Silver Lake’s value for RRVL looks lower than what investors are factoring in RIL’s current share price
The fact that JioMart optionality has not added much value to Reliance Retail is a disappointment
After Reliance Industries Ltd (RIL) raised a record ₹1.5 trillion by selling stakes in Jio Platforms Ltd (JPL), expectations have been running high with regard to stake sales in the group’s retail venture. “In our view, the (RIL) stock price at the current level of ₹2,100 is likely pricing in a $75-80 billion value for Reliance Retail," analysts at JP Morgan said in a 9 September report, ahead of the deal announcement.
However, as it turns out, technology-focused private equity investor Silver Lake has valued Reliance Retail Ventures Ltd (RRVL) at a much lower $57 billion.
“Using the valuation of this deal in retail (US$57bn), recent deal in Jio Platforms (EV of ~US$65bn) and proposed deal with Saudi Aramco (EV of US$75bn) and adjusting for the minority interest in Jio (33.5%) and retail (5.6%) gives us an equity value of US$174bn. This is very close to the current market cap," analysts at CLSA pointed out in a 9 September report.
RIL, in fact, enjoys a market capitalization of about $186 billion, excluding the value of treasury shares. The stock appears to have run ahead of itself, and analysts are scrambling to account for the shortfall and somehow justify the stock’s high valuations.
The fallback is the so-called optionality of RIL’s technology businesses such as JioMart and a much-awaited superapp. Analysts at JP Morgan now value this optionality as high as $60 billion. However, these businesses are already housed in RRVL and Jio Platforms respectively and the valuations of the two firms already capture this optionality.
Indeed, Jio Platforms was valued at multiples much higher than peers such as Bharti Airtel Ltd and the reason given for this was that investors have attributed the difference to the option value of the Jio superapp. However, the fact that the JioMart optionality has not added much value to Reliance Retail comes as quite a disappointment.
Stock market investors, flush with liquidity, will perhaps conclude that private market investors such as Silver Lake have not fully appreciated the huge value that the e-commerce businesses can throw up. That’s a foolhardy assumption, given that large private equity investors have access to better investment tools, and more information.
Another hope is that the Silver Lake transaction will be followed up by a strategic investment announcement. “We believe the key will be whether Reliance Retail is able to attract strategic investors (global retailers and e-commerce companies that are competing with Reliance Retail in India), which could drive re-rating on expectations of reduced competition for Reliance Retail," pointed out JP Morgan analysts.
Whether these expectations play out or not remains to be seen. For now, the fundraising spree at RIL puts it in a strong position vis-à-vis competition in the telecom, retail and e-commerce segments.