Reliance Industries should consider de-merger to unlock value

Industry:    

Mukesh Ambani-owned Reliance Industries is rubbing shoulders with the largest global private equity players, who have invested in India over the past few years.

With its latest nearly $100 million investment in the luxury hotel Mandarin Oriental in New York, and $200-million stake purchase in hyperlocal delivery platform Dunzo, RIL has spent $5.7 billion on acquisitions and investments across various sectors over the past four years.

Its investments would have hit $9 billion if its deal to acquire Future Group’s retail business, which is mired in a legal battle for control with Amazon, had been cleared.

Nonetheless, Reliance’s investments stand tall against Softbank’s $14 billion, invested over a decade, and Prosus’ $6 billion since 2005.

RIL invested $1.8 billion in a host of companies in 2021, either by taking stakes or going for outright acquisitions.

It ventured into the world of fashion and invested in companies run by designers Ritu Kumar, Manish Malhotra and Anamika Khanna. In addition, it also bought Amante and Zivame.

It also acquired online milk delivery platform Milkbasket for an undisclosed sum.

That said, telecom, internet and new energy segments account for RIL’s largest sectoral investments.

While the first two sectors have seen investments worth $2.5 billion since 2018; Ambani has, so far, spent $1.3 billion in new energy sector.

Analysts say Reliance’s investments and acquisitions are part of a larger plan to fill in technology gaps, and believe the firm is looking to grow businesses faster with partners wherever possible.

AK Prabhakar, head of research at IDBI Capital, decodes the investment rationale for us.

Given this, Prabhakar believes RIL’s diversification is only to bridge any gaps within its core verticals.

And since these investments are available at attractive valuations due to Covid-induced depression, especially in the hospitality sector, it is the right time to go for stake purchase, he says.

But, these investments must be taken with a pinch of salt.

Ambareesh Baliga, an independent market analyst, for instance, believes spreading too thin across geographies may not be the right strategy.

So, how should RIL proceed with the investments?

While Baliga expects telecom, retail, and new energy divisions to be RIL’s growth drivers over the next decade, Prabhakar.

As for investors, incumbent shareholders may hold the stock from a long-term perspective while new investors may enter the counter on dip.

Over the short-term though, the stock of Reliance Industries is expected to remain range-bound until it conquers the Rs 2,500-mark. A breakout above this level may result in a 10% jump towards Rs 2,750 levels.

As regards today, stock-specific news flow, Covid-19 caseload, FII activity, and global cues will be the key triggers for the markets. Yesterday, the BSE Sensex zoomed 651 points to end at 60,396 level while the Nifty50 ended above the 18,000-mark at 18,003.

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