Reliance Industries has seen its share price rise by 22% year-to-date, a notable increase driven by the positive momentum and expectations surrounding its telecom arm, Jio. Analysts have been particularly bullish about Jio’s prospects, with Jefferies India Ltd. suggesting that Jio could list at a valuation of $112 billion. This assumption has bolstered confidence among investors, pushing Reliance’s share price upwards.
Jefferies’ recent report states that if Jio were spun off from Reliance Industries, the fair value for Reliance shares would be around ₹3,580, implying an approximate 15% upside from current levels.
If Reliance chooses to list Jio through an IPO, the fair value would drop to ₹3,365, factoring in a 20% holding company discount. This distinction is crucial for investors as it highlights the potential differences in shareholder value depending on the listing route Jio takes.
There’s speculation that Jio’s public listing could occur in 2025. Jefferies points to Jio’s strategic focus on monetization and subscriber market share gains as indicators of this possibility.
Unlike in the past, Jio led the way in the recent tariff hikes while keeping feature phone tariffs unchanged, a move seen as a part of its preparation for a public listing. This aligns with the previous spin-off of Jio Financial Services (JFS), suggesting that Reliance might follow a similar strategy for Jio.
While an IPO could see Reliance listing 10% of Jio, possibly through an offer for sale by minority stakeholders, this route would involve significant investor mobilization due to the 35% allocation required for the retail segment. The downside is the inevitable holding company discount, which could range between 20-50%, reducing the perceived value of Reliance’s stake in Jio despite maintaining majority control.
Alternatively, a vertical spin-off of Jio would avoid the holding company discount, allowing for better value unlocking. This method, however, would lower Reliance’s ownership stake in Jio to 33.3% post-listing, as shareholders would receive proportional shares in Jio based on Reliance’s 66.3% stake in the telecom arm.
This reduction in stake could be a concern, but it also opens up opportunities for Reliance to potentially buy back shares from private equity funds after the spin-off.
Investor sentiment seems to lean towards the spin-off route. Both domestic and foreign investors appear to favor this method for its potential to unlock greater value without the holding company discount. Existing Reliance shareholders are also likely to prefer this route, looking at the positives it brings in terms of value realization.
For Reliance Industries, the strategic decision between an IPO and a spin-off for Jio is significant. Each route has its benefits and challenges. The IPO route, while providing immediate liquidity and potentially broadening the investor base, comes with the drawback of a substantial holding company discount. The spin-off route, on the other hand, offers a cleaner value unlock but at the cost of a reduced controlling stake in Jio.
Regardless of the chosen path, the potential listing of Jio represents a pivotal moment for Reliance Industries. It’s a decision that will shape the company’s future, affecting its structure and value. Investors will be watching closely, weighing the implications of each route and their impact on shareholder returns and strategic control. The anticipation around Jio’s listing underscores the high stakes and strategic importance of this move for Reliance Industries.
