Is Dalal Street undervaluing Reliance Retail?

NEW DELHI: It seems there is a big divergence in Dalal Street in the way money managers see the role of oil-to-telecom behemoth Reliance Industries in their portfolios. The reason behind it seems to be that no one is quite sure how to value its retail venture.

The ownership pattern of Reliance Industries’ shares is curious. While foreign portfolio investors (FPIs) and financial investors or BFIs have a near-neutral position, owning close to its weight in benchmark indices, domestic mutual funds have a meaningful underweight position against their benchmarks.

“It appears that the two sets of investors have divergent views about the prospects and fair value of Reliance Industries’ retailing business — the other two businesses (oil and telecom) are relatively simpler to value and there is reasonable consensus on their fair values,” said Sanjeev Prasad of Kotak Securities in a recent note.

He has valued the oil-to-chemical and exploration and production businesses collectively at Rs 700 per share, based on 10 times FY23 expected EPS of Rs 69. 10X P/E multiple is consistent with mid-cycle earnings (profitability) for a USD-linked business, he said. EPS refers to earnings per share.

Kotak analysts have valued Reliance’s 66.5 per cent stake in Jio at Rs 700 per share, based on 25 times FY23 expected EPS of Rs 28, similar to Bharti Airtel’s FY23 multiple. Negligible value has been ascribed to new energy and media to keep things simple.


At current share price of Reliance Industries, the maths leaves an implied valuation of Reliance Retail around Rs 1,050, that is nearabout Rs 2,457 (the last closing price) minus Rs 1,400 (Rs 700 for each of the other two businesses). The implied Rs 1,050 fair value for Reliance’s stake in Reliance Retail translates into 69 times FY23E EPS of Rs 15.2 and 56 times FY24E EPS of Rs 18.6.

EPS has been calculated down to just Reliance Industries’ 85 per cent stake in the company.

Avenue Supermarts, one of Reliance Retail’s peers, trades at 120 times FY23E EPS and 90 times FY24E EPS. Similarly, Titan trades at 74 times FY23E EPS and 59 times FY20E EPS, noted analysts.

This “presumably reflects the market’s faith in the long runway of growth for retailing companies based on the twin drivers of demographics (reflected in higher GDP/capita) and formalisation (higher share of formal retailing),” said Prasad.

Interestingly, Reliance Retail shares are trading at Rs 3,250 in the unofficial markets for unlisted shares, a dealer said. This values it at around 210 times FY23E EPS and 170 times FY24E EPS. It seems if its shares are undervalued in the secondary market compared to its peers, they are overvalued in the unlisted market.

Reliance Industries is eyeing two sets of markets with its retail venture — directly targeting end-consumers as well as distribution of products — a unique strategy. Thus, it competes with consumer companies through its private label brands, retailers and distributors.

A justification of Reliance Retail’s undervaluation could be that investors are wary about Mukesh Ambani and his team’s ability to pull this off successfully. But not many analysts agree with this skepticism.

“People should note Reliance Industries’ formidable combination of capital and execution. Its telecom foray is a good example. It built an industry-leading business through disruption, and demolished competition and investor skepticism, which resulted in massive outperformance of the stock,” said Prasad.

Share prices of Reliance Industries have jumped 360 per cent from January 1, 2017, versus 115 per cent rise in benchmark Nifty 50.