Stake sale, Future Group asset acquisition to boost Reliance's Retail business: Fitch Ratings

We also expect the synergies from the acquisition to enhance RIL's bargaining power with vendors, and offline and online customer reach, Fitch said.

Sep 11, 2020 11:09 IST India Infoline News Service

Reliance Industries Ltd's (RIL, BBB-/Stable) plans to sell a stake in its retail subsidiary at an equity valuation of Rs4.21 trillion and its proposed acquisition of Future Group's retail businesses will solidify RIL's position in India's organised retail market and strengthen its consumer business, says Fitch Ratings.

We believe the proposed acquisition of Future Group's retail business will fortify its retail footprint, especially in the grocery retail sub-segment. The equity stake sale will further strengthen RIL's financial profile and competitive position beyond the proposed acquisition, Fitch Ratings said.

The acquisition will add about 1,700 large stores to RIL's 11,806 stores in its retail segment and increase its organised retail revenue market share by around 5%. The asset acquisition will add about 2%-2.5% to RIL's EBITDA in the financial year ending March 2022 (FY22). The Rs247 billion (USD3.4 billion) consideration for the acquisition is less than 3% of its FY20 total assets, a relatively small impact on its balance sheet. Future Group's solid presence in Tier 1 Indian cities with well-established retail formats, including Big Bazaar, Central, FBB, Easyday and Brand Factory, will complement RIL's increasing strength in second- and third-tier cities. RIL's acquisition of Future Group's warehousing and logistics business, in addition to its stores, will help to expand the scale of JioMart, RIL's online grocery platform.

We also expect the synergies from the acquisition to enhance RIL's bargaining power with vendors, and offline and online customer reach. These benefits and RIL's proven business strategies would over time bridge the EBITDA margin gap between the 8.7% for RIL's retail segment in FY20 and around 5% for Future Retail Limited (C/Rating Watch Positive), a retail subsidiary of Future Group.

The Future Group asset acquisition is subject to regulatory, shareholder, creditor and other customary approvals, which may take around six months to complete. The total consideration of INR247 billion would include a cash payment of about INR50 billion-60 billion and balance as liabilities would be absorbed by RIL. We retain our expectations for RIL to return to a net cash position by FY22, despite the additional debt for the transaction.

Our net cash expectation is driven by proceeds from the sale of RIL's stakes in its telecom and retail subsidiaries. RIL has announced plans to sell a 1.75% stake in Reliance Retail Ventures Limited, its retail subsidiary, to Silver Lake for INR75 billion, subject to regulatory and other customary approvals. This is in addition to the sale of around 33% of Jio Platforms for Rs1.52 trillion. RIL also completed its Rs531 billion rights issue in June 2020, with Rs133 billion in cash received to date and the balance in FY22.

RIL's net cash position would also be helped by the completion of an Rs252 billion investment by Canada's Brookfield Infrastructure Partners L.P. in Tower Infrastructure Trust, which plans to use part of the proceeds to pay down RIL's investment (INR128 billion as of March 2020) in the non-convertible debentures issued by the trust. In addition, RIL received INR76 billion in 1QFY21 from BP plc (A/Stable) for a 49% stake in RIL's fuel retail network and aviation fuel business.

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