R-Power-RNRL: Realignment process

The drop in RNRL’s share price is a process of alignment with the 4:1 swap ratio; the stock is expected to stabilise soon.

The RNRL scrip tanked 27 per cent on the Bombay Stock Exchange on Monday to Rs 46.30. The reason is the 4:1 share swap ratio for the company’s merger with R-Power, which has drawn varied views.

According to some analysts, the ratio should have been 3:1. So, shareholders getting one share of Reliance Power for four RNRL shares was seen as unfair, which is why the market reaction has been sharp. The 4:1 ratio also meant that RNRL’s stock price would be around 25 per cent of Reliance Power’s share price. With Reliance Power closing at Rs 175 on Friday, the RNRL price of Rs 63 had to retreat and align with the share-swap ratio. But, with the share price of Reliance Power climbing to Rs 180, the RNRL scrip is expected to stabilise around Rs 43-45.

However, the shareholders of RNRL will gain in the long run, as their company moves up the value chain — from being a trading company with little or no earnings to a power company with plans to set up 37,000-Mw capacity. Of this, 10,000 Mw will be from gas-based power projects, says the management. Also, the government has made it clear that gas from the KG basin will be supplied to power generators and not trading companies like RNRL. Also, based on the book value numbers, the swap should have been 5:1 or even lower, which would have made things worse for RNRL shareholders.

After the merger, Reliance Power shareholders will see a 14.6 per cent dilution in equity. However, this will not affect the company much, especially when there is a direct synergy. The promoter holding in the merged entity will decline 4.36 per cent to 80.42 per cent. So, in case the management needs to meet the 25 per cent public shareholding norm, the extent of the increase in the supply of the stock in the market will be much less.