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Emerging Markets = Japan 1989?

Bullish consensus about emerging markets may cause the next bubble

In 1989, Japan was caught up...

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Is the market ecstatic over the RPower-RNRL merger? No, it’s not!

The sudden spurt in Reliance ADAG stocks yesterday was surprising, considering they had not moved much despite ambitious statements at the AGM; it is hard to digest that the long-known RPower-RNRL merger is the cause... so stay cautious

Nothing new has come out after the AGM statements (except the shareholder nod for the RPower and RNRL merger). Moneylife had written then that the plans set out for Reliance Power seem ambitious (http://www.moneylife.in/article/9572.html). However, more than a week after the AGM, the stocks seem to be buzzing again. Our talks with informed market participants indicate that this is not driven by serious (read institutional) buying. One can only assume that a bunch of powerful operators are driving the stocks. Retail investors would do well to stay away.

On 4th September, Reliance Power and Reliance Natural Resources shareholders approved the merger between the two - it is estimated to create a Rs500-billion company. It will be an all-share deal, under which RNRL shareholders will get one Reliance Power share for every four shares of RNRL. Reliance Power's contention is that the merger will allow RNRL shareholders to participate in RPower's future growth prospects - the ambitious 35,000MW plan, and its coal reserves. However, this is not news - talks of the merger, including the share-swap ratio, have been going on since July.

On 7th May, RNRL shares had tanked by more than 20% in a single day after the Supreme Court ruled in favour of RIL saying that the Ambani brothers' MoU was not binding and that RIL and RNRL must renegotiate in six weeks. RNRL shares rose sharply again late May after the brothers decided to bury their differences by removing the 'non-compete' clause from their July 2005 family MoU. However, when the merger was announced in July, RNRL shares once again tanked dizzyingly (more than 20%) as the swap ratio was not seen as favourable. At that time, RNRL traded at around Rs64 and Reliance Power at around Rs175 - the ratio between the two was at 1:3. Since then, the shares fell steadily to hit a low of
Rs37 on 18th August. Now, is the market is seemingly overjoyed by the same merger? That is quite hard to digest.

The only new development in Reliance Infrastructure is that its third road project (140km, Pune-Satara highway, toll-based) began on 1st October - hardly any reason for the kind of rise we saw yesterday. The project will cost the company almost Rs20 billion and will entail operating and maintaining the existing four-lane road, collecting toll, widening the road to six lanes, developing 244km of service roads, building 49 structures, 58 bridges, and upgrading two existing toll plazas.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).

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COMMENTS

K Narayanan

6 years ago

Shareholders approval is a myth created by the Companies Act 1956,It is the promotors who decide everything and they hold the major shares of those present and voting.Even postal ballot doesn't help much.Unless there are two warring groups, the AGM is a meaningless exercise.I suggest we scrap the AGM business and the so called auditing.Let the balance sheet be signed by the Chairman, MD,finance director,general manager finance,internal auditor and co secretary.If anything wrong is found let all those persons be hauled up mercilessly and collectively.

sameer k

6 years ago

considering the merger n its negativ impact on the stock price; Is it advisable to hold RNRL, brought at Rs. 46 or its better to just move on (at the cureent market price Rs. 39

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