Facebook-Reliance Jio Deal Unlocked Reliance Industries’ Valuation

Facebook Buys 9.9% Stake in Reliance Jio (April 22, 2020)

Introduction

Facebook-Reliance Jio deal of $5.7 Billion is the largest ever foreign direct investment (FDI) in India’s technology sector. On April 22, Facebook announced to buy 9.9% stake in Reliance Jio and investing $5.7 Billion (Rs.43,574 Cr) in Jio platforms. This unique strategic deal has unlocked the valuation of Reliance Jio and thereby of Reliance Industries.

Facebook-Reliance Jio Deal | Decoding Reliance Industries’ Valuation

Facebook Buys 9.9% Stake in Reliance Jio

• On April 22, Facebook announced to buy 9.9% stake in Reliance Jio, thus investing $5.7 Billion (Rs.43,574 Cr) in Jio platforms.
• It is the largest investment for a minority stake by a technology company anywhere in the world and the largest ever foreign direct investment, FDI in India’s technology sector.
• Jio Platforms, a wholly owned unit of Reliance Industries, brings together Jio’s digital apps, ecosystems and the wireless platform offered by telecommunications carrier, Reliance Jio Infocomm Ltd, under one umbrella.
• The investment values Jio Platforms amongst the top 5 listed companies in India by market capitalization, within just 3.5 years of launch of commercial services.
• Facebook is looking to expand its presence in India, its largest market in terms of subscriber base.

Win-win Deal for both Facebook and Reliance Industries

This deal is a win-win for both Facebook and Reliance Industries. There are some strategic benefits to both companies.

Facebook

• It would strengthen the Facebook’s presence in its largest market, especially for its WhatsApp unit. It would give Facebook deeper access to India, the second-largest internet market after China.
• With its half-billion internet users, the South Asian country is an attractive market for the world’s largest technology companies, including Amazon, Apple, Microsoft and Google.
• In India, Facebook has about 250 million users, while WhatsApp has over 400 million.it can Now, it can use Jio’s subscriber base of nearly 400 million users to reach out to customers, businessmen and youngsters

Reliance Industries

• For Reliance, this deal with Facebook comes as a boost at a time when RIL is fighting against the impact of the coronavirus pandemic and a slump in demand for crude oil.
• The deal will help reduce debt burden of Reliance Industries, an oil-to-retail conglomerate, which bulged due to the high-speed expansion of Jio and retail businesses.
• In RIL’s Annual general meeting (AGM) held on August 12, 2019, Mr. Mukesh Ambani has led a clear road-map towards becoming a zero net debt company by March 31, 2021.
• The $5.7 billion investment by Facebook is a significant step towards that goal. RIL is also in talks with Saudi Aramco, to sell 20% stake in its oil-to-chemicals division.
• For Jio, the deal is a leap over its peers, including Bharti Airtel. The RIL arm will now have the opportunity to slew up several deals with Facebook that will be exclusive to Jio subscribers.
• The collaboration with Facebook will give Jio a significant advantage on product and technological fronts. It will keep competitors miles away and grab a larger wallet share of consumers across domains – Telecom, payments, retail.

Facebook- Reliance Jio Deal Unlocked the Valuation of Reliance Jio & Reliance Industries’

Reliance Jio

• The technology giant, Facebook has invested $5.7 Billion (Rs.43,574 Cr) for buying the stake of 9.9% in Reliance Jio platforms as a part of a strategic deal. Thus, it will value Reliance Jio at Rs.4.62 Lakh Cr.
• The current market capitalization of Reliance Industries is around Rs.8.69 Lakh Cr as on April 23. It means, more than 50% of the RIL’s valuation is contributed by its Jio platforms.
• Lets decode the valuation of the other key business segments of Reliance Industries : Reliance Retail and Reliance Oil and Gas Business

Reliance Retail

• We have considered the listed peer of Reliance Retail – Avenue Supermarts in order to calculate Reliance Retail’s valuation.
• The Earnings Before Interest Taxes (EBIT) of D’Mart for FY2019-20 would be around Rs.1,800-2,000 Cr. While its current market capitalization is hovering between Rs.1.4-1.5 Lakh Cr.
• EBIT of Reliance Retail for FY2019-20 is around Rs.10,000 Cr around 5 times that of D’Mart. So, with the same multiple, the current valuation Reliance Retail comes at Rs.7-7.5 Lakh Cr.
• Even if we don’t consider the same premium valuation of Avenue Supermarts for Reliance Retail, after discounting by say, 30%, the valuation of Reliance Retail comes at around Rs.4-4.5 Lakh Cr.

Reliance Oil and Gas

• The major revenue and EBIT contributor of Reliance Industries is its Oil and Gas Business.
• With the slump in Oil demand amid COVID-19 outbreak across the world, the expected earnings from Oil and Gas segment will get impacted adversely.
• The alternative energy resources are also adding more risks to the RIL’s Oil and Gas business. So, its revenue and earnings share may decrease quarter-on-quarter. Still, it is a very good cash-cow for Reliance Industries, which is continuously generating cash for RIL.
• So, the Reliance’s Oil and Gas business valuation at around Rs.4-4.5 lakh Cr is quite justified by the business.

• So, the total valuation of Reliance Industries is unlocked at around Rs.13-13.5 Lakh Cr. (Reliance Jio : Rs.4.6 Lakh Cr + Reliance Retail : Rs.4-4.5 Lakh Cr + Oil and Gas Business : Rs.4-4.5 Lakh Cr).
• While the current market capitalization of Reliance Industries is at Rs.8.69 Lakh Cr. So, there is a great upside potential for the Reliance Industries share. Thus, it will create a very good opportunity for the Reliance Industries’ shareholders.