RIL's acquisition of Future Group's warehousing and logistics business, in addition to its stores, will help to expand the scale of JioMart, RIL's online grocery platform, Fitch said.
Reliance Industries’ stake sale in its retail arm will enable the company to pursue other growth initiatives while maintaining zero net debt status and also help solidify its position in the market, global rating agencies Moody’s Investors Service and Fitch Ratings said on Thursday.
On September 9, RIL announced the divestment of 1.75 per cent stake in the retail arm to private equity firm Silver Lake Partners for Rs 7,500 crore.
“The transaction is credit positive as it will enable RIL to continue to pursue other growth opportunities while maintaining zero net debt,” Moody’s said in a note.
In a separate note, Fitch said the sake sale and its proposed acquisition of Future Group’s retail businesses will “solidify RIL’s position in India’s organised retail market and strengthen its consumer business.”
“We believe the proposed acquisition of Future Group’s retail business will fortify its retail footprint, especially in the grocery retail sub-segment. The equity stake sale will further strengthen RIL’s financial profile and competitive position beyond the proposed acquisition,” Fitch said.
The Silver Lake deal is the company’s first divestment within the retail segment, which is currently wholly owned by RIL.
With this deal, the oil-to-telecom conglomerate has now established an enterprise value for its retail segment, which sets the stage for further stake sales within the segment.
Moody’s said Reliance Retail Ltd, going by the Silver Lake deal, is valued at USD 57 billion.
The firm’s digital arm, Jio Platforms Ltd – which houses the country’s youngest but biggest telecom operator – is valued at USD 65 billion going by the investments made by the likes of Facebook and Google.
RIL values its core oil-to-chemical (O2C) business at USD 75 billion.
Fitch said the acquisition of Future Group’s retail business will add about 1,700 large stores to RIL’s 11,806 stores in its retail segment and increase its organised retail revenue market share by around 5 per cent.
“The Rs 24,713 crore consideration for the acquisition is less than 3 per cent of its FY20 total assets, a relatively small impact on its balance sheet,” it said.
Future Group’s solid presence in Tier 1 Indian cities with well-established retail formats, including Big Bazaar, Central, FBB, Easyday and Brand Factory, will complement RIL’s increasing strength in second- and third-tier cities.
RIL’s acquisition of Future Group’s warehousing and logistics business, in addition to its stores, will help to expand the scale of JioMart, RIL’s online grocery platform, Fitch said.
“We also expect the synergies from the acquisition to enhance RIL’s bargaining power with vendors, and offline and online customer reach,” it added.
The stake sale in Reliance Retail Ventures Ltd to Silver Lake is in addition to around 33 per cent of Jio Platforms for Rs 1.52 lakh crore.
RIL also completed its Rs 53,124 crore rights issue in June, with Rs 13,300 crore in cash received to date and balance in FY22.
“RIL’s net cash position would also be helped by the completion of a Rs 25,200 crore investment by Canada’s Brookfield Infrastructure Partners LP in Tower Infrastructure Trust, which plans to use part of the proceeds to pay down RIL’s investment (Rs 12,800 crore as of March 2020) in the non-convertible debentures issued by the trust,” Fitch said.
In addition, RIL received Rs 7,600 crore in 1QFY21 from BP plc for a 49 per cent stake in its fuel retail network and aviation fuel business.
The proposed divestment in Reliance Retail, Moody’s said, will help to further the company’s ambitions within the retail segment without straining its balance sheet.
“Although RIL’s capital spending will drop compared with historical levels, the company will continue to incur large capital spending across all business segments for its next stage of growth.
“However, we expect the bulk of this growth to be financed by proceeds from asset sales, which will enable the company to continue with its strategy of maintaining zero net debt,” it added.
With RIL’s digital services business having achieved a critical mass and strong market position in India, Moody’s expected that it will now focus on growing its retail segment.
The company is already the industry leader within the organized retail sector in India, but the contribution from this segment to consolidated Earnings before interest, taxes, depreciation and amortization (EBITDA) remains low at around 10 per cent.
Further growth in the segment will augment RIL’s overall earnings base and lead to improved earnings diversification, it said.
“RIL’s recent announcement of its proposed acquisition of the consumer businesses of Future Group is a step toward growing its retail business and expanding its retail footprint,” the rating agency said.
Including the current transaction and based on RIL’s previous announcements, it expected the company to raise around USD 25 billion from further stake sales across various business segments and balance proceeds from a rights issue offering in the next 12-18 months.
With zero net debt, all proceeds from future asset sales can be used for growth initiatives.
“Notwithstanding the company’s strategy of pursuing growth while maintaining financial discipline, a rating upgrade is unlikely unless the Government of India (Baa3 negative) is upgraded to Baa2,” Moody’s said.
“This is because the company’s increased linkages with the domestic economy constrain its rating to no more than one notch above the Indian sovereign rating.”