NEW DELHI: The Rs 53,125 crore rights issue of Reliance Industries, the largest ever in India, kicked off on Wednesday.
Analysts find the issue ‘quite attractive’ and have advised existing shareholders to avail the window, citing potential upside on account of the oil-to-telecom major’s recent steps to deleverage its balance sheet and create value in retail and telecom ventures.
The fact that the promoter group intends to participate in the issue fully and has pledged to buy all the undersubscribed shares also offer additional comfort, they said.
A rights issue is offered to existing shareholders identified as of the record date, which was May 14 in RIL’s case. For this particular issue, existing shareholders are required to pay only 25 per cent of the money for subscribing to the rights issue, while the balance will fall due in two installments in May and November next year.
A lot of retail buying was seen in the RIL stock in the Rs 1,300-1,400 range. Such retail investors will have ability to get the scrip at Rs 1,257 level. “The flexibility in payments makes it even easier to buy the stock. You pay one-fourth of the due amount and invest in one of the best performing businesses currently. Expectations, though, were of a bigger discount to entice people,” said Probal Sen, Senior VP-Research at Centrum Broking.
In case the right issue holder decides to sell the rights, Prabhudas Lilladher calculates the breakeven of theoretical price for renunciation of right entitlement at Rs 210.
“However, given that buyer is taking the liability to pay Rs 1,096 after 18 months and risk to price change, we believe price to settle between Rs 153 (market price-right issue price) and Rs 175,” it said.
The difference between RIL share price of Rs 1,408.90 and the rights price of Rs 1,257 on Tuesday was Rs 151.90. On Wednesday, RIL’s rights entitlements closed at Rs 212, up 39.57 per cent over that price. These will continue to trade on exchange in T2T (Trade 2 Trade) segment till May 29 under RelianceLR code on BSE and RIL RE on NSE.
The Mukesh Ambani company is offering 1 share for every 15 held as of record date, which was May 14.
Out of the total funds that will be raised, Rs 39,755.08 crore would go towards repayment or prepayment of a portion of certain borrowings availed by company. Analysts said the additional shares are unlikely to drag earnings per share.
“With a cost of debt at 8.5 per cent and a tax rate of 24 per cent, the rights issue priced at Rs 1,257 per share is likely to be largely earnings neutral on our estimates,” HSBC said in a note. Prabhudas Lilladher said, its target would go down to Rs 1,580 from Rs 1,601 due to rights shares.
Naveen Kulkarni of Axis Securities said the rights issue looks attractive primarily because 75 per cent of Reliance’s value comes from the B2C businesses, which include telecom and retail business.
“Both these businesses look attractive. With the kind of marquee investors coming in, which have a lot of experience, you are getting these businesses at a substantial discount to current price,” he said.
The rights issue, Kulkarni said. has added close to Rs 100 per share value of the company, as without it the scrip could have witnessed a derating because of the challenges in the oil and gas space.
“If I were to do an SOTP valuation, the value for the company’s stock works out to around Rs 1,680, which shows there is still significant upside left in it from current level. One should, thus, look to subscribe to the rights issue,” Kulkarni said.
RIL’s issue is the biggest ever for India. Before this, Bharti Airtel and Vodafone Idea came out with rights issues of Rs 25,000 crore each in 2019. Tata Steel did a Rs 12,800 crore rights issue in 2018.
The RIL issue is of partly paidup shares. The shares allotted will now trade separately. Once the entire call money is raised and the right issue shares are fully paidup, they will trade along with the currently listed equity shares of the company.
CLSA said the ongoing stake sales and rights issue give visibility in cash inflows of the company.
Motilal Oswal Securities in a note said the contribution from the standalone business to RIL’s consolidated Ebitda has declined to 60 per cent in FY20 from 85 per cent in FY15.
Higher debt in the standalone business as well as better valuations for telecom and consumer businesses that account for 78 per cent of valuations leads it to believe that these two segments are the new core, the brokerage said.
It now values the firm’s core business at just Rs 358 per share, Reliance Retail at Rs 500 a share and RJio at Rs 760.
This is the first rights issue for RIL in 30 years and will provide additional liquidity and confidence to new investors (such as Facebook) about the promoter’s commitment to the business, analysts said.
RIL’s digital arm Jio Platforms recently received a cheque from General Atlantic, a leading global growth equity firm, worth Rs 6,598.38 crore for a 1.34 per cent stake. Earlier, the company announced a $5.7 billion deal with Facebook for a 9.99 per cent stake in Jio Platforms in what was India’s largest ever FDI in the technology sector.
The company also received additional investments worth over $2.2 billion in the telecom venture from Vista Equity Investors and Silver Lake.