A TERM PAPER On RPL merger with RIL

Submitted to (ANAND INSTITUTE OF MANAGEMENT)

IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE AWARD FOR THE DEGREE OF MASTER OF BUSINESS ASMINISTRATION

In Gujarat Technological University

UNDER THE GUIDANCE OF JAY JOSHI (ASSISTANCE PROFESSOR, AIM) Submitted by MEHMOOD DAGIA PRASHANT KOTIYA BALAJI NAGARGOJE DILIP PRAJAPATI [Enrollment No.:107020592026] [Enrollment No.:107020592027] [Enrollment No.:107020592033] [Enrollment No.:107020592034]

MBA SEMESTER - IV [Batch: 2010-12]

(ANAND INSTITUTE OF MANAGEMENT) MBA PROGRAMME Affiliated to Gujarat Technological University Ahmedabad 2010-12

INTRODUCTON OF RELIANCE INDUSTRY LTD The Reliance Group, founded by Dhirubhai H. Ambani (1932-2002), is India's largest private sector enterprise, with businesses in the energy and materials value chain. Group's annual revenues are in excess of US$ 58 billion. The flagship company, Reliance Industries Limited, is a Fortune Global 500 company and is the largest private sector company in India. Backward vertical integration has been the cornerstone of the evolution and growth of Reliance. Starting with textiles in the late seventies, Reliance pursued a strategy of backward vertical integration - in polyester, fibre intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production - to be fully integrated along the materials and energy value chain. The Group's activities span exploration and production of oil and gas, petroleum refining and marketing, petrochemicals (polyester, fibre intermediates, plastics and chemicals), textiles, retail, infotel and special economic zones. Reliance enjoys global leadership in its businesses, being the largest polyester yarn and fibre producer in the world and among the top five to ten producers in the world in major petrochemical products. Major Group Companies are Reliance Industries Limited, including its subsidiaries and Reliance Industrial Infrastructure Limited. Reliance Industries Limited (RIL) is India's largest private sector company on all major financial parameters with a turnover of Rs. 1, 39,269 crore (US$ 34.7 billion), cash profit of Rs. 25,205 crore (US$ 6.3 billion), net profit (excluding exceptional income) of Rs. 15,261 crore (US$ 3.8 billion) and net worth of Rs. 81,449 crore (US$ 20.3 billion) as of March 31, 2008.

RIL is the first private sector company from India to feature in the Fortune Global 500 list of 'World's Largest Corporations' and ranks 103rd amongst the world's Top 200 companies in terms of profits. RIL is amongst the 30 fastest climbers
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ranked by Fortune. RIL features in the Forbes Global list of the world's 400 best big companies and in the FT Global 500 list of the world's largest companies. RIL ranks amongst the 'Worlds 25 Most Innovative Companies' as per a list compiled by the US financial publication-Business Week in collaboration with the Boston Consulting Group.

Global rankings in most key businesses integrated energy company in Refining and Petrochemicals poised for large gains in the E&P sector Large part of Indian business and capital markets, driven by organic growth Indias largest private sector and only Fortune 500 company

Annual exports in excess of US$ 6 billion to over 100 countries Committed to large investments in key businesses refining and petrochemicals US$ 8-9 Billion in next 4-5 years

Conservative balance sheet annual cash flow at US$ 2.8 Billion, net gearing at 22%

INTRODUCTON OF RELIANCE PETROLEUM LTD Reliance Petroleum Limited was set up by Reliance Industries Limited (RIL), one of India's largest private sector companies based in Mumbai. Currently, RPL is subsidiary of RIL, and has interests in the downstream oil business. RPL also benefits from a strategic alliance with Chevron India Holdings Pte Limited, Singapore, a wholly owned subsidiary of Chevron Corporation USA (Chevron), which currently holds a 5% equity stake in the Company . RPL is setting up a Greenfield petroleum refinery & polypropylene plant in a Special Economic Zone at Jamnagar in Gujarat. W ith an annual crude processing capacity of 5,80,000 barrel capacity per stream

day(BPSD), RPL will be the sixth largest refinery in the world.

RPL : HIGHLIGHT Crude processing capacity of 580,000 barrels/day, completed in a record time of 36 months Higher complexity: Nelson Complexity Index of 14.0 Among the top 5% refineries globally with capability process ultra heavy crude (Average API of 24) Built to supply ultra-clean fuels to meet the worlds evolving needs Focus on high growth transportation fuel segment. Lowest US$/complexity-barrel cost among recently built refinery projects. Crude refining commenced on 25th Dec 08 and first parcel of product exported in Jan 09

World class refinery with minimal project risk; ready to deliver superior returns, Reliance Petroleum Limited (RPL) started crude processing on 25th December 2008 and achieved successful production of various products. RPL dispatched its first parcel of refinery products in January 2009. RPL has also declared its first un-audited quarterly results today. During the year, RPL processed 3.6 million tons of crude with revenue of Rs. 3,678 crore (US$ 725 million) and the net profit of Rs. 84 crore (US$ 17 million).

