Brokerages’ View On Silver Lake’s Investment In Reliance Retail
Silver Lake has acquired a stake in Reliance Retail Ventures Ltd., betting on another business of billionaire Mukesh Ambani-controlled empire after investing in its digital and telecom assets.
The private equity firm ploughed Rs 7,500 crore for a 1.75% stake in the holding arm of Reliance Industries Ltd.'s retail unit. The transaction valued the retail business at Rs 4.21 lakh crore pre-money.
Silver Lake earlier invested more than Rs 10,200 crore for nearly 2.1% stake in Jio Platforms Ltd., the holding firm of Reliance's digital business.
Here are the brokerage views on the private equity firm's investment in the retail unit:
- Unlike increase in valuation because of price discovery in a spate of deals for Jio Platforms, the benchmark set by Silver Lake investment in the retail unit is broadly in line with expectations and doesn't warrant an imminent upgrade.
- Acquisition of Future Group's assets, subject to approvals, strengthens Reliance Retail's leadership with access to some good properties and established consumer brands across key consumption centers.
- Sustainable scale benefits should kick in the near to mid term
- Room for RIL to extract operating efficiencies and improve profitability with lower capital costs.
- Integration of supply chain/logistics business could also bolster RIL's retail backend and perhaps also its new commerce plans.
- Announcements on further stake sales in retail could keep news flow supportive for the stock.
- With capital raising for Jio largely done and price discovery of retail unit complete, the focus is now likely to shift to:
- JioMart, given the partnership with WhatsApp
- Digital offerings beyond connectivity where Jio has been making investments but are yet to achieve meaningful scale
- The partnership with Google to develop an entry-level 4G smartphone could help bring forward the target of 500 million mobile subscribers.
- Induction of financial investors into the retail segment is earlier than expected.
- Benchmark retail valuation at Rs 4.21 lakh crore less than consensus expectations (Rs 4.8-5 lakh crore).
- Benchmark valuation for Jio largely factored in telecom operations but upside from apps (education, health, agriculture, entertainment) was not accounted for.
- Upside in retail segment from further ramp-up in e-commerce and kirana store integration is not fully factored in.
- Synergies from recent acquisition of retail business of Future Group is yet to be realised.
The next catalysts for RIL's stock are:
- Rollout of health app with online medicine delivery, and education app.
- Potential induction of strategic and financial investors in retail.
- Tariff increase in the telecom business.
- Turnaround in refining margin cycle.
- While the valuation is 7% lower than its implied Reliance Retail Ventures Ltd. value, beginning of the stake sale process is broadly a positive.
- The stake sale allows value benchmarking.
- It could trigger further cash inflows, though RIL is unlikely to sell as large a stake in the retail unit as 33% in Jio Platforms; Bloomberg reported talks with KKR for up to $1.5 billion stake.
- With private equity investments in both Jio Platforms and Reliance Retail Ventures, the market would expect Reliance Industries to separately list these companies eventually.
- RIL’s balance sheet flexibility has materially improved and investors would like to see how the company uses it.
- While RIL's statement didn't explicitly mention JioMart, it highlights Reliance Retail has started a transformational digitalisation of small and unorganised merchants. So JPMorgan concludes that the stake sale to Silver Lake includes JioMart/new commerce.
- Investments by strategic partners was a key positive for Jio Platforms. For Reliance Retail too, while any stake sale is positive, the market would more likely bid up strategic investors than private equity inflows.
- The price should help reduce investor concerns on RIL's retail valuations.
- At these valuations, it would add about 6% to Morgan Stanley’s base case net asset value for RIL.
- Fresh investments in Reliance Retail positive and are expected to drive further upside to the stock.
- Reliance Retail has consolidated its dominant market positioning in offline retail through its recent acquisition of retail, wholesale, logistics & warehouse business of Future Group. It also aims to digitise kirana stores through its new commerce business.
- India's retail market is expected to grow at an annualised rate of 10% to reach $1.3 trillion by 2025.
- Organised retail is expected to grow faster (18% CAGR) and reach about 15% share by 2025 from 8% in 2018.