Reliance Industries Ltd.

- Demerger Scheme
Scheme Of Demerger

Valuation

LKP Research

As per the scheme of proposed demerge cleared by the board of RIL and approved
by Hon. Bombay High Court, following undertakings of RIL will be transferred to
four Special Purpose Vehicles (SPVs) as under:
1. Business of RIL's Telecommunications Undertaking is to be transferred to
Reliance Communication Ventures Ltd. (RCMVL);
2. Business of RIL's Coal Based Energy Undertaking is to be transferred to
Reliance Energy Ventures Ltd. (REVL);
3. Business of RIL's Financial Services Undertaking is to be transferred to Reliance
Capital Ventures Ltd. (RCLVL); and
4. Business of RIL's Gas Based Energy Undertaking is to be transferred to Global
Fuel Management Services Ltd. (GFMSL)
RCMVL includes RIL's investment in Reliance Communications Infrastructure Ltd.,
Reliance Infocomm Ltd. and Reliance Telecom Ltd. The value of the investments
of RIL in the demerged company is approximately Rs. 154 bn. REVL includes RIL's
investment in Reliance Energy Ltd. The value of investment of RIL in the demerged
company is Rs. 30 bn. RCLVL includes RIL's investment in Financial Services and
Insurance. The value of investment of RIL in the demerged company is Rs. 6 bn.
RIL's investment in GFM is not significant.
As per the scheme of amalgamation approved by Hon. Bombay High Court, all the
existing shareholders of RIL (except the Specified Shareholders i.e. Trustees of
Petroleum Trust, which holds 7.5% of shares of RIL, and four other companies i.e.
Reliance Aromatics and Petrochemicals Pvt. Ltd., Reliance Energy and Project
Development Pvt. Ltd., Reliance Chemicals Pvt. Ltd., and Reliance Polyolefins Pvt.
Ltd., who collectively holds 4.7% of shares of RIL) will get one share of each
demerged company against one share of RIL. As a result thereof, the total number
of shares to be issued by the resulting demerged companies would be 122 crore
as against existing 139 crore equity shares of RIL. So an existing RIL shareholder
(except the Specified Shareholders) holding one share will get:
1. One share of RCMVL of face value Rs. 5;
2. One share of REVL of Face value Rs. 10;
3. One share of RCLVL of face value Rs. 10;
4. One share of GFM of face value of Rs. 5.
valuable company for shareholders of RIL, since its valuation will decide the post
demerger price of shares of RIL, RCMVL will get itself listed on all the Stock
Exchanges, where RIL is listed currently. REVL will hold 45% equity stake in
Reliance Energy and the Board of Reliance Energy will meet on 3rd January 2006
to discuss the amalgamation of REVL with Reliance Energy. RCLVL will hold 29%
equity stake in Reliance Capital and the Board of Reliance Capital will meet on 2nd
January 2006 to discuss the amalgamation of RCLVL with Reliance Capital. GFMSL
will get itself listed on all the Stock Exchanges, where RIL is listed currently.
Hence, shares of all the demerged companies will have full liquidity.
Through the mechanism of the demerger, the share price of RIL will fall and the
same will be compensated by the value of the shares in four demerged companies.
We try to value each demerged company base on fair valuations that each company
can fetch.
RCMVL will be holding 65.90% stake in Reliance Communications. Since, it is an
unlisted company, we try to value it based on the EV/Subscriber criterion taking
Bharati Tele-venture as benchmark. EV of Bharati Tele is approximately Rs. 675 bn.
with a subscriber base of approximately 1.66 crore. The EV/Subscriber ratio of

Ajay Shah

Bharati Tele works out to about 511.36 bn. For a fair valuation of Reliance
Communications, which has a subscriber base of almost similar size at 1.70 crore,
EV/Subscriber for RCMVL will also work out to about Rs. 511 bn. Since RCMVL will
hold 65.90%, value of its holding works out to 337 bn. Hence, based on number
of shares to be issued i.e. 122 crore, we arrive at a valuation of Rs.276 per share.
REVL will be holding 45% stake in Reliance Energy. Board of Reliance Energy has
approved the merger of REVL with itself with the exchange ratio of 7.5:100.
Considering the market value of Rs. 600, the aggregate value works out to Rs.
4,500 i.e. Rs. 45 per share of REVL.
RCVL will be holding 29% stake in Reliance Capital. Board of Reliance Capital has
approved the merger of RCVL with itself with the exchange ratio of 5:100.
Considering the market value of Rs. 435, the aggregate value works out to Rs.
2,175 i.e. Rs. 22 per share of RCVL. GFMSL is more or less dormant company, hence
its value has been taken at face value of Rs. 5. If we sum up the valuations of
all the four demerged companies, total benefit works out to Rs. 345.
VALUATIONS OF DEMERGED COMPANIES
Holding of RIL
Effective holding of Demerged Companies
(REVL, RCVL, RCMVL, GFM)
Effective % holding of RIL shareholders
in demerged companies
Current Market Price
Valuation of RCMVL Based on
EV/Subscriber ratio
Face Value of GFM, in absense of fair
valuation
Benefit per share of RIL

REL
45%

RCL
29%

RCMVL
66%

GFM
100%

45%

29%

66%

100%

45
613

29
451

66
-

100
-

276

46

22

276

5
5

Total benefit accruing to RIL shareholders is Rs. 348 per share of RIL.
Record Date

Impact On RILShareholders

RIL has set 25th January 2006 as the record date to give effect to the scheme
of demerger. From 18th January to 24th January 2006, the shares of RIL will be
under "No Delivery" period. From 25th January 2006 onwards, shares of RIL will
be traded normally. Post demerger price of RIL will be decided based on special
trading session to be held by BSE & NSE, which will take place on 18th January
2006 between 8 a.m. to 9 a.m.
Due to the impact of listing of RIL shares post demerger the BSE and NSE
authorities have to adjust the SENSEX and NIFTY valuation, considering huge
market capitalisation of RIL in both the indices. Even, the post demerger price
of RIL shares will impact the NAV of various schemes of Mutual Funds.
Shareholders of RIL will continue to hold same quantity of shares of RIL and
additional shares of resultant demerged companies and shares of Reliance
Energy Ltd. and Reliance Capital Ltd.
RIL - STANDALONE VALUATION
PARTICULARS
Sales
PAT
EPS
Assignable P/E
Market Value of RIL per share

LKP Research

FY06E
82,564
8,669
62.19
11.00
684

Ajay Shah