CORE COMPETENCIES RELIANCE INDUSTRIES LTD Reliances core competence lies in its ability to conceptualize and implement multi-billion dollar projects. Our core Reliance belief is to nurture our customers and help them grow. We provide them comprehensive solutions backed by world class and proven services at every stage and round the clock. These include project identification, new product design, product and market development, raw material selection and testing beside a host of 'industry specific' solutions. We at Reliance are inspired by a sole objective: to help you build a better business - one committed to excellence. In pursuit of our above goals, Reliance, over a period of time has painstakingly built a highly specialized and dedicated team of technical and commercial experts who provide round the clock support, to its existing customers and potential entrepreneurs as well. The knowledge and core competency that Reliance has acquired and developed over the years in the Polymer

business has made it a major force globally. At its core is the Polymer Research and Technology Centre (PRTC), where the emphasis is on addressing the diverse needs of its customers and facilitating value added performance. Our expertise is extensively offered to help develop products and markets from 'concept to fruition' and beyond. It's our people what sets us apart. We invite you to build an alliance and gain access to our vast pool of resourcesdedicated professionals with a proven track record and grow with us. Largest inhouse pool of intellectual capital. Attracting and retaining the best people, and nurturing the entrepreneurial spirit. Unique financial engineering capabilities. Demonstrated ability to implement complex, multi-billion dollar projects in record time frames. Ability to create world class assets at 30%+ capital cost advantage compared to peer group.
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 Reliance generates over 3% of Indias GDP Reliance contributes over 5% of the governments total tax revenues - the largest by any business house Indias largest, and the amongst the worlds largest, shareholder families - over 5 million retail investors Reliance is now playing a leadership role in creation of a world class infocom infrastructure in India Largest in-house pool of intellectual capital Attracting and retaining the best people, and nurturing the intrapreneurial spirit Unique financial engineering capabilities Demonstrated ability to implement complex, multi-billion dollar projects in record time frames Ability to create world class assets at 30%+ capital cost advantage compared to peer group Absorption of diverse and complex technologies and optimal operation of plants

RELIANCE PETROLEUM LTD Reliance has received government approvals for establishing about 5,800 retail outlets for marketing of transportation fuels across India and aims to establish these outlets by March 31, 2004. This petroleum retailing initiative presents a unique opportunity to Reliance to get close to the final consumer across the length and breadth of India. Reliance will seek to win and retain consumers by delivering clean and unadulterated fuels to correct quantities.
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Thus, through forward integration from refining into marketing, combined with a world-class differentiated retail customer experience, Reliance will further enhance long-term shareholder value. RPL operates the largest, and most complex, refinery in India, with over 25% of total domestic capacity Worlds largest grassroots refinery, with capacity of 27 mn tpa - the 7th largest refinery in the world at any single location 30% + capital cost advantage, over global peer group Flawless start-up, and quick synchronization of entire refinery complex within a world record timeframe of 3 months Capacity utilisation of 101% achieved in the second quarter of operations - a unique achievement even in the global context

STRATEGY RELIANCE INDUSTRIES LTD Building and sustaining leadership position across its product categories in the domestic markets; Pursuing attractive export opportunities; Implementing vertical integration; Improving its technology; Achieving economies of scale; Focusing on prudent financial management; and Investing in high growth opportunities. Identifying new businesses with high growth potential; Investing in businesses that can scale rapidly and generate returns over an extendable period of time; and Aspire to be the lowest cost manufacturer/service provider, which it believes will result in RIL gaining "dominant market leadership".

