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Rise in R-Adag shares seems overdone

Rise in R-Adag shares seems overdone
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First Published: Thu, Jun 17 2010. 11 02 PM IST

Updated: Thu, Jun 17 2010. 11 02 PM IST
How much would Mukesh Ambani and Anil Ambani’s businesses gain by the scrapping of the non-compete agreement between the two groups? Based on the markets’ response to the news so far, the two groups are expected to benefit to the extent of Rs28,480 crore.
The market capitalization of the two groups has risen by 13.5%, or Rs58,850 crore, since the time the non-compete agreements were done away with on 23 May. But during this period, the broad markets have risen by around 7%. Adjusted for this, the market capitalization of the two groups has risen by Rs 28,480 crore.
Also Read Big Gains (Graphic)
What’s interesting about the gain in the value of these companies is that at least 90% of it pertains to stocks belonging to Reliance-Anil Dhirubhai Ambani Group (R-Adag). Mukesh Ambani’s Reliance Industries Ltd (RIL) has risen by just 7.7% after the agreement to allow either group to enter sectors that had earlier been reserved for one of them. This is pretty much in line with the rise in the broad market, which indicates the markets haven’t attached much value from the truce between the brothers to RIL’s value. The gains, if any, should be more for RIL, given its large cash balance and free cash generation. It would be better placed to capitalize on the ability to enter sectors it wasn’t allowed to earlier. What’s more, it even made a concrete move in this direction, by buying a 95% stake in Infotel Broadband Services Pvt. Ltd, a telecom company, earlier this month.
This is not to say that Anil Ambani’s companies won’t gain from the truce. For instance, the fund-raising options of Reliance Communications Ltd (RCom) were limited in the past, owing to the right of first refusal with Mukesh Ambani. The company is now planning to hive off its tower infrastructure business and retain only a minority shareholding in the newly created company. Besides, it plans to induct a strategic investor by selling a 26% stake and raise funds to further reduce its debt burden. While there would be benefits for Anil Ambani’s companies, the market response seems to be overdone. RCom shares have risen by 44% since the truce last month and now trade at a significant premium to Bharti Airtel Ltd, which has better financials.
The gain in some other companies is even higher. Reliance Natural Resources Ltd’s shares have risen by 53%. Reliance Power Ltd and Reliance Infrastructure Ltd’s valuations have risen by 27% and 21%, respectively. There are no visible benefits from the truce for some of these companies for them to rise by such an extent.
Graphic by Yogesh Kumar/Mint
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First Published: Thu, Jun 17 2010. 11 02 PM IST