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Ambani doing a Jio to retail biz may add Rs 2,00,000 crore to investor wealth

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NEW DELHI: Just 30 minutes after the news of Silver Lake investing Rs 7,500 crore in Reliance Retail surfaced, a report by Bloomberg suggested PE investor KKR was in advanced talks to invest $1 billion (roughly Rs 7,300 crore) in Reliance’s retail business.

A media report on Tuesday had enlisted KKR and Facebook among prospective buyers, making investors wonder whether billionaire Mukesh Ambani‘s Reliance Industries will do ‘Jio’ to retail business, with a flurry of deals is in the pipeline.

If future deals continue to give retail business a Rs 4 lakh crore plus valuation, the Reliance Industries (RIL) stock is likely to earn an re-rating, said analysts, who sees the Mukesh Ambani firm stock add another Rs 2,00,000 crore to market capitalisation.

“What will happen now is that the Silver Lake’s 1.75 per cent stake purchase will determine the entire value of the retail business. Suddenly, the entire valuation will change. Earlier we were assigning Rs 1.75-2 lakh crore value to the retail business. With Silver Lake valuing retail at Rs 4 lakh crore, we see a bump-up in Reliance Industries m-cap by Rs 2 lakh crore,” said Rusmik Oza of Kotak Securities.

On Wednesday, the company commanded a value of Rs 13.46 lakh crore (excluding RIL RE’s Rs 52,196.53 crore market value).

Oza said that retail, especially brick-and-mortar stores, are not as profitable business as Reliance Jio, and thus he had assigned a lower value to the retail business earlier. But, if future retail deals continue to value retail business at Rs 4 lakh crore plus, a re-rating on the counter is likely, he said.

Ambani’s back-to-back Jio deals earlier this year had taken the market by surprise. After Google’s Rs 33,737 crore investment in July, Jio Platforms raised a combined of Rs 1,52,056 crore by selling 32.97 per cent stake in mobile business. That put Jio’s value 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 translate into a 1.75 per cent equity stake in Reliance Retail on a fully diluted basis.

Deepak Jasani of HDFC Securities said Silver Lake’s valuation for the retail business was higher than expectations. Silver Lake itself must be having a strong reason to invest in the retail pie at this valuation, he said.

“The RIL stock did not react much to the announcement in Wednesday’s trade. It could either be in disbelief or due to weakness in the broader market for the day. Nonetheless, if RIL announces a flurry of retail business deals, like it did for the Jio Platforms at similar or higher valuations, the stock would be in for further rerating,” Jasani said.

RIL last week announced buying of Future group‘s retail assets for Rs 24,713 crore . It is also hiving off its oil-to-chemical business into a separate entity, which analysts say would further unlock value at the oil-to-telecom giant. This added to the optimism over the stock that has rallied 146 per cent from March lows of Rs 867.82 Level. On Wednesday, the stock was up about 1 per cent at Rs 2,139.10.

“The large part of the money into the RIL stock has come in from the foreign institutional investors and there is a fair bit of underinvestment by domestic investors. That is why, you can expect the stock not to correct more, even if the market turns volatile. The stock might go through a bit of a consolidation. But looking at the RIL story and the fact that you will have a larger Arpu and the retail story, which is going to come through, people would want to really look at it,” said Hemang Jain of Motilal Oswal Securities.

The penetration in the organised retail in India is expected to increase 17 per cent by FY25 from 11 per cent in FY19. Credit Suisse believes that Reliance would be the biggest beneficiary of large volume-based discounts from FMCG brands, being the single largest retailer in the sector.

Analysts said the recent Future Group deal would take Reliance Retail’s market share in the organised grocery segment to 38 per cent of retail from 22 per cent earlier. It would make the offline market a virtual duopoly market, with Reliance Retail almost doubling the size of its nearest competitor in grocery retailing DMart. The deal would also make Reliance Retail almost three times in fashion retailing vis-vis ABFRL.

For its online segment, the acquisition would help in building a deep discounting strategy for JioMart, the ecommerce venture that competes with Amazon and Flipkart. Reliance, which recently launched JioMart in 200 cities, now averages 250,000 orders a day within weeks.

Jyoti Roy, DVP for Equity Strategist at Angel Broking, said the Future deal’s impact would be more on offline retailers, given Future’s group’s pre-dominant offline models such as Big Bazaar, Central and Brand Factory.

“For online, Future Retail and Reliance Retail both fairly have a new journey. But Reliance would have more touch points, where they can fulfill more online orders. To be sure, Reliance already has a strong offline model,” he told ETMarkets.com last week

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