RIL rights issue: Stock price up 78% since March lows; should you subscribe?

HIGHLIGHTS

*Rights issue available at Rs 1,257 per share, 25% discount to CMP

*For each existing 15 shares, RIL investors can get 1 more share

*Stock outlook positive as RIL aims to become a net zero debt firm by FY21

*The stock price already reflects most of the upside for the near term

*Promoters to buy not only their share of equity but also the unsubscribed portion

*If you don't participate, your equity will get diluted post-issue

*If uninterested, existing investors can sell their rights in the secondary market

*The issue appears attractive for existing investors at 25% discount and only for 25% upfront payment

*Resist your urge to buy RIL share as a new investor and wait for a suitable secondary market opportunity

Reliance Industries' rights issue, the biggest ever in India, is just round the corner with the record date being fixed as May 14. The record date is the cut-off date at the end of which investors must own RIL shares to be eligible to participate in the rights issue. The dates to subscribe to rights issue are yet to be announced.

Rights issue, like an IPO, is executed to raise public money, with the only difference of it being open to merely existing shareholders. RIL has announced a rights issue of Rs 53,125 crore in a ratio of 1:15, that is, for every 15 shares, you'll get one RIL share. The price has been fixed at Rs 1,257 per share, 25.43 per cent discount to current market price of Rs 1576.75 as on May 11.

The rights issue is coming at a time when RIL is in the news for all the right reasons. The company targets to become a net zero debt company by March 2021. The rights issue is aimed towards it, besides a spate of stake sale announcements it made recently. After the much talked about Rs 43,574 crore Reliance Jio-Facebook deal in April, private equity giant Silver Lake Partners bought 1 per cent stake in Jio Platforms for $750 million in a deal that valued the unit at $65 billion. They are also in talks with Saudi sovereign wealth fund and General Atlantic to sell some stakes in Jio Platforms. Last year in December, Jio had announced the deal to sell tower assets into InvIT at Rs 25,500 crore with Brookfield of Canada. The company expects to conclude the deal by the current quarter of FY21. They are also looking for an investor to buy into the Fiber business.

Promoters' inclination in rights issue

One of the major positives that makes the RIL rights issue attractive is promoters' inclination to buy more shares of their company. Promoters have committed to subscribe to not only their share of equity but also the unsubscribed portion of public shareholders.

"Founders hold 50.5 per cent stake in the company and through this process, they may end up increasing their stake in the company to high 50 % levels. With promoters buying shares at Rs 1257/ share under the rights issue, it is bound to result in attracting global investors too," says a report by KR Choksey Institutional Research. The promoter's commitment shows both conviction and confidence towards the company's future prospects.

How to subscribe?

The process to apply for a rights issue is similar to how you do it for the IPO that is, through ASBA (Applications Supported by Blocked Amount). If your bank supports it, you can apply online. Once the dates are announced, the company will send you the rights issue form to explain the process clearly.  

At the time of exercising the right an existing investor has to pay only 25% of the money at the time of application while the rest of the amount will be needed to pay as per the calls by the company.

What if you don't subscribe?

Although a rights issue gives you a right not an obligation to buy extra shares, investors should not ignore this corporate action, as post-issue, the value of shares that you hold get diluted, due to new shares being issued. If you don't participate, your equity will be diluted even more as post-issue, the return on equity (RoE), earnings per share (EPS) and dividends reduce for each shareholder since there are now more shares for the same earnings. The reduction will be sharper for those who let their rights lapse. If uninterested, existing investors can sell their rights in the secondary market to willing buyers at a mutually acceptable price.

What should you do?

The recent announcements have reflected well on the stock. RIL stock price has risen 78 per cent against the recent low of Rs 883.85 hit on March 23, 2020. With such steep gains already built in the stock, does it make sense to add more shares via rights issue?

Jyoti Roy, DVP Equity Strategist at Angel Broking nods in affirmative. "We would advise investors to participate in the rights issues as we are positive on the long term prospects of the company. The company has built a dominant position in both it's telecom and retail business which are expected to drive growth for the company while the hydrocarbon business is expected to be a stable low growth business for the company. Recent investments by Facebook and other large marquee investors into Jio platforms will also help the company deleverage its balance sheet which is leading to rerating for the company," he says.

However, one should not expect attractive gains at least in the near term. "Investors would do well to understand that there are a few listed companies that are worthy of investment at this point and Reliance seems to be one of them. But, the rights subscription may not result in a big appreciation as the recent rise in the stock price captures most of the upside for the near term, unless we see more large stake sales in Jio Platforms to well known investors or see a speeding up of stake sale process in oil-to-chemicals business to Saudi Aramco," Deepak Jasani, Head of Retail Research at HDFC Securities says.

To be fair, the company's petrochemical and refining business may underperform in the near term due to steep crash in the crude oil price and weak demand amid recessionary fears across the globe due to coronavirus pandemic. But, strong performance in its digital and retail businesses may offset the underperformance, say experts.

However, RIL after roping in big names as potential investors, which are subject to regulatory approval, on one hand has mitigated the risk of any approval shock and at the same time has demonstrated that its future roadmap has many serious buyers.

If you are an existing investor, it may make sense for you to subscribe to the rights issue which is coming at an upfront 25 per cent discount. However, the current discount should not be the only factor for you to apply for it. You should also have a long-term horizon if you are willing to subscribe to the issue.

If you are a new investor, buying RIL shares just to enable yourself for a right issue may not be the right idea. The upfront 25 per cent discount, which is available for existing investors, will turn out to be less than 2 per cent as you will have to incur a higher cost of buying 15 RIL shares to get one discounted right. It would be better for you to wait for an appropriate opportunity in the secondary market to invest in RIL shares.

Also read: Coronavirus Live Updates: PM Modi address at 8 pm; may extend lockdown with ease in restrictions, cases-70,756

Coronavirus: Delhi Metro to resume operations soon? Special staff deployed to clean stations