Reliance to unlock some treasury stock

India's largest private company, Reliance Industries, is on a huge fund-raising drive. After completing a preferential issue of 120 million warrants to promoters in February this year for Rs. 16,824 crore, the Mukesh Ambani controlled company is now planning to mop up around Rs 10,000 crore through a combination of convertible bonds and treasury stock.

According to highly placed industry sources, the company is likely to issue foreign currency convertible bonds/ warrants/convertible debentures to be converted within 12-18 months at Rs. 1,900-2,100 a share. The Reliance Industries scrip is trading at Rs 1,597 and the company has the highest market capitalization of Rs. 2,22,557 crore on the Indian bourses.

At the time of conversion, Reliance Industries would use treasury stock and not issue fresh equity in lieu of the convertible instruments, investment banking sources said on condition of anonymity.

Asked about the issue, a Reliance Industries spokesperson said, "We do not wish to comment on market speculation."

After absorbing IPCL, Reliance Industries holds around 13.6 per cent, or 198 million shares, as treasury stock. Since the conversion is planned at around Rs 2,000 per share, the company could issue nearly 20 million shares, which would result in a dilution of the promoters' indirect interest by around 1.2 per cent to 53.8 per cent.

In February, Reliance Industries issued 120 million convertible warrants to its promoter, Mukesh Ambani, at Rs 1,402 per warrant to be converted into shares within 18 months. This will prop up Ambani's stake in Reliance Industries to 55 per cent on an enhanced paid-up capital of Rs 1, 573.5 crore--after the IPCL merger and the warrants issue--from 51 per cent of the current paid-up capital of Rs 1,393.5 crore. With a dilution of 1.2 per cent treasury stock, the promoters' holding will still remain significantly above 51 per cent.

At the proposed conversion rate and on the enhanced equity base, the market capitalisation of Reliance Industries will jump to over Rs 3,00,000 crore at the time of conversion.

The funds thus raised will be invested in the petrochemicals business and also in exploration for and transportation of gas. As Reliance industries embarks upon a massive expansion plan, the company intends to mobilise funds through equity and not entirely through the debt, according to sources.

According to the media report below RIL plans to mop issue FCCB worth INR 100 bn from FCCB @INR1900-2000/share and issue treasury shares in lieu of the same.



We believe that RIL does not require equity issuance to fund its capex programme considering it low debt/equity ratio of 0.2x. Issuing FCCB may not be required until RIL has some larger plans of capex. On the other hand, it is positive if RIL uses treasury shares that it holds with itself (worth INR 300 bn) to issue shares.



Issuance of FCCB without a corresponding capex announcement may be dilutive to current shareholders (less likely). Therefore, we would like to not give too much into the news item until we hear announcements from the company on the same.



We had downgraded RIL to ACCUMULATE from BUY . We believe that the stock has run up too fast and that there is limited upside from current levels. At INR 1600, RIL trades at 21.8x FY08E EPS.