Buy on rumour, and again on the news. That’s what has happened with the stock of Reliance Industries Ltd (RIL).
About a month back, on March 25, the RIL stock had rallied over 20 per cent intra-day, a record rise, and closed the day with gains of about 15 per cent. That rally was driven by news that Facebook would pick up a 10 per cent stake in RIL’s telecom business, RJio. The possibility of value-estimation of and value-unlocking in a key business segment buoyed sentiment for the RIL stock that until then was being hammered down along with the market due to the coronavirus impact.
RIL’s announcement on Wednesday — that Facebook would indeed be picking up about 10 per cent in Jio Platforms for ₹43,574 crore (about $6 billion) in an all-cash deal — saw the RIL stock zoom up again by about 10 per cent. The market seems pleased that at a time when the world stands massively disrupted by Covid-19, RIL has pulled off a deal that significantly reduces concerns about its mega balance-sheet deleveraging plans.
Uncertainty on Aramco deal
The Facebook deal holds much significance for RIL. One, given the historic crash in crude oil prices over the past few months, there is growing scepticism on whether Saudi Aramco will go ahead with its proposed plan to buy 20 per cent in the refining and petrochemical business of RIL.
The Saudi Aramco deal was expected to give RIL about $15 billion (about ₹1-lakh crore). A back-off or delay by Saudi Aramco will be a setback for RIL’s deleveraging plans. Given the uncertainty, the Facebook-Jio Platforms deal (for which binding agreements have been signed) comes as a significant breather for RIL.
This could help the company progress with its plans to become zero net-debt, though the initial timeline of FY21 seems a challenge due to the coronavirus chaos. As of December 2019, RIL’s net debt (debt less cash) is said to be about ₹1.5-lakh crore. RIL currently holds a 100 per cent stake in Jio Platforms and, after the deal consummation, will hold about 90 per cent; Facebook will become the largest minority shareholder in Jio Platforms.
Two, Jio Platforms, which houses RJio among other digital businesses of RIL, has got top-dollar valuation even in these difficult market conditions. The investment by Facebook values Jio Platforms at ₹4.62-lakh crore pre-money enterprise value ($65.95 billion, assuming a conversion rate of ₹70 to a US dollar).
This valuation is 10-15 per cent higher than what many analysts were earlier estimating. Digital businesses may be a big gainer in the post-corona world and RJio’s quick rise over the past few years to dominate the Indian telecom market seems to have aided the attractive valuation.
Three, RIL’s ambitious expansion plans in the digital business including in e-commerce and new commerce, targeting mom-and-pop stores, should get a boost from the alliance with Facebook. In particular, the wide reach in India of Facebook group company WhatsApp, which plans to launch its payment platform, should help RIL’s digital businesses.
The alliance will also aid RIL’s plan of its consumer businesses (including digital and retail) achieving an equal footing on profit contribution with the hydrocarbon business (refining and petrochemicals). Over the past few quarters, RIL’s consumer-facing businesses have been doing quite well compared with the hydrocarbon businesses that have been on the back-foot. This is likely to continue given the turmoil in oil, refining and petrochemicals markets that have resulted in cuts in both volumes and margins.
On the other hand, the telecom business is better positioned amid the turmoil given the growing need for connectivity. Also, some parts of the retail business such as groceries and staples would have done well.
After the deal, the earnings from the digital business in RIL’s consolidated profit will fall to the extent of the stake sale. But savings on interest cost from repayment of debt should help offset the impact.
From its peak of ₹1,610 in mid-December 2019, the RIL stock had crashed to ₹884 on March 23. But within a month, it has gained more than 50 per cent despite the turmoil in the oil market. A good part of this rally is attributable to the Facebook deal. The consolidated trailing 12-months price-to-earnings ratio of the stock is now about 19 times, in line with its three-year average.