Silver Lakes bites into Reliance Retail
On Wednesday, Silver Lakes, the US-based PE fund, infused Rs,7500cr or ($1.05 billion) into Reliance Retail Ventures for a 1.75% stake. That values the overall retail ventures at around Rs428,500cr or $58 billion. To understand the context of this deal, let us take a quick look at the contours of the previous Jio Platform monetization.
It may be recollected that Reliance had sold 32.98% in Jio Platforms for a total consideration of Rs152,091cr valuing the overall business at $63 billion. However, the strategic sale to Google and Facebook was done at lower valuations and hence we shall consider the average valuation assigned by PE funds as a benchmark, which is $67 billion.
It looks like even for Reliance Retail, the company is planning a similar combination of PE funds and strategic investors. Reliance is in talks with Amazon, which could be a strategic investor in Reliance Retail. Similarly, on the PE investments front, Reliance Retail has already placed a stake with Silver Lakes and KKR may invest shortly in the retail venture. Based on the placement with Silver Lakes, Reliance Retail has been valued at $58 billion.
Financials of the Reliance Retail story
Here is a quick comparison of the financials of Reliance Retail and Avenue Supermarts.
|Particulars||Reliance Retail||Particulars||Avenue Supermarts|
|Sales Growth||25%||Sales Growth||24%|
|No. of Stores||10,644||No. of Stores||212|
|Sales per Square Feet||Rs.56,772||Sales per Square Feet||Rs.32,875|
|EBITDA Margin||6.0%||EBITDA Margin||8.8%|
|Market Capitalization||Rs428,000cr||Market Capitalization||Rs1,45,200cr|
|MCAP to EBITDA ratio||44.58x||MCAP to EBITDA ratio||68.75x|
It is really hard to find a parallel to the breadth of products that Reliance Retail offers but the one stock that comes closest is Avenue Supermarts, ownerof the D-Mart brand. We take out the COVID period and only focus on the Mar-20 fiscal year. Even if you impute the stake sale to Silver Lakes as the approximate valuation, we are looking at a retail franchise that is substantially cheaper in terms of Market Cap / EBITDA than Avenue Supermarts. One thing is certain that the retail opportunity is enormous. IBEF (India Brand Equity Foundation) estimates the total size of Indian retail at $1.1 trillion if the unorganized sector is added. That means; even the surface of the retail segment has not really been scratched.
For Reliance it is more of a SOTP effort
For a long time, Reliance has been an extremely complex organization andthis effort is towards assigning a ballpark valuation for the 3 principal business divisions viz. Reliance O2C Business, Jio Platforms and Reliance Retail Ventures. This is likely to be instrumental in a much better SOTP picture of the Reliance stock. Let us look at how a typical SOTP table for Reliance will look after the latest effort to monetize Reliance Retail Ventures.
|Reliance Business||Indicative Valuation||Logic for Valuation|
|Reliance O2C Business||$75 billion||Proposed stake sale to Saudi Aramco|
|Reliance Telecom and Digital||$67 billion||Placement of shares with PE Funds|
|Reliance Retail Ventures||$58 billion||Placement of shares with Silver Lakes|
|Indicative SOTP valuation||$200 billion|
|Adjustment for Jio minority interest||-$22.10 bn||32.98% minority stake|
|Adjustment for RRVL minority interest||-$3.19 bn||5.50% minority stake|
|Adjusted SOTP Valuation||$174.71 bn|
The above valuation does not include the value of the treasury stock held by the Reliance group. It also does not factor the huge potential cash pile that RIL is already sitting on. If you add up the Jio monetization, Brookfield tower monetization, OMC sale and the rights issue, Reliance is sitting on a potential cash pile of $32 billion.
Now for the bigger story! The oil & gas extraction business including the KG-D6 blocks are not part of Reliance O2C so their value is not shown in the above SOTP. This oil business valuation is when crude is $40/bbl. You can imagine, the valuation impact on extraction and refining business if crude was to go to $60/bbl. When you add these factors to the cash pile, the SOTP story becomes more obvious.
The retail venture monetization may see more investors coming and we may also see a partial monetization of the O2C business. But with the retail monetization of RRVL, the SOTP structure of RIL is getting a lot clearer. That, apparently, was the intent anyways; to give a clear message to the financial markets!