Stock pick of the week: Restructuring of Reliance Industries is good news
The current restructuring exercise at Reliance Industries, including sale of stake to well-known buyers and halving of debts, have made the company a favourite of analysts.
The enterprise value for this deal is expected to be around $75 billion. This proposed tie up with global oil major Aramco should enhance prospects of Reliance, especially because its refining and petrochemical divisions are facing several headwinds now. Earlier, Reliance had decided to sell 49% of its budding fuel retail network to British Petroleum, another energy giant. The main point worth noting in all these stake sales is that all the divestments are happening with well-known strategic buyers and at premium valuations.
High debt was another investor concern at Reliance and to allay these fears, Reliance plans to halve its debt by using funds generated from these divestments. More importantly, Reliance plans to list several of its subsidiaries like Reliance Jio, Reliance Retail, etc and become zero net debt company during 2021-22. In addition to allaying fears about debt, there will be an earnings boost also from debt reduction because it will bring down the interest cost substantially.
Reliance Retail has already become the largest organised retailer. However, the organised retail segment is still very small in India and therefore, the upside is still unlimited. In other words, Reliance Retail can be considered a possible proxy for the expected India consumption story that may play out over the next few decades.
Reliance Jio has already become the number one mobile player and is expecting to increase its subscriber base to around 50 crore. The Jio business will get a further uptick from the JioFiber launch. The pricing of JioFiber launch is not ‘aggressive’ as the Jio mobile rollout (starting JioFiber plan is 100 GB data at 100 mbps speed for Rs 699 per month) and this is positive for the industry also. Immediate stock price movement will depends on the success of this launch.
Analysts are getting bullish on this counter now because of these restructuring exercises. They also cite the example of similar exercise during 2005 and 2006, when shareholders of Reliance got shares in its subsidiaries in 1:1 ratio before listing and this resulted in their combined value going up by around 40%.
- Buy: 27
- Hold: 6
- Sell: 3
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