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KKR-Reliance Retail deal: Value unlocking story continues

Deal with KKR marks the second monetisation in Reliance Retail

Highlights
- KKR to invest Rs 5,550 crore for a 1.28 percent stake in Reliance Retail
- Deal values Reliance Retail at Rs 4.33 lakh crore
- Synergy benefit with Future Retail will drive future upside

- RIL shareholders should see further upside with two engines of growth firing

Reliance Industries  continued to walk the path it had clearly mentioned in its annual general meeting earlier this year. Then, it had announced that it was looking for strategic as well as financial investors for its retail venture. After the acquisition of Future group’s wholesale and retail businesses for Rs 25,000 crore in the last week of August, Reliance Industries has now started monetising its stake in Reliance Retail. After Silver Lake committed to buy a 1.75 percent stake for Rs 7,500 crore, KKR has now decided to invest Rs 5,550 crore in the retail unit. Its price for a 1.28 percent stake in Reliance Retail Ventures values the entity at Rs 4.33 lakh crore. KKR had already committed a Rs 11,367-crore investment in Jio Platforms.

As per various reports, India’s retail market is likely to be around $1.5 to $2.0 trillion by 2030 of which organized retail is likely to be around $400 billion and the e-commerce market is likely to be around $300 billion. Presence in both the online and offline channels will help Reliance Retail in tapping both the opportunities. With the acquisition of the Future group’s retail assets, segments such as lifestyle and grocery will become big contributors. Already Reliance Retail has become a big vertical of RIL over time. The pandemic-induced lockdown had adversely impacted growth in the retail sector. However, with the gradual opening up of the economy, we expect Reliance Retail to return to the growth path.



Creating room for future growth while keeping the balance sheet light

A key strategic move by RIL has been to improve the quality of its balance sheet. Helped by 14 bulge-bracket deals and a Rs 53,000-crore rights issue, the company achieved its zero net debt target much before the deadline. Overall, capital raised has been to the tune of Rs 2.13 lakh crore well above the reported consolidated debt numbers. Of this, about Rs 23,000 crore would be retained at the Jio Platform level.

Table: RIL’s net cash post investments

Source: Moneycontrol Research, RIL

With the requisite growth capital available to Jio, the time is now ripe for RIL to fire up another growth engine — the retail segment.  The stake sale in Reliance Retail will provide growth capital and help it reduce debt. As on March 31, 2020, Reliance Retail had a debt of Rs 4,618 crore.

Coming to valuations, Reliance Industries’ current market cap is around Rs 15 lakh core.

The KKR investment is slightly above Silver Lake’s valuation. However, since it is a very small private equity investment, it shouldn’t be seen as the only benchmark for the valuation of Reliance Retail. The way Reliance is using JioMart along with the Whatsapp platform and its large offline presence, achieved through the acquisition of Future’s business, we expect the retail business to be significantly re-rated in the future.


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