Reliance Industries demerger on July 20: Buy RIL shares before that for gains, say brokerages

The demerger of Reliance Industries (RIL) on July 20 is the next big market event investors are now focussing on. The National Stock Exchange has also announced that it will be conducting a special pre-open session for RIL on July 20 as Jio Financial Services (JFS) is set to enter the benchmark Nifty.

RIL had announced the demerger of Jio Financial Services for a ratio of 1 equity share of Jio Financial for 1 fully paid-up equity share held in RIL. This means, if an investor has 10 shares of RIL, he/she will get 10 shares of JFS as well. The record date for the same in July 20, so if one holds RIL shares on July 20, he/she will be eligible for JFS shares.

Reliance Industries on July 8 announced in a BSE filing that the National Company Law Tribunal approved the planned demerger of Jio Financial Services. It announced the record date of July 20, 2023, for the same.

It said that the demerger of its financial service undertakings into RSIL (Reliance Strategic Investments Limited) would be renamed JFSL (Jio Financial Services Limited).

Brokerage Views

Brokerage house Nuvama believes that post the demerger, the wealth of RIL shareholders could potentially increase by 3–5 percent. The brokerage estimates the value of JFS shares at ₹168 per share.

"Valuation of the demerged entity is estimated at ₹1 trillion (6 percent of the current market price)," it said. Nuvama retained its 'buy' rating on RIL with a target price at ₹3,205, indicating an upside of 14.5 percent.

It also noted that when Reliance Industries demerged four of its entities in 2005, the market actually rewarded RIL stock.

"After the split, shareholder wealth swelled 38 percent. Should the market have a déjà vu moment this time too, shareholders’ wealth could potentially increase by 3–5 percent. The de-merger of financial services is a spin-off of RIL’s 6.1 percent treasury shares (valued at ₹117/share: 4 percent of CMP after assuming 30 percent holdco discount; ₹168/share or 6 percent of CMP ex-discount)," it said.

According to Nuvama, RIL’s strength lies in its ability to build businesses of a global scale and execute complex, time-critical and capital-intensive projects. These strengths shall prove advantageous as the company embarks on large investments in all segments, it added.

Nuvama expects RIL's consumer business (Digital and Retail) to contribute 50 percent to EBITDA from FY25 given its strong expansion and customer base.

"We are now ascribing a rich valuation to JIO and Retail seeing their huge potential while remaining positive on the core O2C business (both refining and chemicals). We believe refining margins in Asia would rise due to a paradigm shift in regional refining dynamics from West to East, which are favourable for a complex refiner like Reliance. Global utilisation rates have bottomed out in chemicals. RIL is almost done with its capex cycle, investing in world-scale projects such as petcoke gasification, off-gas crackers and telecoms, which are expected to drive future growth in months to come. RIL has started commissioning and remaining projects of KG-D6, which shall enhance overall gas production. RIL’s foray into the new energy business shall unleash the next leg of growth, besides aiding its conventional business," it explained.

Meanwhile, brokerage house Axis Securities also recommended investors to buy Reliance Industries shares before the record date i.e. 20th July. The brokerage believes it to be a more economical way to buy Jio Financial Services which is likely to list at ₹160 per share.

Axis Securities values Jio Financial Services at the treasury stock valuation of ₹1,08,597 crore at 1 time RIL’s treasury stock valuation.

"The shareholding pattern will be the same as that of Reliance Industries Ltd. We value JFSL at treasury stock valuation as the business model of the company is yet to be announced. Even if the entire allocation is not directed towards JFSL, the company might be able to leverage the same for regulatory funds," noted the brokerage.

Stock price trend

The stock has risen over 16 percent in the last one year and 10 percent in 2023 YTD. Ahead of the demerger, the stock has surged 10 percent just in July so far, extending gains for the fifth straight month since March. However, it gave negative returns in the first 2 months in the current calendar year, down 7.5 percent and 1.3 percent in Jan and Feb, respectively.