A tale of two RPLs

RP and L, it would seem, are the favourite alphabets of the Ambanis— when the brothers were together and also when they’re on their own.

The first RPL in the fold of Reliance group founder Dhirubhai Ambani took shape in 1993; the patriarch came out with an initial public offering (IPO) for a company called Reliance Petroleum to part-finance the setting up of a refinery. Some 13 years later, it was the turn of the eldest son Mukesh, now Chairman of Reliance Industries (RIL), to flag off a second RPL. That’s when, in April 2006, Reliance Petroleum was born again—this time to see through a Rs 2,700-crore issue to fund another refinery.

The RPL that’s unleashed the biggest IPO—and also one that’s absolutely different from the previous two—is that of youngest brother Anil Ambani. Last fortnight, the Chairman of the Reliance-Anil Dhriubhai Ambani Group (R-ADAG) group flamboyantly closed a Rs 11,700-crore public issue for Reliance Power. The power major has been floated to execute a string of big-bang energy projects.

The numbers are huge on both sides (the brothers had reached a settlement to go their own ways in June’05). Consider the projects in the respective pipelines: Mukesh raised the funds to bankroll a 29 million tonnes per annum greenfield refinery at Jamnagar that calls for a total investment of Rs 27,000 crore. Anil has power projects totally some 24,200 MW that will need a little under Rs 32,000 crore to execute. Both issues were oversubscribed big-time—the refinery one, 52 times and the power one, 73 times. But it’s the price at which Anil’s RPL lists that could decide which RPL really rocks. At the time of writing, the RPL with the refinery had a market capitalisation of around Rs 90,000 crore. At an offer price of Rs 450, the power RPL will have a market value of a little over Rs 1 lakh crore. The listing price will of course widen the gap. If the grey market price of close to Rs 900 is indeed going to be the price at which Anil’s RPL lists, it could boast a mindboggling market cap of Rs 2 lakh crore. And don’t forget: The promoters hold 90 per cent of the power RPL (See RPL vs RPL).

Indeed the penchant for size is what’s common to both brothers. But there are differences between the two RPLs, and they’re not just sectoral. One big distinction is the stage at which these two companies have entered the market. “Mukesh’s RPL entered the market closer to the gestation period,” says U.R. Bhat, a former JP Morgan head who runs an advisory firm for institutional investors called Dalton Capital Advisors Pvt Ltd.

One huge common thread running through both these companies is that, for both brothers, their respective RPLs is the first big test in execution (Mukesh was involved in the execution of the blueprint for the first refinery, but he had his father to guide him then). What the brothers have clearly learnt from their father is how to reward shareholders in handsome fashion. Mukesh’s RPL has already returned almost 250 per cent. Anil’s RPL promises even higher rewards. Analysts worry, however, that both stocks could have run ahead of fundamentals, and it’s only successful completion of projects and the resultant cash flows that will be able to justify future spurts in these scrips.

Investors for their part have already begun speculating about when the RPLs will be merged into their respective flagships. The original RPL was merged into RIL in 2002 (although a swap ratio of one share of RIL for 11 of RPL didn’t please some punters). Merrill Lynch recently put out a report that suggested a merger of RPL with RIL. That could happen if Chevron, which holds a 5 per cent stake in RPL, with an option to take it up to 24 per cent by July 2009, decides to exit instead. RPLs will come and RPLs will go but the Ambanis will go on forever—so what if they go on in different directions.