RIL : Reliance Retail SWAP Offer

RIL Proposed Share Swap Offer for Reliance Retail Shareholders

Introduction

Reliance Industries Ltd, RIL on 25th December, proposed RIL : Reliance Retail SWAP offer to shareholders of Reliance Retail with a swap ratio of 4:1. This share swap offer will allow shareholders of unlisted Reliance Retail to exchange their unlisted shares for that of RIL.

RIL : Reliance Retail SWAP Offer for Reliance Retail’s Shareholders

Share Swap Scheme Proposed by RIL

• According to the share swap scheme proposed by RIL, the swap ratio is 4:1. It means the Reliance Retail shareholders can receive one RIL share for 4 shares held in Reliance Retail.
• This scheme will be applicable to Reliance Retail employees, who were allotted shares or Restricted Stock Units (RSUs), under various Employee Stock Option Plans (ESOPs).
• The company had implemented two schemes namely Reliance Retail Employees’ Restricted Stock Unit Plan 2006 and 2007. Under these schemes Restricted Stock Units (“RSUs”) have been allotted to eligible employees. On exercise of the RSUs by some of the employees, equity shares have been allotted to them.
• Also, the company has been receiving requests from the employees holding equity shares for providing them options for exit and liquidity.
• Thus, the proposed share-swap deal will allow shareholders of unlisted Reliance Retail to exchange their unlisted shares for that of RIL. It will enhance liquidity for the employees, as the shares owned by them can be traded on the stock exchange.

Valuation of Reliance Retail According to RIL’s Swap Offer

• The current market capitalization of Reliance Industries Ltd. (RIL) is around Rs.10 Lakh Cr. Thus, according to the proposed share swap ratio of 4:1, Reliance Retail’s valuation comes out to be Rs.2.5 lakh Cr.
• Reliance Retail was valued at around Rs.5 Lakh Cr and trading at Rs.850-900 in the grey market, a few days before share swap scheme’s announcement (25th Dec).
• When RIL valued its Retail business at Rs.2.5 Lakh Cr, its share price in grey market had come down to Rs.475-500. Thus, lot of Retail investors lost their money post share swap announcement made.

Reliance Retail Ventures to Hold 100% Stake in Reliance Retail Post Swap Deal

• Reliance Retail, a subsidiary of Reliance Retail Ventures Limited and an indirect subsidiary of RIL. The proposed scheme will not alter the capital structure of any of the companies.
• Under the scheme, equity shareholders of Reliance Retail will be given listed equity shares of Reliance Industries and the corresponding equity share capital held by them in the Reliance Retail will be reduced and cancelled.
• This scheme does not contemplate any outflow of funds/assets of the Company. So, the aggregate of Equity capital (equity and other equity) of the company pre and post implementation of the scheme will remain the same.
• RIL, through its subsidiary Reliance Retail Ventures, holds about 99.95% of stake in Reliance Retail and about 35 lakh equity shares are in circulation in the unlisted market. After the swap ratio, Reliance Retail Ventures will hold 100% stake in the Reliance Retail.

Is Reliance Retail Valued Fairly?

• Does the proposed market capitalization of Reliance Retail is justified?
  • Do we have any peer company of Reliance Retail which is listed. We can take Avenue Supermarts in order to gauge the correct valuation of Reliance Retail.
  • Reliance Retail’s performance is concerned, its EBITDA numbers are declared every quarter and net profit numbers are not available directly. (Here, EBITDA : Earnings Before Interest Taxes Depreciation and Amortization).
  • So, we can compare operating profits of both peer companies : Reliance Retail and Avenue Supermarts. Thus, we can get some valuation angle by doing the peer comparison.
• Comparing Revenue
  • Reliance Retail : Revenue of Q2 FY20 = Rs.41,202 Cr
  • Avenue Supermarts : Revenue for TTM (Trailing 12 Months) = Rs.22,341 Cr
• Comparing EBITDA for Q2 FY20
  • Reliance Retail :
    • EBITDA = Rs.2,322 Cr
    • EBITDA Growth % YoY = 67%
  • Avenue Supermarts :
    • EBITDA = Rs.517 Cr
    • EBITDA Growth % YoY = 33%
  • Thus, for Q2 FY20, EBITDA of Reliance Retail is almost 4 times that of Avenue Supermarts. Also, EBITDA % YoY growth of Reliance Retail is 2 times that of Avenue Supermarts.
• Market capitalization of Avenue Supermarts is Rs.1.2 Lakh Cr and that of Reliance Retail is just Rs.2.5 Lakh Cr according to RIL’s proposal.

Future Outlook of Organized Retail Market in India

• With 10,901 stores across the country, Reliance Retail is India’s top wholesale supplier to small shopkeepers. The RIL’s subsidiary operates India’s largest chain of supermarket stores and consumer electronics stores.
• Expanding its footprints across grocery, consumer electronics, fashion and lifestyle segments, Reliance Retail opened 337 new stores in the quarter, taking the overall number to 10,901 stores.
• Only 12% of Indian Retail market is organized as of today, still 88% retail market is unorganized. So, there is a lot of pace for these Organized Retail players like Reliance Retail, Avenue Supermarts to penetrate that market share.
• Organized retail market share projections 30% by 2025 and 40% by 2030.
• So, the Reliance Retail’s valuation offer made by RIL to its shareholders seems to be at a lower than its fair valuation. Reliance Retail’s Rs.2.5 Lakh Cr market valuation proposed by RIL is not justified at all on account of its exponential growth prospectus.