Reliance Sum of Parts


Well-Known Member
The recent news flow on the Grey market pricing of Reliance Retail provides interesting ways to value Reliance. While the market is focusing on the fact that most people won’t take this offer, there are other valuable things to consider.

If Reliance is willing to pay 1 share of RIL for 4 shares of Reliance Retail, that means Retail is worth at least about ₹ 400 per share. Or much much more according to the market.

By most people estimates, and by profits, Jio is bigger and better business than Retail - with competitors in dire straits because of AGR dues, price wars, etc, whereas Retail is fighting well entrenched global players like Amazon and Walmart. So Jio should also be valued at at least ₹ 400 per share very conservatively.

So where does that leave the rest of Reliance? Worth less than ₹700 per share? Which is lower than the lowest it has been for a long time!!

We are in a low oil price environment - which means RIL should have a decent market environment. At high prices, the PSU competitors of Reliance get benefit of subsidy bonds from government, which isn’t there for Reliance. So the lower the subsidy, the better for Reliance. And if oil price goes up, Reliance stands to make inventory gains to compensate for current oil losses.

Yes, the company is sitting on huge debt - and there are some concerns - like a potential arbitration award against Reliance. However, Reliance has successfully fought back some part of the arbitration damage, and has already made provisions for some portion. So the impact of any judgment is unlikely to be significant on Reliance from downside perspective. But the potential for upside surprise still exists.

One catch is that Jio will have to shell out big money for BWA spectrum which will come up for auction in 2020. But considering the financial state of competitors, unlikely to have serious pressure on Reliance.

The delay on Aramco deal is a concern, from debt reduction standpoint. But Reliance balance sheet is still at manageable leverage levels.


Well-Known Member
The Macquarie report and its timing are quite interesting, coming as it did on the day January Futures contracts expired.

Also, the report makes very interesting reading - listing out large number of positives, and making an assertion that all these positives are already priced in. Are they truly priced in?

The IMO 2020 guidelines started on Jan 1st 2020, and Reliance is amongst the biggest beneficiaries globally from this. While there will be a glut in High sulphur fuels, this won’t impact Reliance as their complex refinery can convert dirty crude to clean fuel. The impact of this isn’t there in earnings yet.

Landscape in Telecom couldn’t be better. With revenue shooting up 25-30% because of price hikes, plus Interconnect charges, plus increasing number of users. In fact, unless competitors get some reprieve, it’s hard to see anyone, including Bharti Airtel being able to compete effectively with Jio. This has happened in just last 2 months, and the impact of this isn’t there in earnings yet.

Reliance Retail is the only segment with strong competition - from Walmart and Amazon. This is relatively small from earnings perspective for Reliance, anyway. Market is pricing shares of Reliance Retail significantly higher than 25% of RIL share price.

Reliance is trading at 19 times earnings. For a company that has segment leaders in 3 of the largest businesses in India, with proven large scale execution capability, this is quite a reasonable level.
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