Unlike Jio, Silver Lake valuation for Reliance Retail is not gold plated

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After Reliance Industries Ltd (RIL) raises a record 1.5 trillion by selling stakes in Jio Platforms Ltd (JPL), expectations are high for sales of stakes in the group’s retail business. “In our opinion, the share price (RIL) at the current level of 2100 is likely forecasting a value of $ 75 billion to $ 80 billion for Reliance Retail, ”analysts at JP Morgan said in a September 9 report, before the deal was announced.

But it turns out that tech-driven private equity investor Silver Lake valued Reliance Retail Ventures Ltd (RRVL) at $ 57 billion much less. It is disappointing to say the least.

“Using the valuation of recent deals in Jio Platforms (EV of about $ 65 billion), the proposed deal with Saudi Aramco (EV of $ 75 billion) and this one in retail ($ 57 billion). dollars), gives us $ 197 billion EV for all three segments of Reliance. Adjusting minority interests (roughly $ 25 billion) in Jio and Retail as well as the $ 4.6 billion in net debt likely to remain through March 2021 gives a value of $ 174 billion, net of Reliance ” , CLSA analysts noted in a report last week.

RIL, however, enjoys a market capitalization of around $ 190 billion. While the stock appears to have taken a head start, analysts are struggling to account for the deficit and still somehow justify the stock’s high valuations.

The fallback is what’s known as the faculty of RIL’s tech businesses like JioMart and a much-anticipated superapp. JP Morgan analysts now value this option at $ 60 billion. But the point is that since these companies are already hosted in the Jio and RRVL platforms respectively, and the reviews of both companies are already seizing this option. Indeed, Jio Platforms was valued at much higher multiples than its peers such as Bharti Airtel Ltd, and the reason is that investors attributed the difference to the value of the Jio superapp option.

But the fact that the JioMart option hasn’t added much value to Reliance Retail is a disappointment.

Stock investors, full of cash, may come to the conclusion that private investors like Silver Lake have not fully appreciated the enormous value that e-commerce companies can bring. Needless to say, this is a reckless assumption.

Another hope is that the Silver Lake transaction will be followed by an announcement of a strategic investment.

“We believe the key will be whether Reliance Retail is able to attract strategic investors (global retailers and e-commerce companies that are currently competing with Reliance Retail in India), which could lead to a reassessment of expectations. reduced competition for Reliance Retail, ”JP Morgan analysts point out.

While equity investors have gotten a head start on the valuation front, as they have also done with a number of other stocks, the fundraising frenzy at RIL remains. places it in a very strong position vis-à-vis the competition in the telecommunications, retail and electronic commerce segments.

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