RILs shareholder-friendly demerger

FE Investor Bureau | Updated: Aug 4 2005, 05:55am hrs
The demerger of Reliance Industries Ltd's (RIL) power, telecom and financial services business and the huge expansion plans for doubling the petroleum refining capacity means a lot more than what meets the eye.

Firstly, the fact that the de-merged businesses will result into three separate entities will add to shareholders wealth. This is because these businesses were previously taken into the books as 'Investments' and some of them were valued at around 80% discount to the market value (because as per Accounting Standards, Investments are to be valued at cost or market value, whichever is less). While the shareholders can expect a good return in the form of additional shares in the new companies, there are some points that need to be considered.

RIL has a strategy of getting tax shields by generating capacity expansion plans.

This was one of the reasons why Reliance Petroleum Ltd (RPL) merged with RIL. The assets of the telecom business are relatively new and represent a good tax shield in the form of higher depreciation. This is in addition to the fact that RIL's telecom business has accumulated losses, which can be carried forward.

Secondly, most of the power plants are now shifting or planning to shift to become gas-based plants. Considering RIL's huge gas reserves in the Krishna Godavari Basin, the synergy seemed to be perfect for RIL and Reliance Energy Ltd (REL). With the demerger, REL might have to purchase gas at market rates. This might affect the margins of REL.

RIL has informed that gas pricing with REL will be done as per the scheduled agreement. The uncertainty in this regard was clarified by Anil Ambani at a press conference last evening. A new company named 'Global Fuel Management Services' will be incorporated and will be entrusted with the responsibility of looking after the fuel management of REL's requirements.