Reliance Retail takes on from where Jio left, drives RIL valuations higher
- Reliance Retail was the biggest driver of RIL’s valuations in the past year
- Reliance Retail’s leverage is at far lower levels, besides which the positive surprise on growth has impressed investors
News that Reliance Retail Ventures Ltd , the holding company of Reliance Retail Ltd, is preparing to go public soon is not very surprising. The company has looked like a perfect IPO (initial public offering) candidate for some time now, as this column pointed out last June (bit.ly/2yILcQW).
But, in the past year, the case for an IPO has become far stronger, with the value of the retail business increasing by leaps and bounds. In fact, Reliance Retail was the single biggest driver of parent Reliance Industries Ltd’s (RIL’s) valuations in the past year.
As the chart alongside shows, the contribution of the retail business to RIL’s enterprise value (EV) has doubled for three top brokerage firms in the past year. What’s more, Reliance Retail has accounted for 66-90% of the increase in fair value estimates of these broking firms. Considering that the retail business’s share of RIL’s total value stood in single digits just a year ago, the fact that it has done the heavy-lifting in terms of value accretion in the past year is quite an achievement.
Analysts ascribe a large part of the 40% increase in RIL shares in the past year to improvements in the fortunes of the retail business. It’s worth recalling that the 70% rally in RIL shares in 2017 was driven by optimism on the telecom business housed in Reliance Jio Infocomm Ltd. While Jio has continued to surprise positively on the growth front, there are still worries about high cash burn and leverage.
Reliance Retail’s leverage is at far lower levels, besides which the positive surprise on growth has impressed investors.
In the quarter through December, Reliance Retail’s core revenue, excluding petroleum retailing and mobile recharges, surged 135% on a year-on-year basis. A CLSA study comparing the results of the top eight listed organized retail firms including the pure retail business of Reliance Retail, shows revenues for the company’s peers grew 4-33% year-on-year. “As compared to 6-42% year-on-year growth in Ebitda for peers, Reliance registered a huge 178% year-on-year growth,” said the broker in a report on 26 February. Ebitda is earnings before interest, tax, depreciation and amortization.
This sharp rise in profitability has notably pushed up Reliance Retail and taken it at a striking distance to sector leader, Avenue Supermarts Ltd on unit profit metrics of Ebitda per square feet, pointed out CLSA. Avenue Supermarts, although smaller in size, leads the industry in terms of such profitability metrics.
Of course, one reason for Reliance Retail’s spectacular growth has been the fast-paced expansion that the firm has been on for a while. “Reliance Retail has added 2.9 m sq feet in the first nine months of FY19, driving up its area by over 16% from end-FY18, fastest absolute expansion in the sector and second in percentage area growth,” analysts at CLSA said in a note.
The flip side is that the high pace of store additions has resulted in higher debt, which, according to Jefferies India Pvt. Ltd, has risen to ₹13,200 crore in February, from a little over ₹3,000 crore in March 2018. After accounting for capex, the company appears to be burning cash, the rise in debt suggests. But with annual estimated Ebitda of over ₹6,000 crore, leverage ratios seem under control.
“Even as Reliance Retail’s fast paced growth is commendable, one must understand that at the moment a lot of things in the business’s financials are opaque, since detailed quarterly profit & loss accounts are not available,” says Govind Shrikhande, an advisor to private equity firms in the retail sector. If at all a listing happens, more clarity is likely to emerge on things such as related party transactions, the number of properties that are leased versus owned or accounting for various inter-segmental expenses, he adds. Shrikhande was formerly managing director at Shoppers Stop Ltd.
To be sure, the Indian retail market presents tremendous potential and opportunities. And RIL, evidently, has grand plans for its retail business, which naturally includes leveraging on its telecom business. Even as these factors can support Reliance Retail’s growth in the coming quarters, it’s worth noting that RIL investors seem to be baking a good portion of the optimism in the share price as of now. CLSA now ascribes an EV of over ₹2 trillion for the retail business, which amounts to an EV/Ebitda multiple of around 26 times its one-year forward earnings estimates.
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