Reliance Industries Rights Issue May 2020 Review

Published on Monday, May 11, 2020 by Dilip Davda

• RIL is coming with the public equity offer after three decades
• It's the first mega and fastest rights issue of Indian Markets
• Total issue size is Rs 53124 cr. and promoters will contribute around Rs 25962 cr. (48.87%)
• This mega issue is going to change the matrix of primary markets.
• Online application is recommended amidst ongoing Lockdown situation.

ABOUT COMPANY:

Reliance Industries Ltd. (RIL) has been the darling of investors across the board for over four decades now. It has rewarded investors handsomely against their original holdings since IPO time. The company that was primarily a polyester yarn manufacturing company diversified over the years and is currently the refinery conglomerate of India with respected market cap. The company is currently engaged in polyester yarn, petrochemicals, telecom, retail outlets etc. It has also invested in media, broking and financial segments with strategic partners.

While secondary market is witnessing highly volatile trades with bearish undercurrent and many corporate that have SEBI nod for their IPOs are seating on fence to wait for opportune time, known for his business acumen, Mukesh Ambani is encasing the mad rush of investment for its Jio venture that has lifted its valuations with marquee investors like Face Book (Rs 43574 cr.), Silver Lake (Rs 5656 cr.) and Vista (Rs 11367 cr.) planning to invest in Reliance group. Also Fuel retailing JV with BP (Rs 7000 cr.) and stake buy plans of Saudi Aramco is mirroring its positive impact on this counter for a while. These reports have overshadowed the impact of crude oil crisis for RIL for a while. This is the first Indian company that has crossed Rs 100000 cr. mark for consolidated EBITDA.

As pre Letter of Offer for this rights issue, as on 31.03.20 shareholding pattern indicated promoters 48.87%, Public 48.74% and 2.39% non-promoter/non-public portion.

That's the reason this counter marked historic high in turbulence time of global slowdown and COVID-19 pandemic scare and attracted one and all.

Issue Details/Capital History:

To part finance its plans to repay/prepay of all the portion of certain borrowings (Rs 39755.08 cr.), General corporate purpose (Rs 13281.05 cr.), RIL's mega right issue worth Rs 53124 cr. and is spending around Rs 89 cr. for this issue process. The company is issuing 422626894 equity shares of Rs 10 each on the basis of rights issue in the ratio of 1 share for every 15 shares held as on record date of 14.05.20. The scrip has already gone ex-right on bourses since 13.05.20. This issue opens for subscription on 20.05.20 and will close on 03.06.20. This issue is lead managed by JM Financial Ltd., Kotak Mahindra Capital Co. Ltd., Axis Capital Ltd., BNP Paribas, DSP Merrill Lynch Ltd., Citigroup Global Markets India Pvt. Ltd., Goldman Sachs (India) Securities Pvt. Ltd. HDFC Bank Ltd., HSBC Securities and Capital Markets (India) Pvt. Ltd. ICICI Securities Ltd., IDFC Securities Ltd., JP Morgan India Pvt. Ltd., Morgan Stanley India Co. Pvt. Ltd., SBI Capital Markets Ltd., while KFin Technologies Pvt. Ltd. (formerly known as Karvy Fintech Pvt. Ltd.) is the registrar to the issue. Perhaps due to ongoing COVID-19 pandemic, RIL has appointed a team of 14 merchant bankers for marketing this ultra mega rights issue.

1. Rs 314.25 (Rs 2.50 FV and Rs 311.75 premium per share) i.e. 25%  with application in May/June 2020
2. Rs 314.25 (Rs 2.50 FV and Rs 311.75 premium per share) i.e. 25%  1st call in May 2021
3. Rs 628.50 (Rs 5.00 FV and Rs 623.50 premium per share) i.e. balance 50% as final call in November 2021.

As on 31.03.20, RILs total debt were Rs 161035 cr. (on a consolidated basis) and the company is going to utilize some proportion of rights issue proceeds and other inflows by way of strategic stake cell in Jio arm to become debt free company by end CY 2020. 

Post closure of this rights issue, RIL will have addition of Rs 423 cr. to its paid up equity and Rs 52702 cr. to its reserve fund under security premium account. Its current paid up equity capital of Rs 6339 cr. will stand enhanced to Rs 6762 cr.

FINANCIAL PERFORMANCE:

For the last two fiscals, on a consolidated basis RIL has posted a turnover/net profit of Rs 625212 cr. /Rs 39837 cr. (FY19) and Rs 659205 cr. / Rs 39880 cr. (FY20). Net profit is calculated on the basis of exceptional items inclusion. It has maintained dividend payout at 65% for both these financial years.

