Investors in the two Reliance groups cheered a truce between battling billionaire brothers Mukesh and Anil Ambani, sending their combined market capitalization zooming by about Rs18,053 crore on Monday to Rs4,53,744 crore as the siblings appeared to bury four years of acrimony.
Stocks of all Reliance firms soared in reaction to the peace pact announced on Sunday afternoon, in what sector analysts billed as largely a “sentimental relief” rally. The benchmark Bombay Stock Exchange benchmark Sensex ended nearly flat at 16,469.55 points.
Mukesh Ambani-controlled Reliance Industries Ltd (RIL) rose 2.58% to Rs1,021.45, making up for a part of the drop in 2009-10, its first dip in five years and the most in a decade. The sharpest gainers on Monday in younger brother Anil Ambani’s group were fuel-trading company Reliance Natural Resources Ltd with a 22.58% gain to Rs54.55, mobile phone operator Reliance Communications Ltd (RCom) by nearly 11% to Rs147.90 and power generator Reliance Power Ltd (RPL) by 7.86% to Rs149.55 on BSE.
Calling the agreement between RIL and the Reliance-Anil Dhirubhai Ambani Group (R-Adag) as “positive”, Goldman Sachs’ energy analysts Nilesh Banerjee and Nishant Baranwal said “this would likely help RIL to seek growth opportunities in new sectors within India and to help deploy more than $18 billion (Rs84,060 crore) of free cash flows over FY11-FY14.”
“Given the competitive landscape in businesses like telecom, financial services etc, any potential entry by RIL could be in the form of co-operation with Adag or via industry consolidation,” they wrote, identifying four sectors—telecom, retail, logistics and infrastructure—where both groups could exploit possible synergies.
The two groups have scrapped a 10-year non-compete clause, with the exception of gas-based power plants that RIL will keep off till 31 March 2022, allowing them to branch out into newer businesses and eliminating “any room for further disputes”.
Analysts and investors will be keenly looking for growth drivers in RIL and how it intends to harness this new found freedom.
Chairman Mukesh Ambani will address shareholders at its annual general meeting on 18 June, which happens to be the date on which the de-merger that included the non-compete clause was announced five years ago.
An RIL senior executive, who did not want to be named, said that the 2005 de-merger pact was “restricting both the companies, but (they) are now set free” and agreed that this could provide a much-needed growth boost as the oil-to-yarn conglomerate has been searching for profitable investment outlets. “This was an opportunity to ensure we got all our options open,” added the executive.
Jagannadham Thunuguntla, who heads the equities division at Mumbai-based SMC Capitals Ltd, said the agreement was “a relief to the shareholders of Adag group companies...(whose) stocks had taken a severe hit after the recent Supreme Court verdict”, calling it more of “a psychological statement to the investors that the two groups are willing to work in close tandem”.
Experts are still trying to pin down the benefits that will accrue to R-Adag.
A Mumbai-based energy sector analyst with a foreign brokerage said the deal will need to be scrutinized further to see “what has Adag got in return for giving RIL access to its areas of businesses…(as) that question will be important to Adag shareholders. They need to know what have they taken away from the table.”
The accord has been reached at a time when R-Adag needs cash for a number of projects, including paying for high-speed, third generation (3G) mobile spectrum and rolling out the network.
By scrapping the non-compete agreement before its scheduled date of 31 December 2015, RIL can immediately enter all the sectors R-Adag is in. S.P. Tulsian, an analyst who tracks the two groups very closely, surmises that R-Adag would have been recompensed. “Reliance Adag is on the back foot,” he said.
Jaypee Capital Services’ senior assistant vice-president Abbas Merchant said the development was “more in favour of RIL, unless there is some more compensation for Adag in connection with the gas-sharing agreement that has to be negotiated soon.”