Reliance Industries demerger could give shareholders 3-5% upside on formation of Jio Financial Services

Taking cues from Reliance Industries’ 2005 demerger, Nuvama Institutional Equities projected that the markets could have a “deja vu moment” and potentially increase shareholders’ wealth by 3-5%. The brokerage company retained its target price of Rs 3,205, maintaining its ‘Buy’ rating as well. 

Finding valuation 

In 2005, when RIL demerged into four separate entities, Nuvama said, “The market actually rewarded RIL. After the split, shareholder wealth swelled 38%.” RIL announced the demerger of its financial services undertaking, which is set to be rechristened to Jio Financial Services. The demerger is a spin-off of RIL’s 6.1% treasury shares, which Nuvama had valued at Rs 117 apiece, coming in at 4% of Reliance Industries’ closing price on July 14 of Rs 2,740.7 apiece. This valuation assumes a 30% holdco discount, without which, the valuation per share will be Rs 168 per share, at 6% of Friday’s closing price ex-discount. “We argue that RIL stock could be least impacted by this demerger and instead see an upside of 3-5%,” said Nuvama. 

Treasury shares valuation 

Reliance demerger in 2005 

In January 2006, RIL’s share price jumped 38%, resulting in substantial value being generated for its shareholders. The decision to split RIL was approved by the company’s board on June 19, 2005. Prior to this, Reliance Industries and Reliance Capital, two of RIL’s group companies, were already listed on exchanges. Subsequently, in February and March 2006, the remaining companies were listed, while three new subsidiaries were created: Reliance Natural Resources Ventures, Reliance Energy Ventures, and Reliance Communications. 

“The stock price has been taken after taking into consideration all the stock splits and adjustments made. Each of these subsidiaries issued its shares to shareholders of RIL in the ratio of 1:1. After the split, there was an increase of nearly 38% for each shareholder,” said Nuvama.

Outlook for RIL

Reliance Industries’ upstream division will benefit from elevated gas prices along with faster-than-anticipated KG-D6 production ramp-up. This will lead to it almost matching the EBITDA from the retail segment by FY24. “RIL’s venture in new energy business shall unleash the next leg of growth, besides aiding its conventional business. RIL aims to progressively transition to green hydrogen from grey hydrogen by 2025. It plans to launch FMCG business in its retail division to develop and deliver high-quality and affordable products. Retain ‘BUY’ and a TP of Rs 3,205,” added the report.