Jio Financial Services: Can RIL do a repeat of 2005? 3-5% upside possible for Reliance shares, says Nuvama
RIL stock could be least impacted by this demerger and instead see an upside of 3-5 per cent, Nuvama said adding that RIL’s O2C (refining) segment should benefit greatly from "the Golden Era of Refining."
- Jul 17, 2023,
- Updated Jul 18, 2023 2:38 PM IST
With Reliance Industries (RIL) announcing July 20 as the record date for demerger of its financial service undertakings into Reliance Strategic Investments Limited (to be renamed as Jio Financial Services or JFS), all eyes are on whether it can unlock value for investors. If one goes by history, gains are likely for RIL investors going ahead.
"We demonstrate that back in 2005, when RIL demerged four entities, the market actually rewarded RIL. After the split, shareholder wealth swelled 38 per cent. Should the market have a déjà vu moment this time too, shareholders’ wealth could potentially increase by 3–5 per cent. The demerger of financial services is a spin-off of RIL’s 6.1 per cent treasury shares," Nuvama Institutional Equities said in a note.
Nuvama noted that RIL board had permitted RIL split on June 19, 2005. Among RIL’s group companies, Reliance Industries and Reliance Capital were already listed. The remaining companies were listed in February and March 2006 with the creation of three new subsidiaries (Reliance Natural Resources Ventures, Reliance Energy Ventures and Reliance Communications).
"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 38 per cent in shareholder wealth as RIL shares did not fall post-split, in addition to which investors got the additional entities, effectively for free," Nuvama noted.
Nuvama estimates a value of Rs 168 per share for JFS, which is currently a part of non-operating assets in its SoTP valuation. It ascribed a value of Rs 323 per share to non-operating assets. In addition, it value treasury shares at Rs 168 per share based on RIL’s closing price on July 14.
"We argue that RIL stock could be least impacted by this demerger and instead see an upside of 3-5 per cent," it said.
Nuvama said RIL’s O2C (refining) should benefit greatly from "the Golden Era of Refining." RIL’s upstream division is likely to remain the key beneficiary of elevated gas prices along with faster-than-anticipated KG-D6 production ramp-up, it said.
"We argue, it shall nearly match retail EBITDA by FY24. RIL’s venture in new energy business shall unleash the next leg of growth, besides aiding its conventional business (New energy upgrade). 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," it said while suggesting a target of Rs 3,205 for the stock.
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With Reliance Industries (RIL) announcing July 20 as the record date for demerger of its financial service undertakings into Reliance Strategic Investments Limited (to be renamed as Jio Financial Services or JFS), all eyes are on whether it can unlock value for investors. If one goes by history, gains are likely for RIL investors going ahead.
"We demonstrate that back in 2005, when RIL demerged four entities, the market actually rewarded RIL. After the split, shareholder wealth swelled 38 per cent. Should the market have a déjà vu moment this time too, shareholders’ wealth could potentially increase by 3–5 per cent. The demerger of financial services is a spin-off of RIL’s 6.1 per cent treasury shares," Nuvama Institutional Equities said in a note.
Nuvama noted that RIL board had permitted RIL split on June 19, 2005. Among RIL’s group companies, Reliance Industries and Reliance Capital were already listed. The remaining companies were listed in February and March 2006 with the creation of three new subsidiaries (Reliance Natural Resources Ventures, Reliance Energy Ventures and Reliance Communications).
"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 38 per cent in shareholder wealth as RIL shares did not fall post-split, in addition to which investors got the additional entities, effectively for free," Nuvama noted.
Nuvama estimates a value of Rs 168 per share for JFS, which is currently a part of non-operating assets in its SoTP valuation. It ascribed a value of Rs 323 per share to non-operating assets. In addition, it value treasury shares at Rs 168 per share based on RIL’s closing price on July 14.
"We argue that RIL stock could be least impacted by this demerger and instead see an upside of 3-5 per cent," it said.
Nuvama said RIL’s O2C (refining) should benefit greatly from "the Golden Era of Refining." RIL’s upstream division is likely to remain the key beneficiary of elevated gas prices along with faster-than-anticipated KG-D6 production ramp-up, it said.
"We argue, it shall nearly match retail EBITDA by FY24. RIL’s venture in new energy business shall unleash the next leg of growth, besides aiding its conventional business (New energy upgrade). 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," it said while suggesting a target of Rs 3,205 for the stock.
Also read: HDFC Bank Q1 results today. Earnings preview, share price target & more
Also read: Adani Power, HDFC Bank, LTTS: How should you trade these buzzing stocks