A deal could emerge between Reliance Industries and Amazon for a $ 20 billion investment in Reliance Retail. What are the implications for the company and the rest of the sector?
The Jio platform competes directly with Amazon. So if Amazon decides to enter Reliance Retail with a large stake, it is effectively buying from its biggest competitor. His compulsions for doing that are unclear. But if the deal happens and to the extent that it is speculated on, then obviously Reliance Retail raises a lot of capital at a time when many retailers are struggling and as a result could opt for brownfield expansions through acquisitions. as it did. with the Future Group. To that extent, its expansion and growth could be faster and that is one of the implications.
For the rest of the sectors, it could again be something of concern because with such a large giant accumulating, it could be a concern for the other players in the sector who are relatively hungry for capital given their high debt position. So it’s not that great for the competitive landscape if the deal closes, but from Reliance Retail’s perspective, it’s a good thing.
For Reliance shareholders, if a large chunk of Reliance Retail sells out at this price, then it is necessary to assess what additional news stream may drive the action. Given the fact that they could have sold almost 33-35% of Jio Platforms and almost 45% of Reliance Retail, the biggest growth drivers of the future, from Reliance’s perspective, valuations could be capped at some point depending on of how much money they get and at what speed.
How is the overall energy basket playing due to the link with crude oil prices, which have been quite choppy lately?
It is a psychological operation from a WTO perspective because refining margins continue to be repressed and if the current drop in prices is passed on to consumers, these companies do not benefit much. But if it is retained as it was retained last time, it will obviously increase the profits of these companies.
Now it is not a free market in the energy space. It has become a more regulated sector, so I don’t think valuations can jump substantially for these companies. These will be sporadic moves, they will be more range bound rather than having a significant upside.
What is your opinion on BPCL? How does it appear to move regardless of what is happening within the rest of the space?
These companies will now be traded as regulated companies and to that extent, the valuation should not be as much as we expected in the privatization mode.
It will be very difficult to sell these companies with the kind of price interference that we have seen before the elections, before Covid, during Covid and possibly there is some spike in oil prices during the state elections that could also happen.
So, in my opinion, the whole paradigm of valuation has changed. You have to treat them as PSU companies. It will be very difficult to privatize BPCL with what has happened in recent months, unless and until there is some categorical statement or clarification on how the price of fuel will be set. Otherwise, whoever is buying does not know what he is buying because he does not know what kind of profit he will get.
What’s your opinion on Tata Motors?
Tata Motors has two parts; one, national CV. That part will remain under pressure for the next two years given the lower use of CV. Globally, JLR is another business and some traction could be seen due to the rally in the US and China markets.
The key determinant of Tata Motors’ stock price movement will be following up on the president’s statements on how to relieve the company of debt. If there are some follow-up moves that are considered credible, the next leg of the up move will be seen otherwise at this stage for the stock to go up significantly, it is very difficult.
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