RELIANCE PETROLEUM LTD Reliance Petroleum (RPL) has outlined a growth strategy which will focus on leveraging its competitive strengths to secure leadership position in refining and marketing of petroleum products and enhance long-term shareholder value. The major elements of RPL's growth strategy for the future will be maximising production from existing assets, enhancing global competitiveness, entering the business of retail marketing of petroleum products in India, investing in pipeline distribution infrastructure and accessing global markets. The company has also announced that it proposes to increase production from existing refining assets. It has the ability to increase production beyond the rated capacity through debottlenecking of operations at marginal costs. This increased production from existing assets will contribute to increased profitability. The
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project cost is Rs. 14,250 crores which is Rs. 5,278 a tonne. This is lower by 30 per cent as compared to the capital costs for refineries set up recently. The competitive advantage of low per tonne capital cost will be further enhanced when the capacity is increased through debottlenecking. RPL has obtained approval for India's largest ever syndicated foreign currency term loan facility for $750 million (Rs. 3,500 crores). Agreements for $500 million have already been signed. The other agreements are expected to be finalised shortly. The company proposes to enter retail marketing of controlled products and is now evaluating a multi-pronged strategy, encompassing potential joint ventures and alliances, acquisitions of marketing and distribution assets, and/or development of its own distribution and marketing infrastructure. RPL's memorandum of understanding with Indian Oil Corporation for the formation of a joint venture for marketing and the company's participation in the process of disinvestment of IBP reflects this strategy. Also, RPL is the first Indian company to offer an opportunity to all shareholders for participating in an international offering of its shares - it already announced that it will be sponsoring international offers of GDRs against the existing equity shares held by Reliance Industries and all other categories of shareholders. RPL has announced that the average capacity utilisation for the first two months of the current quarter was a record 107 per cent.

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REASONS FOR MERGER Reliance Petroleum Limited (RPL) merged into Reliance Industries Limited (RIL) In a physical sense, this has enabled Reliance to complete the integration across the energy and materials value chain - ranging from oil and gas exploration and production, refining and marketing, petrochemicals, power and textiles. In a competitive sense, the merger has created a firm foundation for Reliance to compete with other global energy majors; supported by a robust balance sheet and strong operational synergies. Above all, the merger places Reliance in the reckoning for a place in the Fortune Global 500 list of the world's largest corporations. The merger of Reliance Industries Limited and Reliance Petroleum Limited seeks to consolidate businesses across the value chain. This is consistent with global industry trends. The merger will bring about operational synergies, logistics advantages, cost efficiencies, productivity gains, rationalization of business processes and optimization of fiscal incentives. These would result in strong financials, enhanced flexibility and reduced volatility in the earnings stream. All these factors will enhance shareholder value.

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The merger of Reliance Petroleum Limited (RPL) with Reliance Industries Limited (RIL) has enabled seamless integration of operational scale and financial synergies That existed between the two Companies. Assets and liabilities of RPL have been transferred to RIL with effect from 1st April 2008, as per the approval granted by the Hon High Courts of Mumbai and Gujarat. Shareholders of RPL received 1 share of RIL in lieu of every 16 shares of RPL held by them, as per the scheme of merger. Accordingly, 6.92 crore new equity shares of RIL have been allotted to the shareholders of RPL.

The merger creates a platform for reinforcing the Company's position as an integrated energy company on a global scale. The merger enhances value for shareholders of both Companies. Through this merger, RIL consolidates a worldclass, complex refinery that complements its existing refining assets. RIL will additionally gain from reduced operating costs arising out of the combined operations. The merger is expected to reduce the earnings volatility for RPL. Shareholders as they participate in the integrated energy chain of RIL. BENEFIT OF RIL-RPL MERGER: Indias most valuable company (by market capitalization) Mukesh Ambanicontrolled Reliance Industries Limited (RIL) has decided to absorb its Reliance Petroleum Limited (RPL) unit through a share swap arrangement. RIL said it would issue one share for every 16 held in the unit, giving it direct control of the worlds largest refinery complex. Below is the analysis from top brokerage houses across the country on the deal and who stands to benefit in the scheme of arrangement.

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RPL merger with RIL: Value creation through scale and synergies, The merger of Reliance Petroleum Limited (RPL) with Reliance Industries Limited (RIL) has enabled seamless integration of operational scale and financial synergies That existed between the two Companies. Assets and liabilities of RPL have been transferred to RIL with effect from 1st April 2008, as per the approval granted by the Hon. High Courts of Mumbai and Gujarat. Shareholders of RPL received 1 share of RIL in lieu of every 16 shares of RPL held by them, as per the scheme of merger. Accordingly, 6.92 crore new equity shares of RIL have been allotted to the shareholders of RPL. The merger creates a platform for reinforcing the Company's position as an integrated energy company on a global scale. The merger enhances value for shareholders of both Companies. Through this merger, RIL consolidates a worldclass, complex refinery that complements its existing refining assets. RIL will additionally gain from reduced operating costs arising out of the combined operations. The merger is expected to reduce the earnings volatility for RPL shareholders as they participate in the integrated energy chain of RIL.

