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Tuesday, June 02, 2020

Explained: Why is RIL racing ahead on Dalal Street?

Reliance Industries (RIL) Share Price: The sharp rise of 46 per cent in the share prices of RIL over the last one-month comes amidst a volatile market condition that led to a Sensex crash of 26.7 per cent since January this year.

Written by Sandeep Singh , George Mathew , Edited by Explained Desk | Mumbai, New Delhi | Updated: May 13, 2020 1:21:01 pm
Explained: Why is RIL racing ahead on Dalal Street? Mukesh Ambani, chairman and managing director of Reliance Industries Ltd. (Bloomberg Photo: Dhiraj Singh)

On Monday, Reliance Industries share prices inched closer to its all time high value of 1,617 it hit in December 2019 as it hit an intra-day high of Rs 1,614. The sharp rise of 46 per cent in the share prices of RIL over the last one-month comes amidst a volatile market condition that led to a Sensex crash of 26.7 per cent since January this year. The rise in RIL – the biggest gainer among the Sensex companies between April 3 and May 11 — ahead of its Rs 53,125 crore rights issue has come under the Dalal Street spotlight.

Is the rally in RIL shares for real?

While the share prices of the company fell by over 4.5 per cent on Tuesday in line with the overall weakness in the market, RIL saw its share prices jump by 46 per cent since April 3, when the Sensex which hit a 39-month low of 27,590 is now 12,000 points down from the January peak 42,273 level as it fell under global growth concerns amidst the spread of coronavirus across the world. The rise is despite a decline in crude oil prices and demand for refined products hit RIL’s bottom line and it reported a 37.2 per cent fall in net profit for the March quarter.

While other listed companies faced the investor backlash in the wake of lockdown, RIL share prices jumped as the group announced three significant equity deals in Jio Platforms over the last one-month, valuing the company at over Rs 5 lakh crore. While Facebook announced to buy a 9.9 per cent stake in Jio Platforms on April 22 for $5.7 billion, US-based tech investment firm Silver Lake announced to invest Rs 5665 crore in Jio Platforms on May 4. Last week, Vista Equity Partners, a PE firm announced buying a 2.32 per cent stake in Jio Platforms for Rs 11,367 crore. Jio Platforms has now raised over Rs 60,500 crore over the last one month, that market leaders feel will significantly increase the company’s ability to reduce its debt. Another factor that led to a rise in share price over the last week has been the company’s decision to go for a mega rights issue to its existing shareholders aggregating to Rs 53,125 crore.

What is the significance of the rights issue?

The company has set the record date for the rights issue as May 14, which means that all the shareholders who own shares of RIL as on May 14, will be allowed to participate in the rights issue. While the company has announced that it will offer the rights issue at Rs 1,257 per share, which is a significant discount on its current market price, a section of experts is not convinced about the rally as the entire economy is in the doldrums and the lockdown has hit the backbone of the industry.

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Will the prices rise after the rights issue?

Experts say that ideally addition of more shares through rights issue leads to dilution in earnings per share as the net profit has to be spread over a larger base of shares. This should ideally lead to a correction in share prices after the issue. However, given the fact that the rise in share price of RIL over the last one month has little to do with the company’s performance and more to do with its reduction in debt and strength of balance sheet, some feel that there could be a rise in share prices as the proceeds from the rights issue will help the company significantly bring down its debt levels. However, there were several instances in the past when share prices of listed companies declined sharply after a big rights issue.

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What does debt reduction mean?

The debt level of RIL has been a big overhand for the company over the last few years, even as its profits and cash reserves have been growing. Reliance Industries saw a sharp rise in its gross and net debt and the group saw its net debt more than double from Rs 76,388 crore in March 2015 to Rs 157,236 crore by the end of September 2019. While its chairman Mukesh Ambani has set a target to turn RIL a debt free company by March 2021, the company’s recent stake sale in Jio Platforms which helped it raise over Rs 60,000 crore and the planned Rights issue will further boost the company’s move in that direction. Besides, Saudi Aramco is learnt to be continuing with its due diligence to buy 20 per cent stake in Reliance Industries and if that concludes, it will be another shot in the arm for the company. Brokerages say that a reduced level of debt could increase the group’s ability to utilise cash for value addition and growth and also result into re-rating of the share price.

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