Reliance Retail Valuation Analysis

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Reliance Retail Surpassed Major Listed Blue chips

Introduction

The valuation of Reliance Retail, an unlisted arm of Energy-to-Telecom-to-Retail conglomerate, Reliance Industries, has recently surpassed major listed blue chips in terms of market capitalization. In this article, we will discuss about valuation of the attractive segments of Reliance Industries i.e. Reliance Retail.

Reliance Retail is currently not listed on any of the exchanges, however, looking at the movement of Reliance Retail’s stock prices in unlisted market in the last 6 months suggests company’s increasing focus on this segment after Jio Platforms.

Reliance Retail Valuation Analysis

  • The current valuations of Reliance retail in the unlisted market are creating a euphoric atmosphere. Let us have a look at its share price movement from Jan’20.
  • The Reliance Retail scrip hovered at Rs.1,100 on June 30, the highest price in the unlisted market. The stock has risen steadily from around Rs.425-450 at the end of January 2020.
  • Thus, Reliance Retail has delivered about 150% return on a year-to-date basis (YTD).
Reliance Retail Valuation Analysis
Reliance Retail Valuation Analysis
  • Thus, as seen from the above table, Reliance Retail share price has increased 150% from Jan’20 and its current market cap is higher than the market cap of many listed blue-chip stocks like HDFC Bank, HUL, Kotak Mahindra Bank, ICICI Bank, etc.
  • Let us take a look at market capitalisation of Reliance retail, as shown below.
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Reliance Retail Shareholding Break-up

Shareholding Break-up of Reliance Retail
Shareholding Break-up of Reliance Retail
  • Currently, the unlisted shares available in market are 35 lakhs, which comprises of 0.05%, whereas those held by Reliance Industries are 699.65 crores, taking the total number of shares of Reliance Industries to 700 Cr.
  • Now that we know the total number of shares, let us calculate the market capitalisation of Reliance Retail, by simply multiplying the number of shares and price per share.

Reliance Retail Valuation

Reliance Retail Valuation
Reliance Retail Valuation
  • Thus, the Market capitalisation of Reliance Retail comes to Rs.7.7 Lakh Cr, which is quite high and surpasses many blue-chip stocks as mentioned above.
  • Let us look at the total revenue in FY20 to calculate the approximate Price/Sales value of Reliance Retail Ltd.
Reliance Retail – Price to Sales Ratio
Reliance Retail – Price to Sales Ratio
Reliance Retail – Price to Sales Ratio
  • The Price to Sales metric calculated for Reliance Retail comes to 5.1x, if we compare this to its listed peer , Avenue Supermarts which is trading at Price/Sales of 6x. This is a quite euphoric valuation which is mainly on the back of various investments in Jio platform which acted as a sentiment booster for Reliance Retail.
  • Due to various investments in Reliance Jio, company has become net debt-free, and thus, it will have some cash in its hands. This might increase the company’s focus on its retail segment i.e. Reliance Retail which is evident from the share price movement of Reliance Retail in unlisted market.
  • Looking at the total valuation of Reliance Retail and Reliance Jio, it comes to Rs.13 Lakh Cr as shown below :
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Total Valuation of Reliance Retail & Reliance Jio
Total Valuation of Reliance Retail & Reliance Jio

Conclusion

  • The strong emergence of these two segments -Reliance Retail and Reliance Jio will result in Reliance Industries being a holding company and these two as its subsidiaries in the upcoming times, similar to the structure of HDFC Ltd
HDFC Ltd Listed Subsidiaries
HDFC Ltd Listed Subsidiaries
  • Just as HDFC Limited is usually valued at 20% discount to its valuation of subsidiaries, considering similar structure for RIL, valuation of its subsidiaries (Retail and Jio) will come in around Rs.10 Lakh Cr at 20% discount, adding the traditional business valuation at Rs.3-4 Lakh Cr, the total valuation of RIL comes around Rs.13-14 Lakh Cr.
  • This valuation is mainly the result of euphoria for garnering investments in Jio platform , which led to the company becoming net debt free and expectation of similar focus on its retail segment.
  • As there are only 35 lakh shares of Reliance retail in unlisted market and as demand is shoring up due to the positive sentiment which is driving the prices at higher levels.
  • However, we do not want to speculate if an investor should invest in Reliance Retail or not, as most of the times a retail investor gets trapped in the last leg of stock rally.
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