main content

Reliance Industries RIL - RPL Merger

RIL - RPL Merger - EPS accretive for RIL.

Reliance Industries Ltd’s (RIL) and Reliance Petroleum Ltd’s (RPL) board of directors have approved RPL’s merger with RIL in an all share deal in the ratio of 1:16 (one RIL share for every 16 shares of RPL). RIL will extinguish the treasury shares created from the merger and issue 6.92 crore shares (4.4% dilution) to the minority shareholders of RPL.

The merger will provide RIL access to RPL’s strong free cash flows of around $1.2-1.5billion each year (expected from the next fiscal year) in the difficult macro environment. This is expected to help RIL to tide over the downturn in the petrochemical cycle and fund its capital expenditure (capex) in the exploration business.

At the operational front, RIL will benefit from crude oil sourcing and placement of the final products in the export market. Moreover, the meger will help RIL balance its overall product slate and better adjustment of capacity ultilisation in the times of downturn.

The merger will be positive for RIL’s earnings per share (EPS) and the company’s EPS is expected to increase by 3.3% to Rs131.8 per share in FY2010. At the current market price, the stock trades at a price/earnings ratio of 9.6x FY2010E consolidated earnings and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 7.1 x FY2010E.Buy / Accumulate the stock on declines with the sum-of-the-parts (SoTP) -based price target of Rs1,660 per share.