Invested since 2015, at an average buying price of Rs. 588 (adjusted for splits and preferred share issue in 2020).
Compound Annual Growth Rate (CAGR) of 22% in 8 years, excluding the consideration of the de-merged Jio Financial Services (JFS).
During this timeframe, the company has transitioned its focus from petrochemicals and refining, into retail and telecom/digital sectors considerably.
The question is about opportunity cost. It is currently the highest position in my portfolio at 12% (+1% JFS), so would holding a large position in it still make sense? Or some profit booking should be done?!
My primary understanding right now is separate listing of it’s different business units, will be value unlock for its existing shareholders.
The individual segments could attract more focused investor interest, allowing them to be valued based on their specific growth prospects and financial performance. Additionally, the listing of each business unit can enhance transparency and provide investors with a clearer understanding of the individual operations and financials. This increased transparency may attract a broader investor base, potentially leading to improved liquidity and valuation multiples for each listed entity. Also, giving the optionality to exit the businesses which does not fit into my portfolio construct.
Evaluating the each business-unit, in-order to understand the actual value of entire business. At this stage not making consideration of the holding company discount it might be carrying.
Sum of total part valuation (SOTP) of the business
The fund raise done by the company in recent past gives us a good estimate of value for it’s different business segments.
In Aug 2023, Reliance Retail Ventures Ltd., raised funds at Rs. 8.2 lakh Cr (USD 111 Bn) valuation, which is double the value they got in 2020. Giving them a 3.2x Price to sales, as compared to the earlier value of 2.6x. Considering the business has continued to grow at 30% CAGR in the past three years, and EBITDA CAGR surpassing that growth suggests efficiency is improving in the business. Also, revenue growth has surpassed the number of stores added, reflecting improving unit economics per store.
In short, this seems fair value looking at the quality of retail business and the growth which they have been able to achieve.
In 2020, Jio Platforms secured funding at a valuation ranging from USD 58 to 65 billion. Since then, the company has demonstrated a improvement in its unit economics, evident through the growth in Average Revenue Per User (ARPU) and an expanded subscriber base.
Back in 2020, BofA Securities released a report projecting that Jio Platforms’ valuation could potentially reach USD 110 billion (≈ Rs. 8.14 lakh Cr) by FY22. This projection was built on the anticipation of the mobile user count reaching 538 million, broadband users reaching 25 million, and enterprise customers reaching 11 million. These users, collectively contributing to an EBITDA margin of 50%, were expected to generate an ARPU of 200. However, the actual progress in terms of subscriber additions and achieved ARPU has been 439 mn and Rs. 179 respectively. Nevertheless, the company has successfully attained the targeted EBITDA margin of 50%.
On the other hand, Sanford C. Bernstein’s valuation estimate of USD 120 billion is predicated on the ARPU scaling up to Rs. 223 crore by FY24, implying a 25% surge in ARPU from current Rs. 179.
Based on the above, let’s conservatively assume current Jio platform valuations at USD 90 bn (Rs. 6.6 lakh Cr).
Now making the SOTP based valuation done by Jeffries as the basis to understand the right value for Reliance Industries.
This analysis was conducted prior to the demerger of the company’s financial business, Jio Financial Services (JFS). It’s important to note that the Sum of the Parts (SOTP) based valuation indicates a potential value upside of approximately 33% from the stock price of Rs. 2331. However, this assessment appears to be rather conservative.
In this valuation framework, the retail segment falls just short of Qatar Investments’ Rs. 8.2 lakh crore investment in RRVL’s recent funding round. Likewise, Jio Platforms’ Rs. 4.4 lakh crore valuation matches the 2020 investor funding. Given subsequent business growth, the SOTP valuation appears low.
Furthermore, it’s noteworthy that JFS was listed with a market capitalization of Rs. 1.45 lakh crore (with a higher value compared to the considered Rs. 1.2 lakh crore), hence being value accretive for it’s shareholders..
RIL market cap post price discovery of it’s financial arm remained at Rs. 17.5 lakh cr, leading to a value unlock of Rs. 1.45 lakh Cr in form of JFS business, for it’s shareholders. SOTP shows, Retail and Jio alone hold Rs. 14-15 lakh Cr in market cap, leaving a similar upside for rest of the business.
All-in-all, The elephant can still dance… And so given the analysis outcome, it seems prudent to consider profit booking from the de-merged entities (post future analysis) rather than from RIL itself.
Reliance industries before and after demerger of financial business
As on 30th March 2023
RIL Market cap – Rs. 15,77,093 Cr (USD 191 Bn)
RIL Net worth – Rs. 6,68,880 Cr (USD 81Bn)
RIL Revenue – Rs. 9,74,864 Cr (USD 118 Bn)
RIL Profit – Rs. 73,670 Cr (USD 9 Bn)
RIL EPS – Rs. 98.0 Cr (USD 1.2)
RIL share capital – Rs. 6766 Cr (USD 0.8 Bn)
As on 30th March 2024
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