As per market news, the Reliance Rights renunciation could end up being priced between Rs 202-245 and our own analyst, Avisek, puts a price of about Rs 210 as the fair value for this instrument which is nothing but a call option on the underlying share. Please read our previous blog on this topic for more details.
The Rights entitlement (RE) renunciation essentially gives the buyer the rights to buy the shares at the Rights Price (equivalent to a strike price) as against the CMP (Underlying Price). From a buyers point of view it is valuable as it gives the right to buy this stock over the next 18 months at a fixed price. Like a call option. Additionally, all the future upside/downside of the stock is left with the Rights holder which is what makes it a rewarding instrument.
From a sellers perspective , the difference betwene the current price and the option strike price is what should be available – but since some of the payment is coming upfront , the interest saving is reduced from the breakeven price.
Since Rs 314 is paid upfront and Rs 943 (the difference from 1257 strike) is assumed after one year, the buyer is only getting 25% of the breakeven value of the renunciation price on listing i.e. around Rs 50, but it cannot be sold at this price as the difference between the breakeven price and Rs 50 – about Rs 150 – is forever lost to the seller. To therefore arrive at an equilibrium price, the buyer should pay about Rs 150, the additional premium for getting this right, discounted by one year post tax interest rates at an appropriate rate for the money that the person is receiving upfront at time of sale.
Our analyst Avishek a breakeven theoretical price for renunciation of right entitlement at ~Rs210.
A question fo the buyer – Will the Underlying Remain at 1400-1450 range? We believe RIL’s right issue price offers an attractive opportunity to ride on multiple drivers and the recent fund raising plans will strengthen RIL’s balance sheet and allay concerns on deleveraging, especially on potential delay in completing the deal with Aramco.
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