Reliance Industries (RIL) and Reliance Petroleum (RPET) boards have approved the merger of RIL and RPET, with a swap ratio of 1:16.
RIL will purchase Chevron’s 5% stake (225m shares) in RPET at Rs60/share in accordance with the provisions of the equity investment agreement in the next few weeks.
RIL’s holding in RPET will be cancelled and RIL will issue 69.2m of RIL shares to the minority shareholders of RPET. At the approved swap ratio, RIL’s equity would be diluted by 4.4% and our FY10 EPS estimate would see a marginal decline of 0.7%.
The management indicated that RPET’s final project cost is likely to be ~Rs320 billion. This is higher than the earlier anticipated cost of ~Rs270 billion due to depreciation of the rupee against the US dollar and higher capital costs.
As on 31 December 2008, RPET’s debt stood at Rs180 billion and project cost till date was Rs270b. About 85% of RPET’s debt is US dollar denominated.
We believe that most synergies were already in place (crude sourcing, operations, marketing and associated infrastructure).
Incremental benefit to RIL, in our view, would come from flexibility to utilize cash flows available from RPET; and removal of 20% holding company discount applied for its stake in RPET.
We expect RPET to begin commercial production from April 2009 to take advantage of 7-year tax holiday. The refinery has achieved stability in the initial phase of production and has already dispatched its first parcel in January 2009.
RPET is expected to fully commission by the end of 1QFY10. We model GRM at $8/bbl for RIL and at $9/bbl for RPET in FY10.
We remain positive on RIL due to its large E&P potential. RIL currently trades at 9.4x revised FY10E EPS of Rs132. Our FY10 estimates include consolidation for RPL. Maintain BUY.