Reliance Industries rating: Hold — Deal could start off another round of investments

PE investment in line with intent to induct partners in retail business; no major catalysts visible over next six months; ‘Hold’ retained

RIL has announced the investment of Rs 75 bn (c$1 bn) by global private equity firm Silver Lake into Reliance Retail Ventures Ltd (RRVL), the key operating and holding company of the retail businesses. The deal values RRVL at a pre-money equity value of Rs 4.21 trn (c$56.1 bn) and post investment will give a 1.75% stake to Silver Lake. The deal is subject to regular regulatory approval.

What does it mean for our valuation? We value RIL’s retail business at $50.4 bn, while the recently announced acquisition of Future Group retail assets could potentially add $4.9-8.6 bn on completion. Thus, Silver Lake’s valuation of RIL’s retail business is largely in line with our valuation.

Potential medium-term implications: At its AGM, RIL had announced that it would induct partners and investors in its retail business. Hence, we believe that, similar to the investments in Jio, this could be the start of another round of investments in its retail business. Interestingly, unlike Jio where the first investment was announced by Facebook, a strategic partner, this time the first investment is by a financial investor. For us, this raises concern over a potential lack of interest from large strategic partners.

Investment view: Long term, we continue to like the business and its balance sheet; we believe each of its three core businesses – O2C, Retail and Digital Services – have become self-sustaining and cash-generating, with Retail and Digital Services on high growth. The stock has outperformed the Nifty 50 by c22% over the past three months. We believe this is largely driven by significant deleveraging, new investors and partners in the Digital Services business, thus setting a new benchmark valuation and unlocking value. We see no major catalysts over the next six months, and the operational environment remains tough.

Maintain Hold: We keep our earnings forecasts unchanged pending regulatory, credit and shareholder approval. Our SOTP-based TP is Rs 2,020, which implies 6.5% downside. Downside risks: Lower O2C margins than we forecast and a slow uptick. Upside risks include closure of the deal with Aramco and large investments in retail.