Reliance Retail, a major subsidiary of Reliance Industries (RIL), has recently approved a proposal to reduce the equity capital held by non-promoters (0.04 per cent of total shareholding) for a consideration of ₹1,362 per share.

In August 2022, during the Reliance Industries AGM, Chairman Mukesh Ambani announced that an update on the IPOs of Jio and Retail could be anticipated in 2023.

Against this backdrop, a typical Reliance shareholder would be planning for the largest value unlocking exercise in Indian markets. Amidst equity benchmarks hitting fresh life-time highs every day, the macro-environment is also turning favourable for any corporate restructuring.

Investors would be better off knowing Reliance Retail’s business, financials, and valuation benchmarks ahead of any major corporate action.

Operations and financials

Reliance Retail Limited (RRL) is India’s largest retailer operating stores for selling groceries, consumer electronics, clothes, pharmaceuiticals and communication services/connectivity (MyJio Stores).

Reliance Fresh, Smart and several other brands are under grocery segment.

Reliance Digital and MyJio Stores are meant for consumer electronics and connectivity services.

As of last year, Reliance Fashion reported 3,100 stores across 1,000 towns. RRL’s Netmeds (retail pharma business) has been growing with online and offline presence.

Overall, RRL currently operates 18,000 stores across 7,000 towns across the country, covering 66 million square feet of retail space.

RRL is an omnichannel entity, operating brick and mortar, e-commerce, cash and carry, B2C, and B2B formats across the retail supply chain.

This vast scale provides RRL a fast-learning curve and an ability to implement latest technology across formats.

RRL accounts for 3-4 per cent share of the country’s retail sector. Notably, it improved its share by 100 bps in the last one year alone. RRL stated operations in 2006 with Reliance Fresh.

In FY23, RRL generated ₹2,60,000 crore and ₹18,000 crore (7 per cent EBITDA margin) in revenue and EBITDA, respectively. This translates into a two-year CAGR of 38 per cent and 50 per cent, respectively, implying that the company is still in its nascent stage and is finding scope for high growth.

The company’s reported net debt to EBITDA of 3.43 times in FY22 indicates elevated leverage. However, due to the high growth rate coupled with profitability, the high leverage should not be a cause for concern.

Valuations

According to recent reports, RRL was valued between ₹7,42,000 crore and ₹7,72,000 crore ($90 -100 billion) by two independent auditors.

This is a little less than the half of m-cap of RIL of which RRL is a consolidated subsidiary. Reliance Industries holds 85 per cent in Reliance Retail Ventures Limited (RRVL) which in turn holds 99.93 per cent in RRL.

In fact, RRL’s valuation was valued at ₹4.2-lakh crore in September-November 2020 when nearly 10 per cent of the stake was bought by sovereign wealth funds and other large funds.

At the current valuation ascertained by the auditors, RRL is valued at 100 times earnings, assuming FY23 earnings profitability is similar to that of FY22.

The high valuation can be attributed to the under penetration of organised retail in India, accounting for a meagre 10 per cent of the overall retail sector. According to a Bernstein report, Alibaba has captured 16 per cent of the China’s retail market compared to 4 per cent of market share held by RRL in India.

The valuation is also in line with its closest peers. Avenue Supermarkets, which operates the D-Mart retail stores, is trading at 105 times FY23 earnings, while Titan is trading at 84 times. Avenue Supermarkets and Titan account for only a sixth of RRL revenues in FY23.

Similar to RRL, both the companies reported 35 per cent revenue CAGR in the last two years with similar operating margin profile.

RRL, which is a one-stop shop for all things related to ‘Indian Consumption’ with unrivalled scale and ground presence, may be valued accordingly.

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