Reliance Shares May See Upside After Jio Financial Spinoff, One Analysis Suggests
Nuvama exepects shareholder wealth to potentially increase by 3-5% after the spinoff.
Reliance Industries Ltd. could witness a small upside, after the spinoff of its financial services business, according to Nuvama Institutional Equities. At least going by its record after a previous such value-unlocking exercise 18 years ago.
The Mukesh Ambani-led oil-to-telecom conglomerate had announced that it will demerge its financial services business into Reliance Strategic Investments Ltd. and rename it as Jio Financial Services Ltd. Reliance's investment in Reliance Industrial Investments and Holdings Ltd., which is part of the financial services, will be transferred to Jio Financial.
As of March-end, Reliance Industrials held 6.27% stake in Reliance Industries through Petroleum Trust and Reliance Services and Holdings Ltd., according to data on BSE.
Shareholders will get one share of Jio Financial for every one held in the parent. The financial services business currently has licences for a payment gateway, payments bank, non-bank lending and broking, among others.
Nuvama recalled that back in 2005, when Reliance had spun off four entities, the market actually rewarded the company as shareholder wealth increased 38%. This time around, it expects a small rise.
"We argue that RIL (Reliance Industries) stock could be least impacted by this demerger and instead see an upside of 3-5%," it said.
In 2005, Reliance had spun off four entities, two out of which were already listed. These were Reliance Industries and Reliance Capital. The remaining were listed in February and March of 2006 and three subsidiaries were created, Nuvama noted. The research firm added after the split, "there was an increase of 38% in shareholder wealth as the shares of Reliance did not fall post-split, in addition to which investors got the additional entities, effectively for free."
Nuvama has estimated the valuation of the demerged entity at Rs 1 lakh crore, about 6% of the current market price.
"We estimate a value of Rs 168 per share (5% of the sum-of-the-parts valuation), currently embedded in non-operating assets. We ascribe a value of Rs 323 per share to nonoperating assets," the research firm said in a note. It values treasury shares at Rs 168 per share, which is 6% of the current market price as of July 14, Nuvama added.
Here's What Nuvama Said:
Retained 'buy' rating with target price of Rs 3,205 per share.
Outlook on the company is strong.
Reliance's O2C (refining) shall benefit greatly from 'Golden Era of Refining'.
Expects more than $10 (Rs 820.77) per bbl of gross margins from calendar year 2024 onwards.
Upstream division may remain key beneficiary of elevated gas prices, faster KG-D9 production ramp-up.
O2C shall match retail Ebitda by fiscal 2024.
RIL's new energy business shall unleash next leg of growth.
Reliance Industries shares ended 0.08% lower at Rs 2740.7 apiece on July 14, compared with 0.78% gain in benchmark Nifty 50.
Of the 39 analysts tracking the stock, 34 maintained 'buy', three suggested 'hold', while two recommended 'sell'. The consensus price target implies a potential upside of 2.9% over the next 12 months.
