Shell-shocked investors dump RNRL

SCRIP PLUMMETS 27%

Slide To Continue On Short Selling

TRADERS and investors in Reliance Natural Resources, or RNRL, watched in dismay on Monday as more than a fourth of the company's market capitalisation was wiped out in what is being seen as a strong response to an unfavourable share-swap ratio with group firm Reliance Power.
    The stock crashed 27% to close at Rs 46.40 as investors reacted to Sunday's announcement that shareholders of RNRL would get one share in Reliance Power, also controlled by billionaire Anil Ambani, for every four shares they hold in the natural gas supplier. Most RNRL shareholders and analysts had counted on a swap ratio of one share of Reliance Power for every three they held in RNRL.
    RNRL's fall on Monday figures high in the list of stocks that have been pummelled the most in a single trading session. Realty firm Unitech is perched on top with its stock having slid 51% in October 2008 followed by Chennai-based pharma company Orchid, which slumped 39%.
    Brokers say the stock could be under further pressure in the near term as many traders have heavily short sold the July futures. In short selling, an investor or trader sells a stock he does not own, betting on buying it later when the price slides.
    Interestingly, the outstanding positions in RNRL July futures declined 7% while the futures closed at a premium of Rs 0.15 to the spot price. According to market participants, this indicates that many traders had squared off their short positions by purchasing the falling futures. They added these traders would have short sold the futures last week, in anticipation of an unfavourable merger ratio. 'RNRL investors stand to gain'
THESE traders are upset at what they reckon is an attempt by promoters to place their interests ahead of minority shareholders. Promoters control close to 85% in Reliance Power, and about 55% in RNRL.
    Reliance Power CEO JP Chalasani told television channels that RNRL shareholders would benefit in the long run because of their exposure to the generation portfolio of R-Power.
    At the end of March 31, 2010, there were a little over 25 lakh individual shareholders in RNRL while Reliance Power had close to 35 lakh individual shareholders. In FY10, Reliance Power had a book value of Rs 58.69, and RNRL Rs 11.47. A merger based on book value would have thrown up a swap ratio of 1: 5.
    Some market participants say the ratio is not unfair, considering parameters such as book value and business fundamentals.
    "If the promoters had strictly gone by book value, RNRL shareholders would have suffered further. Besides RNRL's existence had been undermined by the recent court (Supreme Court) verdict," said a BSE broker. What he meant was that after the Supreme Court ruled that the government had the last word in the pricing and distribution of natural gas, RNRL had little reason to exist in its present form. However, veteran brokers on Dalal Street say the merger ratio would have been influenced by minority shareholding in the respective companies.
    The original shareholders of RNRL had received shares free during the demerger of the Reliance group businesses in 2005 after the two Ambani brothers split.
    Reliance Power shares were sold to investors through a highly publicised initial public offering in January 2008, which bombed. The promoters later tried to assuage minority shareholders by approving a bonus issue, which excluded the owners. The stock has consistently underperformed the market since it debuted and brokers say a re-rating is likely only when the company starts generating meaningful revenues.
    In financial year 2009-10, the company reported a revenue of Rs 8.55 crore and an earning per share of Rs 1.14, according to the BSE website.
    Interestingly, institutional investors hold just over 4% in Reliance Power—half of the institutional holding in RNRL—although the company has a sounder business model compared to RNRL, which was to eventually trade in the gas it expected to procure from Reliance Industries.
    In May this year, RNRL shares had crashed 23% after the Supreme Court ruled that its memorandum of understanding with Reliance Industries for sharing gas was not valid. Quite a few domestic mutual funds had punted on the company just before the Supreme Court judgement, hoping for a verdict favouring RNRL. At a broader level, domestic institutions have been steadily paring their exposure to RNRL. At the end of June 2009, they held 3.74% in the company. This has come down to 2.61% as on March 31, 2010.
    However, for shareholders of Reliance Power, there is some cheer as the dilution resulting from the merger will be lower than what they had feared. Reliance Power shares rose nearly 4% to close at Rs 181.40 after touching a 52-week high of Rs 190 earlier in the day.

THE BIG EROSION
RNRL shareholders and analysts expected the merger swap ratio with R-Power to be 3:1, not 4:1 as announced. Traders are angry at what they perceive as an attempt by the promoters to place their interests ahead of the minority shareholders. Promoters control close to 85% in R-Power and roughly 55% in RNRL.

Veteran brokers feel the merger ratio may have been influenced by minority shareholding in the respective companies. As on March 31, 2010, there were a little over 25 lakh individual shareholders in RNRL, compared to nearly 35 lakh for R-Power.