The merger is EPS accretive and results in the Company: Operating two of the world's largest and most complex refineries Owning 1.24 million barrels per day (MBPD) of crude processing capacity, largest at any single location in the world Owning 25% of the world's most complex refining capacity Emerging as the 4th largest producer of polypropylene globally Becoming the world's largest producer of ultra-clean fuels at a single location

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RIL- RPL MERGER HIGHLIGHT

MUMBAI, 2 March 2009: The Boards of Directors of Reliance Industries Limited (RIL) and Reliance Petroleum Limited (RPL) today unanimously approved RPLs merger with RIL, subject to necessary approvals. The exchange ratio recommended by both boards is 1 (one) share of RIL for every 16 (sixteen) shares of RPL. RIL will issue 6.92 crore new shares, thereby increasing its equity capital to Rs 1,643 crore. Commenting on the merger, Mukesh Ambani, Chairman and Managing Director, Reliance Industries Ltd said: This merger follows Reliance Industries philosophy of creating enduring value for all our stakeholders. It is a significant step in our goal to be among the largest global corporations.

Merger is Indias largest ever RPL shareholders to receive 1 (one) share of RIL for every 16 (sixteen) shares of RPL RILs holding in RPL to be cancelled. No fresh treasury stock created RIL to be a top 10 private sector refining company globally RIL to become the worlds largest producer of Ultra Clean Fuels at single location Merger to unlock greater efficiency from scale and synergies Merger to be EPS accretive RIL to have 3.7 million shareholders

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TENDER OFFER Under the terms of the proposed merger, RPL shareholders will receive 1 (one) share of RIL for every 16 (sixteen) RPL shares held by them. The appointed date of merger of RPL with RIL is 1st April 2008. RIL will cancel its holding in RPL. Based on the recommended merger ratio, RIL will issue 6.92 crore new equity shares to the existing shareholders of RPL. This will result in a 4.4% increase in equity base from Rs 1,574 crore to Rs 1,643 crore. Consequently, the promoter holding in RIL will reduce from 49.0% to 47.0% Offer price was Rs.227.46 for one share of RIL

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VALUATION:
The financial details of Tata Chemicals before merger and after merger are given as follows: (All amounts are in Rs. In Crores) Particulars PAT Dividend No. of Ordinary Pre-Merger 15309.32 1897.05 15737.98 Post-Merger 16235.67 2084.67 32703.74

Shares Market Per Share 761.60 1074.65

BEFORE MERGER 1. EPS (Earning Per Share) = = = = = = = = = = = = PAT/ No. of Ordinary Shares 15309.32/ 15737.98 97.28 Rs. Dividend / No. of Ordinary Shares 1897.05 / 15737.98 Rs.12.05 MPS / EPS 326.85 / 97.28 3.36 times MPS* No. of Ordinary Shares 761.60* 15737.98 11986045.568 Crore Rs.

2. DPS (Dividend Per Share)

3. P/E (Price-Earnings) Ratio

4. Market Value

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AFTER MERGER 1. EPS (Earning Per Share) = = = = = = = = = = = = PAT/ No. of Ordinary Shares 16235.67/ 32703.74 49.64 Rs. Dividend / No. of Ordinary Shares 2084.67/ 32703.74 6.37 Rs. MPS / EPS 1074.65/49.64 21.65 times MPS* No. of Ordinary Shares 1074.65* 32703.74 35145074.191 Crore Rs.

2. DPS (Dividend Per Share)

3. P/E (Price-Earnings) Ratio

4. Market Value

INTERPRETATION: From the above valuation it can be stated that after the merger the Earning per Share has reduced from 97.28RS. to 49.64 Rs. because of the increase in the number of shares and in the profit after tax And also the DPS (Dividend per Share) been reduced as the dividend amount also increased but not upto that extent increased in the number of shares . After the merger the share price of Reliance Industries Ltd has increased. Thus, because of this reason, the P/E Multiples has also increased after the merger. And hence, as the market price of the share goes up, the market capitalization also increased. Market Capitalization increased also because of the increase in the rise of the number of the ordinary shares.

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CONCLUSIONS: We believe the deal is a win-win situation for both companies, as RIL will have improved Cash-flow, stronger Balance Sheet and lower cost of capital post merger. For RPL shareholders, the merger is expected to reduce Earnings volatility and allows them to participate in RIL's full energy value chain. Both the companies have lots of benefit and synergy between each other. The merger will unlock significant operational and financial synergies that exist between RIL and RPL. It creates a platform for value-enhancing growth and reinforces RILs position as an integrated global energy company. The merger will enhance value for shareholders of both companies. The merger is EPS accretive for RIL. Through this merger, RIL consolidates a world-class, complex refinery with minimal residual project risk, while complementing RILs product range. There will be further gains from reduced operating costs arising from synergies of a combined operation.

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