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:

Citi Research

• 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:

1. JioMart, given the partnership with WhatsApp
2. Digital offerings beyond connectivity where Jio has been making investments but are yet to achieve meaningful scale
3. The partnership with Google to develop an entry-level 4G smartphone could help bring forward the target of 500 million mobile subscribers.

Also Read: Silver Lake Values Reliance Retail Lower Than Most Brokerage Estimates

Credit Suisse

• 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.

JPMorgan

• 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.

Morgan Stanley

• 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.

Bernstein

• 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.