Based on its ex-right quote of Rs 1496.40 (BSE) and Rs 1496.45 (at NSE) at the close of trading hours on 13.05.20 it is priced at a discount of 16% and this percentage will keep changing on either side on the basis of its quote till the closure of the issue. Considering its current paid up equity and the performance for FY 2019-20, this issue is priced at a P/E of 19.80 and at a P/BV of 2.1 based on its NAV of Rs 592.71 as on 31.03.20. If we attribute FY20 earnings on fully diluted equity post rights issue then asking price is at a P/E of 21. Thus this P/E discounts all near term positives and issue appears fully priced.

Since IPO RIL has posted CAGR of 24% p.a. for Revenue, 25% p.a. for EBITDA, 25% p.a. for net income, 31% p.a. for market cap.

What should shareholders do?

As currently we have lockdown following COVID-19 pandemic and postal/courier services are not in operations, this mega issue is going to be marketed with online process. Investors will have to follow the instructions given in the Letter of Offer and the process guidelines indicated on the web site of registrar and transfer agents KFin.

Shareholders applying for this rights issue will have to pay Rs 314.25 (25%) along with application and the balance Rs 942.75 as determined by the company from time to time in one or more calls. As this is the rights offer, it will have official trading on the bourses for renunciation forms at a premium that will keep changing on the basis of its market quote at the time of buying/selling. Original shareholder applying for right shares will be eligible for applying additional shares while renounce buyer will not have such option. They can apply for only the renounced part of shares.

Conclusion

Shareholders must apply for this offer with a medium to long term perspective.

Rights Entitlements Ratio

The Rights Equity Shares are being offered on a rights basis to the Eligible Equity Shareholders in the ratio of 1 (one) Rights Equity Share for every 15 Equity Shares held by the Eligible Equity Shareholders as on the Record Date.

Fractional Entitlements

As per SEBI Rights Issue Circulars, the fractional entitlements are to be ignored. Accordingly, if the shareholding of any of the Eligible Equity Shareholders is less than 15 Equity Shares or is not in the multiple of 15 Equity Shares, the fractional entitlements of such Eligible Equity Shareholders shall be ignored by rounding down of their Rights Entitlements. However, the Eligible Equity Shareholders whose fractional entitlements are being ignored, will be given preferential consideration for the Allotment of one additional Rights Equity Share if they apply for additional Rights Equity Shares over and above their Rights Entitlements, if any, subject to availability of Rights Equity Shares in this Issue post allocation towards Rights Entitlements applied for.

For example, if an Eligible Equity Shareholder holds 16 Equity Shares, such Equity Shareholder will be entitled to 1 (one) Rights Equity Share and will also be given a preferential consideration for the Allotment of one additional Rights Equity Share if such Eligible Equity Shareholder has applied for additional Rights Equity Shares, over and above his/her Rights Entitlements, subject to availability of Rights Equity Shares in this Issue post allocation towards Rights Entitlements applied for. Further, the Eligible Equity Shareholders holding less than 15 Equity Shares shall have 'zero' entitlement for the Rights Equity Shares. Such Eligible Equity Shareholders are entitled to apply for additional Rights Equity Shares and will be given preference in the Allotment of one Rights Equity Share, if such Eligible Equity Shareholders apply for additional Rights Equity Shares, subject to availability of Rights Equity Shares in this Issue post allocation towards Rights Entitlements applied for. However, they cannot renounce the same in favour of third parties.

Options available to the Eligible Equity Shareholders

The Rights Entitlement Letter will clearly indicate the number of Rights Equity Shares that the Eligible Equity Shareholder is entitled to.

If the Eligible Equity Shareholder applies in this Issue, then such Eligible Equity Shareholder can:

(i) apply for its Rights Equity Shares to the full extent of its Rights Entitlements; or

(ii) apply for its Rights Equity Shares to the extent of part of its Rights Entitlements (without renouncing the other part); or

(iii) apply for Rights Equity Shares to the extent of part of its Rights Entitlements and renounce the other part of its Rights Entitlements; or

(iv) apply for its Rights Equity Shares to the full extent of its Rights Entitlements and apply for additional Rights Equity Shares; or

(v) renounce its Rights Entitlements in full.

(with certain inputs from letter of offer of RIL).

DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at own risk. Investors should bear in mind that any investment in stock markets is subject to unpredictable market-related risks. Above information is based on RHP and other documents available as of date coupled with market perception. The author is applying for rights entitlement as per applicable norms for long term holding of RIL shares in the family. (In fact, we have received mail for entitlement of 1 share in the folio).

(SEBI registered Research Analyst-Mumbai).