RIL’s Jio Financial Services: A Potential Repeat of 2005 with 3-5% Upside, Predicts Nuvama

RIL’s Jio Financial Services: A Potential Repeat of 2005 with 3-5% Upside, Predicts Nuvama

Reliance Industries (RIL) has recently set July 20 as the record date for the demerger of its financial service undertakings into Reliance Strategic Investments Limited, which is expected to be renamed Jio Financial Services (JFS).

This move has attracted considerable attention from investors who are eager to see if it can unlock value for them. Looking at RIL’s history, there is a strong possibility of gains for its investors in the future.

RIL has a track record of successfully creating value for its shareholders. Over the years, the company has ventured into various sectors, including telecommunications with Jio, and has consistently delivered impressive results.

The demerger of its financial services undertakings into JFS could potentially enhance the focus and growth prospects of these businesses, leading to increased value for investors. With RIL’s reputation for strategic decision-making and execution, there is optimism among investors that this move will result in favorable outcomes.

According to Nuvama Institutional Equities, historical data indicates that when Reliance Industries (RIL) demerged four entities back in 2005, the market rewarded RIL and shareholder wealth increased by 38 percent. Drawing from this precedent, there is a possibility that shareholders’ wealth could potentially increase by 3-5 percent in the current demerger of RIL’s financial services.

This demerger involves a spin-off of RIL’s 6.1 percent treasury shares. Nuvama Institutional Equities expressed this view in a note, highlighting the potential positive impact of the demerger on RIL’s investors.

According to Nuvama Institutional Equities, the RIL board approved the split of Reliance Industries on June 19, 2005. At that time, two RIL group companies, namely Reliance Industries and Reliance Capital, were already listed on the stock exchange. The remaining companies resulting from the demerger were subsequently listed in February and March 2006.

This led to the creation of three new subsidiaries: Reliance Natural Resources Ventures, Reliance Energy Ventures, and Reliance Communications. This historical context illustrates the previous successful demerger and subsequent listing of these entities, which ultimately contributed to the overall value creation for RIL shareholders.

Nuvama Institutional Equities further highlighted that during the demerger in 2005, each of the subsidiaries created as a result of the split issued its shares to the shareholders of Reliance Industries in a ratio of 1:1. Importantly, following the demerger, the shares of Reliance Industries did not experience a decline.

As a result, shareholders not only retained their existing shares but also received shares of the additional entities, effectively gaining them for free. This favorable outcome contributed to a significant increase of 38 percent in shareholder wealth. The note emphasizes the potential benefits of the demerger and suggests that a similar positive outcome may occur in the current demerger of RIL’s financial services.

According to Nuvama Institutional Equities, they estimate a value of Rs 168 per share for Jio Financial Services (JFS), which is currently categorized as non-operating assets in their sum-of-the-parts (SoTP) valuation. Additionally, they have assigned a value of Rs 323 per share to the other non-operating assets. The treasury shares are valued at Rs 168 per share based on the closing price of RIL on July 14.

Based on their analysis, Nuvama Institutional Equities argues that the demerger of RIL’s financial services is unlikely to have a significant negative impact on RIL’s stock. Instead, they suggest that the stock could potentially see an upside of 3-5 percent. Their valuation of JFS and other non-operating assets supports this view. It indicates that there is potential for value creation through the demerger process, which could positively impact RIL’s stock performance.

Nuvama Institutional Equities stated that Reliance Industries (RIL) O2C (refining) division is expected to benefit significantly from what they referred to as “the Golden Era of Refining.” They anticipate that RIL’s upstream division will also be a key beneficiary, thanks to elevated gas prices and a faster-than-anticipated ramp-up of production in the KG-D6 field.

According to Nuvama, RIL’s refining segment is projected to nearly match the retail division’s EBITDA (earnings before interest, taxes, depreciation, and amortization) by FY24. They believe that RIL’s foray into the new energy business will unlock the next phase of growth, while also supporting its conventional business through a transition to green hydrogen by 2025.

Additionally, RIL plans to launch an FMCG (Fast-Moving Consumer Goods) business within its retail division, aiming to offer high-quality and affordable products.

Based on their analysis, Nuvama Institutional Equities has set a target price of Rs 3,205 for RIL’s stock, suggesting potential growth opportunities and positive prospects for the company’s various business segments.