RETAIL VALUATIONS MAY CAP UPSIDE FOR RIL

Though Silver Lake deal is positive, the stock factors in most gains

The Reliance Industries (RIL) stock gained 2.6 per cent on Wednesday after its retail arm Reliance Retail Ventures (RRVL) received its first equity investment of ~7,500 crore from global technology investment firm, Silver Lakes. The investment for a 1.75 per cent equity stake values the retail business at ~4.21 trillion ($57 billion).

While the deal sets a benchmark valuation for the retail business, triggers for the retail arm and RIL shall now depend on the valuations that the company receives for the next round of investments in RRVL. While the Street is positive on the outlook for the retail business, some analysts believe the $57-billion valuation is lower than estimates, and can cap near-term upside for the stock.

Analysts at CLSA in a post-deal note indicated that the deal value of ~4.2 trillion is 12 per cent lower than the ~4.77 trillion

While the Street is positive on the outlook for the retail business, some analysts believe the $57-billion valuation is lower than estimates

assigned to Reliance Retail in their year-ahead target price (September 2021) and 21 per cent lower than the March 2022 value of ~5.32 trillion. The valuations do not include the retail business of Future Group which was acquired for ~24,000 crore.

Similarly, Jpmorgan’s analysts believe the $57-billion valuation for RRVL will be underwhelming. compared to their valuation of $65 billion. The brokerage has valued the physical retail business at $45 billion, while ascribing $20 billion for the company’s online retail business, Jiomart. However, they believe the stake sale will add to balance sheet flexibility. What may drive a rerating is if rival retailers and e-commerce companies invest in RRVL, driving down competition for the company.

Brokerages believe upside from these levels for the stock is limited as positives from investments in Jio Platform, retail, deleveraging, and near-term growth potential are factored in. There may, however, be some gains on the earnings front from price hikes in the telecom segment, recovery in the retail business in the second half of FY21, and stability in the gross refining margins.