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Reliance Industries – Post Merger Analysis and Views

March 3, 2009

Post Merger of Reliance Petroleum with Reliance Industries Ltd, here is what various brokerage house expect and recommend to investors.

ABN Amro:
RPET assets are likely to be taken over at their current book value. Expect minimal cost savings arising from the merger given that key cost elements like crude sourcing will have been optimised. Proforma post-merger EPS for FY10/11F drops by 1-3% due to the rise in RPET’s project costs rather than because of the merger itself.

Finally, ABN Amro recommends a SELL on Reliance Industries Ltd with a target price of Rs 1,050 as margins in both these segments could fall to trough levels in FY10. From a stock price perspective, the merger is largely a non-event; refining and petrochemical margin movements are far more relevant.

Merrill Lynch:
Merrill thinks otherwise and recommends a BUY. It also expects RIL’s FY10-FY11 EPS by 1-3% post-merger. Post merger RIL can use RPL’s cash more tax efficiently for funding its E&P and other capex projects. If RPL had remained a subsidiary a part of the cash flow sourcing from RPL would have been paid by way of dividend on which 15% dividend tax would have to be paid.

Retains a BUY on RIL with a target of Rs 1,581 and EPS expectations of Rs 137 and Rs 176 for FY10 and FY11.

HSBC:
HSBC is Overweight on RIL. The key benefit of the merger is increased flexibility in utilising RPL’s operational cash flow for RIL’s planned growth projects in E&P and other areas. Another benefit is that RIL may combine some of the secondary processing capabilities of both refineries to optimize combined product yields in line with market conditions, thereby supporting RIL’s higher gross refining margins.

HSBC has set a target price of Rs 1,640 with EPS expectations of Rs 123 and Rs 170 for FY10 and FY11.

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