A media report on Tuesday had listed KKR and Facebook among the potential buyers, prompting investors to wonder whether billionaire Mukesh Ambani’s Reliance Industries will make ‘Jio’ to the retail business, with a number of deals pending.
If future deals continue to give the retail business a valuation of Rs 4 lakh crore more, Reliance Industries (RIL) shares are likely to get a new rating, analysts said, who see Mukesh Ambani’s shares adding others. Rs 2,00,000 crore to market capitalization.
“What will happen now is that the purchase of the 1.75 percent stake in Silver Lake will determine the total value of the retail business. Suddenly, the entire valuation will change. Before we were assigning a value of 1.75-2 million rupees lakh to retail business. With Silver Lake valuing retail at Rs 4 lakh crore, we see an increase in m-cap from Reliance Industries by Rs 2 lakh crore, “said Rusmik Oza of Kotak Securities.
On Wednesday, the company was worth Rs 13.46 lakh crore (excluding RIL RE’s market value of Rs 52,196.53 crore).
Oza said that retail, especially brick-and-mortar stores, is not as profitable a business as Reliance Jio and has therefore placed less value on the retail business before. But, if future retail deals continue to value the retail business at Rs 4 lakh crore plus, it will likely be re-rated over the counter, he said.
Ambani’s back-to-back deals with Jio earlier this year had taken the market by surprise. After Google’s investment of Rs 33,737 million in July, Jio Platforms raised a combined sum of Rs 1.52,056 million by selling a 32.97 percent stake in the mobile business. That put the value of Jio at Rs 4,61,195 crore.
The Silver Lake deal announced on Wednesday valued Reliance Retail at a pre-money equity value of Rs 4.21 lakh crore. Silver Lake’s investment will result in a 1.75 percent equity interest in Reliance Retail on a fully diluted basis.
HDFC Securities’ Deepak Jasani said Silver Lake’s valuation for the retail business was above expectations. Silver Lake itself must have a strong reason to invest in retail at this valuation, he said.
“RIL’s stock did not react much to the announcement in Wednesday’s trading. It could be out of disbelief or due to the weakness in the general market during the day. However, if RIL announces a series of retail trade deals, as it did for the Jio Platforms at similar or higher valuations, the shares would be in a new rating, “said Jasani.
RIL announced last week the purchase of retail assets of the Future group for Rs 24,713 crore. It is also splitting its oil-to-chemicals business into a separate entity, which analysts say would further unlock value at the oil giant to telecommunications. This added to the optimism about the stocks which have recovered 146 percent from the March lows of the Rs 867.82 level. On Wednesday, the shares were up about 1 percent to Rs 2,139.10.
“Most of the money in RIL shares comes from foreign institutional investors and there is a bit of underinvestment from domestic investors. So you can expect the shares to not correct further, even if the market turns volatile. Stocks can go through a bit of consolidation. But looking at the history of RIL and the fact that it will have a bigger ARPU and the retail history, which is going to come through, people would really want to see it, “said Hemang Jain of Motilal. Oswal Securities.
Organized retail penetration in India is expected to increase 17 percent in FY25 from 11 percent in FY2019. Credit Suisse believes that Reliance would be the biggest beneficiary of steep volume discounts from consumer goods brands, being the largest retailer in the sector.
Analysts said the recent Future Group deal would bring Reliance Retail’s market share in the organized grocery segment to 38 percent of retail from 22 percent previously. It would make the offline market a virtual duopoly market, with Reliance Retail nearly doubling the size of its closest competitor in grocery retailing DMart. The deal would also see Reliance Retail become almost three times the fashion retail trade compared to ABFRL.
For its online segment, the acquisition would help build a deep discount strategy for JioMart, the e-commerce company that competes with Amazon and Flipkart. Reliance, which recently launched JioMart in 200 cities, now averages 250,000 orders per day in weeks.
Jyoti Roy, DVP of Equity Strategist at Angel Broking, said that the impact of the Future deal would be more on offline retailers, given the Future group’s predominant offline models such as Big Bazaar, Central, and Brand Factory.
“For online commerce, Future Retail and Reliance Retail have a new journey. But Reliance would have more points of contact, where they can fulfill more orders online. Reliance undoubtedly already has a strong offline model,” he told ETMarkets.com last week
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