source: economic times

After plenty of drama and uncertainty over the final shape of Reliance Industries' demerger of investments in Anil Dhirubhai Ambani (ADAE) group companies the picture has become clear for RIL shareholders. What emerges is that the company's millions of shareholders stand to gain in a big way as they receive free bonus shares in each of the four demerged entities.

Based on the computation of value received by RIL shareholders in the form of bonus shares in the four demerged companies, even at conservative valuations, RIL shareholders will gain a minimum Rs 200 per share.

As per the scheme, RIL will float four new companies - Reliance Communication Ventures (RCV), Reliance Energy Ventures (REV), Reliance Capital Ventures (RCLV) and Global Fuel Management Services (GFMS). The shareholders of RIL will get one bonus share in each of these companies for every one share of RIL. Therefore, if you hold 100 shares of RIL as on the record date, you will get additional 100 shares in each of the four new companies while retaining the 100 shares in RIL. Let's look at the value for each of these four new shares.

The book value of each share of RCV would be close to Rs 126 per share. According to the RIL statement to the stock exchanges, the value of the investments in undertaking to be demerged into RCV is estimated at Rs 15,400 crore. Since this would be distributed over 122 crore shares to be issued to RIL shareholders, the value per share of RCV would be a minimum Rs 126 per share.

This is a conservative estimate as several investment bankers have valued this investment at a considerably higher sum. However, on a conservative basis the value is a minimum Rs 126 per share.

Similarly, RIL would transfer 9.09 crore shares of Reliance Energy (REL) to Reliance Energy Ventures Limited (REV). Spread over 122 crore shares, that will be issued to RIL shareholders, the conversion factor works out to 7 shares of REL for every 100 shares of REV. At the current market price of Rs 650 per share of REL, the value of 100 shares of REV works out to nearly Rs 4,500 or Rs 45 per share of REV.

In the case of Reliance Capital, RIL would transfer 6.01 crore shares of Reliance Capital (RCL) to the newly formed Reliance Capital Ventures (RCLV). Once again, the shareholders of RIL would receive one share of RCLV for every share of RIL they hold. Thus, calculations show that 100 shares of RCLV would be equivalent of nearly 5 shares of RCL. Hence, the market value of 100 shares of RCLV would be Rs 2,400 or Rs 24 per share.

While there will be additional value on account of RCLV's holding in Reliance insurance companies, we have not considered these values for lack of availability of their valuation. The fourth company in which RIL shareholders would get bonus shares will be Global Fuel Management Services whose book value has been fixed at Rs 5 per share.

Therefore, let's assume that the value of this would be Rs 5 only. So, the total additional value received in the form of these four bonus shares is equal to Rs 200 per share of RIL.

So, if an investor were to buy 100 shares of RIL at the current market price of Rs 725 per share, he would be required to invest Rs 72,500. Out of this he would get back shares worth Rs 20,000 (being the value of 100 bonus shares in each of the four new companies), leaving the cost of buying 100 RIL shares at Rs 52,500 or Rs 525 per share of RIL after the demerger.

Since the demerged investments contributed very little to RIL's profits in the form of dividends, the parent company's profits should remain unaffected. Hence RIL's estimated profit of Rs 10,000 crore this year should remain on target. This implies that demerged RIL would earn an EPS of Rs 70 per share in the current year.

At a conservative PE multiple of 10 times current year's earnings the valuation of demerged RIL should be close to Rs 700 per share, a profit of Rs 175 per share or 25 per cent gain on the original investment.

If one assumes that demerged RIL would get a valuation in line with the sensex PE multiple of 14, then the value of demerged RIL share should be Rs 980 per share a massive gain of over Rs 450 on the original investment.These computations also assume that the price of ADAE group companies REL and RCL would remain stagnant at current levels. In case the stock prices of REL and RCL rise further, the gains for investors in RIL would be even higher.