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Reliance expected to spin-off Jio, Retail over 3-4 yrs: Report

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Analysts expect a break-up of Reliance Industries Limited (RIL) in the next 3-4 years through the IPO of the Jio and Retail business segments which should unlock additional shareholder value.
Broking house Bernstein said in a research note that Reliance is expected to spin-off Jio and Retail over the coming 3-4 years.
Following the US$ 7 billion rights issue and 24.7 percent sell down in Jio, Reliance Industries is now effectively debt free.
“We expect a break-up of the company in the next 3-4 years through IPO of the Jio and Retail business segments which should unlock additional shareholder value. We raise our price target to Rs 1,870/share which gives 7 percent potential upside”, the report said.
The upside to valuation could come from a sell down of a 20 percent stake in refining and chemicals to Aramco next year for a value of US$ 15 billion, Bernstein said in the note. Aramco is currently undertaking due diligence although the deal is non-binding.
“Reliance is expected to spin-off Jio and Retail over the coming 3-4 years. The rights issue and sell down in Jio have enabled Reliance to go debt free. We expect capex to come in less than Rs 500 billion and RIL to be FCF positive,” it said.
Reliance has raised US$ 22.3 billion in capital markets through the sell down of a 24.7 percent stake in Jio and US$ 7 billion equity raise. “While net debt to equity was 0.51x at the end of FY20, we expect it will fall to 0.06x by end of FY21,” it said.
“We adjust down our downstream earnings to reflect weaker outlook for refining and petrochemical margins following the coronavirus outbreak. Crude imports have dropped in Jamnagar by 25 percent in 1QFY20 which could presumably lead to lower refining runs. We lower our refining GRM estimate for this year to US$ 5.6/bbl and to US$ 7.4/bbl for FY21,” it said.
In a research note, BofA Securities said after FB’s 10 percent stake in Jio Platforms (JPL), nine PE firms bought 15 percent stake in JPL valuing it at US$ 66 billion.
“We note that PE firms invest with an expectation of IRR of 15-16 percent. In our JPL bull-case valuation, when we model FY22 cellular ARPU of Rs 200 (current Rs 131), good traction in broadband/enterprise offerings and a few of Jio’s apps gaining scale, we estimate a value of US$ 110 billion, implying significant upside potential. Over time, should Jio IPO, as management has stated it intends to, it should act as another catalyst for RIL stock”, it said.
JPL broadly could be divided into connectivity biz (underlying mobile, broadband and enterprise) and services (ad, app subscription, IoT, PoS etc). Partnerships with Microsoft, FB should help JPL offer best tech offerings to users/SMEs, the report said.
Debt concern is behind us with RIL raising US$ 21 billion in less than 2 months (higher than the entire tech start-up industry raised in 2019).
One of the biggest value drivers is cellular industry ARPU improving for VIL to survive/pay AGR dues.
“We expect Jio’s ARPU to stabilize to Rs 250 in long-run as we expect Jio to earn incremental revenues via ad, app subscriptions. With cellular investments behind, Jio is focusing on broadband rollout and targeting SME enterprise market where it could offer bundled pack with Microsoft.”
Given Jio’s focus on making services affordable, it estimates subscription to Jio’s apps – mainly entertainment (content/music/games), Ed-tech & Health-tech to be Rs 55-65/month vs industry norm of Rs 100-150. This might lead to better uptake of paid subscription and it estimates Jio apps to contribute to US$ 9.5 billion value.

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