RIL doubles wealth since March; brokerages see further upside post Future Retail deal

Share of Reliance Industries has more than doubled from the March lows and has risen more than 40 percent so far in the year 2020.

RIL has been on a shopping spree since March pushing the stock price to fresh lifetime highs, and the momentum is likely to continue as most brokerage firms maintain their positive stance while some raised their target price post the deal.

Morgan Stanley which maintains its overweight rating on RIL has raised its target price to Rs 2247 from Rs 1801 earlier.

The global investment bank is of the view that capital allocation, execution, and degearing are key to the next leg of outperformance.

Earlier in August, RIL's announcement to buy Netmeds was its second acquisition in the e-pharmacy space, an area it has highlighted would be of focus as it builds its digital+ e-commerce ecosystem. “Over past three years RIL has announced US$3.1bn in acquisitions with 13% in retail, 80% in TMT & 6% in energy,” said the Morgan Stanley report.

CLSA maintains an outperform rating on RIL with a target of Rs 2250 per share. The acquisition of Future Group business value accretive with big market share gains.

“This acquisition further cements the company’s position as India’s largest retailer. This will add 4.1% to the market share of its organised retail & take it to 17.8%,” said the report.

The global investment bank further added that the expansion could be a key driver of Jio Mart's push. Value accretion may equate to 2% of its current stock price.

As a part of the scheme, the retail and wholesale Undertaking is being transferred to  Reliance Retail and Fashion Lifestyle Limited (RRFLL), a wholly-owned subsidiary of RRVL( Reliance Retail Ventures Ltd) the logistics & warehousing undertaking is being transferred to RRVL.

RRFLL also proposes to invest Rs 1200 crore in the preferential issue of equity shares of FEL to acquire 6.09 percent of post-merger equity and Rs 400 crore to acquire warrants convertible into equity shares of FEL, which will result in RRFLL acquiring further 7.05 percent of FEL.

Under the scheme, Future Group will merge certain companies carrying on the abovementioned businesses into Future Enterprises Limited (FEL).

Shareholders of Future Consumer will get 9 shares of FEL for every 10 held. This values Future Consumer at Rs 18 compared to its last closing price of Rs 11.5 (57 percent premium).

The deal holds very high strategic interest to RIL as it would aid in three ways: a) enhance footprint, b) offer a good legacy franchise, and c) help build competitive strength, Motilal Oswal said in a report.

The brokerage firm maintains a buy rating with a target price of Rs 2250. The existing Future Group shareholders’ share-swap deal indicates ~50% upside arbitrage.

“However, the residual business, following the slump sale and equity infusion adjustments, leaves merely INR4.2b EBITDA, with net debt of INR23b. At an 8x EV/EBITDA, it is left with merely INR9b equity value. This is against a 96% dilution from the share-swap deal at other Future Group entities, leaving nothing on the table for existing minority shareholders,” added the report.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.