5:1 swap may give higher value to IPCL investors

The IPCL scrip is quoting at a lower price multiple to earnings per share and analysts believe that a swap ratio of 5:1 will give IPCL investors a higher value on their investments, report Vyas Mohan and Venkatesh Ganesh.

IPCL shareholders stand to benefit from its merger with Reliance Industries. The IPCL scrip is quoting at a lower price multiple to earnings per share and analysts believe that a swap ratio of 5:1 will give IPCL investors a higher value on their investments.

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"This boils down to the fact that IPCL will stand to benefit from higher multiples, similar to that of Reliance Industries. IPCL shares were trading at a multiple of around five before the announcement, while those of Reliance Industries are trading far higher. Further, investors are in a way de-risking their investment as Reliance Industries is a diversified entity," said Manish Sonthalia, vice-president (equities), Motilal Oswal Securities.

Sanjiv Agrawal, partner and national director (valuations), Ernst & Young said the IPCL share price had not made any significant gains over the last four years despite major rallies in the stock market. "The IPCL share price rose only 25-30 per cent in the last four years. This is partly due to the cyclical nature of the petrochemicals industry. Petrochem margins will come under pressure due to additional capacities coming up in China," he added. Ernst & Young was an adviser to Reliance Industries for the merger.

The board of directors of Reliance Industries on Saturday cleared the merger of IPCL with itself from April 1. Shareholders will get one share of Reliance Industries for every five they hold in IPCL. The Reliance Industries board also approved an interim dividend of Rs 11 per share, which amounts to Rs 1,748 crore, including dividend tax. After the merger, the share capital of Reliance Industries will increase to Rs 1,453 crore from Rs 1,393.5 crore now. On Friday, the Reliance Industries scrip closed at Rs 1,318.

Commenting on the merger, Mukesh Ambani, chairman and managing director, Reliance Industries, said; "The merger will create value through synergies and scale that shall enhance the sustainable competitive advantages of Reliance Industries. This merger will be earnings accretive for the shareholders of Reliance Industries and shall provide shareholders of IPCL an opportunity to participate in Reliance Industries? diversified business portfolio," he added.

Reliance Industries' associate companies hold 47.3 per cent of IPCL's share capital. These shares would be exchanged for shares of Reliance Industries having a current market value of over Rs 3,700 crore, and would constitute 2 per cent of the equity share capital of Reliance Industries, the release added.