Kotak Institutional Equities and JP Morgan value the retail business at about ₹4.5 trln in their respective sum-of-the-parts valuation of RIL. This compares to ₹4.62 trln, at which Jio Platforms stake sale to Facebook and Google happened
If Facebook and Google bought stakes in Jio Platforms Ltd, who is likely to be a worthy suitor for Reliance Retail Ventures Ltd? A report in The Morning Context suggests Walmart is a prime candidate. Whether this turns out to be true or not, Reliance Retail is clearly being prepped for a grand stake sale.
Reliance Retail was already India’s largest retail company; its plan to acquire a majority stake in Future Group companies adds immense scale to its business.
According to analysts at CLSA, the deal would help Reliance Retail expand its retail footprint and warehousing area by over 80%. Warehousing capacity is also a key driver for new commerce and will help sell investors the dream of gains for the new JioMart venture, which is housed in Reliance Retail. “Market share gains will only make it a much stronger force and could be a key driver of Reliance’s new commerce (JioMart) push in the longer term," CLSA analysts add.
Reliance Group’s dominance is reaching levels where analysts are beginning to believe that some rivals may be better off collaborating than competing. “If completed, the potential transaction would also reduce the number of potential avenues that competitors (especially Amazon and Walmart) would have to bolster their physical presence in retailing in India, to strengthen their online business," analysts at Goldman Sachs said.
Note that Amazon had a first-mover advantage, having already acquired a minority stake in a Future Group firm. But foreign ownership rules in multi-brand retail business meant that there was no chance of Amazon increasing its ownership.
Kotak Institutional Equities and JP Morgan value the retail business at about ₹4.5 trillion in their respective sum-of-the-parts valuation of Reliance Industries. This is a tad shy of the valuation ( ₹4.62 trillion) at which the Jio Platforms stake sale to Facebook and Google happened. If a large multinational such as Walmart is tagged, Reliance Retail should be able to attract a higher valuation from private equity firms.
Recall that Reliance Industries had raised ₹1.5 trillion through stake sales in Jio Platforms.
To be sure, the deal is not without risks. “Beyond the numbers, Future Retail’s ongoing inventory issue (high inventory days of about 100) is in our view a clear reflection of store formats and products that are simply not working," said analysts from Macquarie in a report on Monday. “For this transaction to be value accretive, RIL likely needs to re-configure these stores and figure out how to meaningfully turn around Future Retail’s inventory problem; in view of the scale involved (23 million square feet), this is far from given."
For now, though, the focus is clearly on scale and dominance.
The fact that shares of Reliance Industries are trading near their all-time highs shows that investors are salivating at the prospect of another large stake sale in a subsidiary.
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