Digital services holding co to help Reliance unlock value and get strategic investor: Probal Sen, Centrum Broking
Reliance is attempting to position its digital services business as much more than just a telco.
Reorganisation of Reliance’s capital structure is going to consolidate all of the digital assets in one entity, reduce the overall debt as well and streamline the structure. In the long haul, does it help in eventual monetisation and enhance the overall shareholder value?
Absolutely. One of the things that that has been mentioned in terms of communication from the company as well is that globally, if you look at digital platforms, companies have little to no debt on their books, more often than not. The attempt really is to create a similar company and pretty much position the digital services business of Reliance as much more than just being a telco. That is probably the broad message that one should take from this reorganisation.
As you would have seen at the group level, at the consolidated level also, the debt does not change much but it actually frees up debt from the main digital services entity by the creation of the new wholly-owned subsidiary which will have negligible debt on the books and therefore is much better positioned as an opportunity for any strategic investor to come in or even for the eventual listing. Along with a cleaner balance sheet, the new entity will be in a much better position to create value. Now that the capex cycle for the connectivity business is winding down gradually, it has disappeared but telecom infrastructure and broad connectivity have mostly been done. Therefore, capex requirements are much lower than what they would have been three years ago. This is a good time to create this entity. You can unlock value and create an attractive opportunity for a potential strategic investor to come in.
For Reliance, the fireworks were missing on the Muhurat day. Tata Motors, ICICI Bank reacted to the numbers, but this news came on Friday. Markets opened for a brief session on Sunday but the market reaction was very muted.
At the end of the day, the people will have to see in terms of what kind of benchmark value does the strategic investor come in at. The company has talked about a fair value at which this new optionally convertible preference shares will be created, in terms of how they will invest in this new wholly-owned subsidiary. Our sense is that we already value the connectivity part of this business at about Rs 3.6 trillion or so. But our sense is based on our interactions that the fair value at which these preference shares are being created which essentially serve as a marker for value of the digital business will probably be much ahead of that, closer to may be somewhere around Rs 4 lakh crore plus.
Therefore, that premium will take time to be realised as people get more clarity on what kind of strategic investors are talking to Reliance and what benchmark they are giving to this digital business, because today if you really look at it, a bulk of the business is anyways coming from the connectivity part which is well known and whose numbers are already there on the street.
One can argue about whether the people are fairly valuing it or not but that is a matter of the market. But once this premium is established, another round of re-rating can be expected in the stock.