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.
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.