The demerger of Jio Financial Services (JFSL) from Reliance Industries has resulted in windfall gains for all the investors including the promoters. The market value of the erstwhile Reliance Strategic Investments Limited, which has been renamed as JFSL as a standalone company, is as follows: 261.85 per share while the estimated “acquisition cost” was estimated to be around 133 per share.
The market value of the new company, which is currently unlisted, is estimated to be around 1.67 trillion. RIL on Wednesday demerged the subsidiary by issuing one share of JFSL for every RIL share held by investors. This means that JFSL has a total outstanding equity of 635.3 crore shares and also holds about 6% of RIL.
A special pre-trading session was held on Thursday to discover the market price of JFSL. RIL share price declined 261.85 in that session. Since nothing else changed for RIL, this amount was considered to be the derived market value of the new company, which is expected to be listed for trading soon.
Given that RIL is a huge company and changes in its market cap will affect major indices, NSE and BSE will make special adjustments until JFSL is actually listed for trading. Incidentally, RIL price corrected significantly during the normal trading session and in the next trading session.
There are several ways of valuing an unlisted business – in this case, an unlisted subsidiary of RIL. Broadly speaking, financial analysts will look at revenue, profits, growth rates and comparable numbers of listed peers to arrive at a valuation.
Apart from the difference in methods of assessment, there is also a subjective element in this exercise. Analysts and investors with different mindsets will assign different weights and multiples to the numbers on the same balance sheet. In fact, this is why you will find buyers and sellers for the stock at any price. Buyers think the company is overvalued while sellers believe it’s time to cash in.
RIL’s internal valuation is that JFSL is valued at approximately 4.68% of RIL’s total market capitalization, which works out to 133 per share. Brokerages and financial analysts arrive at JFSL valuations by applying their own formulas 160-190 per share. However, it appears that the market has set valuations well above even the most optimistic valuations.
The positive difference is not surprising. Financial analysts often speak of the “holding company discount”, and listed companies have always been valued higher than unlisted companies. This is partly due to the liquidity and relative ease of understanding and valuing an unlisted subsidiary versus a standalone listed business. In an unlisted subsidiary, analysts perform a “sum of the parts” analysis to try to determine how much of the holding company’s market value is derived from that specific subsidiary.
Such subsidiary is not available for trading. Also, it is more difficult to delve deep into the balance sheet of an unlisted subsidiary and ascertain revenue, debt, profitability, etc. The available information is very little detailed. If a company is listed, investors can take information from mandatory disclosures and trade the shares at will, which means the price is likely to be higher in most cases.
RIL has multiple businesses. It is an energy and petrochemical giant. It is also the largest telecommunications service company in the world’s second largest market. It has a large retail presence and a large footprint in digital markets.
JFSL is a financial player in NBFC and Credit segment. It plans to expand into insurance, digital payments and asset management. But there is no clear synergy between JFSL and most other RIL businesses, although JFSL can leverage those Reliance and Jio channels to cross-sell financial services and products to retail customers. RIL has 400 million mobile users, 18,000 Reliance retail stores (with an annual attendance of 800 million), and works with around two million kirana stores. It would be much easier for investors to assess what JFSL is doing as a standalone business.
Historically, post-listing spin-offs have generally resulted in increased valuations and benefited investors. Consider the case of L&T Group, which has gained enormous value from listing its infotech and financial services arms.
RIL may consider shutting down the Jio digital empire at some stage. The listing of Jio Infocomm and Reliance Retail businesses could result in a big jump in the market value of those businesses compared to the estimated value given as part of RIL.