With experts and investors alike awaiting the Reliance Jio IPO (initial public offering), global brokerage house Jefferies said that it sees Jio Financial Services (JFS) listing by September 2023.
"All necessary approvals for a listing of shares of JFS should be in place by September. JFS will commence lending activities immediately and proceed with regulatory approvals for asset mgmt, life, and general insurance. Regulatory approvals are expected to take 12-18 months," it said.
The brokerage sees the value of Reliance Industries' JFS between ₹134-224 and raises RIL's target price to ₹3,100, implying a potential upside of 33 percent. RIL stock trades near our bear case valuation and offers favorable risk-reward, it added.
"Based on the core networth of Jio-FS ( ₹14000 crore) and value of the stake in RIL ( ₹1 lakh crore) with PB range of 3-5x as well as holding company-discount of up to 40 percent (based on benchmarks), we value Jio-FS in the range of ₹90,000-1,50,000 crore that implies ₹134-224/share in RIL's SoTP. We incorporate ₹179/share as base case valuation for JFS in our SOTP," said Jefferies in the note.
According to Jefferies, JFS has a net worth of about ₹28,000 crore and holds a 6.1 percent stake in RIL, which is currently worth over ₹96,000 crore.
“Still from a regulatory perspective, core net worth may be about ₹14,000 crore ($1.7 billion) once the cost of investment in RIL is deducted (in excess of 10 percent of net worth). Therefore, JFS may over the next few years look to raise capital to fund growth or support cash-backed M&A as the need to write-off goodwill will bring down capital,” it said.
RIL has appointed KV Kamath, a veteran of the Indian banking industry (earlier CEO of ICICI Bank), as chairman of JFS and Hitesh Sethia, the current Head of Europe of Mclaren Strategic Ventures, as the CEO and MD.
In a separate recent report, another global brokerage Nomura also noted that the demerger would help the financial services business to attract different sets of investors, strategic partners and lenders having specific interests in the financial services business.
“As a separate entity, JioFS would be able to have higher leverage in line with industry standards. As JioFS scales up, it can drive value unlocking given higher multiples for peers in these industries,” it said. Nomura also has a buy call on RIL with a target price of ₹2,850 per share, indicating an upside of 22 percent.
Reliance Industries: The Long View
Reliance Industries have been witnessing some correction in the near term. The stock has lost 12 percent in the last 1 year and is down around 8 percent in 2023 YTD. IT was flat in March after a 1.3 percent fall in Feb and a 7.5 percent decline in January.
In the base case scenario, with a target price of ₹3,100 and an upside of 33 percent, Jefferies assumes 1) a 21 percent EBITDA CAGR in Jio over FY22-25E, helped by 472 million subscribers at an ARPU of ₹196, 2) 35 percent EBITDA CAGR in Retail over FY22-25E, 3) 11 percent EBITDA CAGR in refining over FY22-25E, and 4) 4 percent EBITDA CAGR in petchem over FY22-25E. Jefferies noted that the SOTP valuation implies 8x EV/EBITDA for O2C Business, 10x for India.
Meanwhile, in its bull case scenario, Jefferies has a target of ₹3,450 for RIL, implying an upside of 48 percent.
In this scenario it assumes 1) the recovery in gross refining margins (GRMs)/petchem margins ahead of estimates, 2) A faster consolidation in telecom leads to tariff upside in Jio, 3) A possible public listing of Jio re-rating valuation multiple, 4) Reliance Retail gains market share faster than expected, and 5) Jiomart GMV (gross merchandise value) comes ahead of expectations.
Now, in the bear case scenario, Jefferies has a target of ₹2,250 for the stock, implying a downside of 3 percent.
In this case, it assumes 1) lower-than-expected telecom ARPU or subscribers, valuation multiple de-rates to 8x, 2) Refining/petchem margins may be lower on a slower pace of China re-opening, 3) Elevated cash burn in e-commerce, valuation multiple de-rates to 20x, 4) Free cash flows don't materialize, and 5) Zero value to New Energy business.
Investment Thesis
Jefferies is bullish on RIL on the back of its sustainable competitive advantage on scale economics, cost leadership, and financial strength. Further, the ₹2 lakh crore free cash flow invested in consumer businesses created ₹9 lakh crore in equity value, it added. New growth engines with large addressable markets - Digital in Jio, e-commerce in Reliance Retail, crude oil-to-chemicals in O2C and New Energy business will also aid RILs' growth, it added.
Meanwhile, Nomura also noted that the listing and value unlocking from RIL’s financial services business in the coming months will be a key event for the stock. It expects the company to lay down a strong roadmap for growth in the financial sector in the coming AGM.
"While significant efforts are needed to scale the financials business, given RIL’s robust execution, capacity to invest, industry-leading retail infrastructure and leading market share across the retail and telecom industry, it appears likely that RIL will dominate the industry,” Nomura stated.
