Reliance Jio listing: Tariff hikes a trigger, but spinoff better option

A Jefferies report suggesting the possibility of a spinoff, or an IPO of Reliance Jio Infocomm (Jio) has trained the spotlight on the telecom and digital space.

The global brokerage assesses a likely valuation of around $112 billion for a listing.

One of the triggers for the report is that telecom service providers have started to hike tariffs as was widely expected and this could push up average revenue per user (Arpu) for market-leader, Jio and its rivals, Bharti Airtel and Vodafone Idea.

If at all Jio is listed in calendar year 2025, RIL could go about it in several ways. It could look at a spinoff as it did with Jio Financial Services (JFS) where it offered RIL shareholders, commensurate holding in JFS.

In that case, RIL owner’s stake dropped from 100 per cent to 45.8 per cent. Alternatively, RIL could go for an IPO for Jio. Given IPO requirements, RIL would have to sell 10 per cent of Jio equity, retaining a stake of around 56 per cent in the newly-listed entity assuming existing institutional investors do not offload any stake.

RIL would retain majority stake (around 56.3 per cent) but the report points out that the valuations of stakes held by holding companies (as RIL would be in that case) is usually at a substantial discount of 20-50 per cent to the market price.

If the stock was listed after spinoff via a price discovery, as occurred with JFS, RIL shareholders would receive proportionate holdings in the new listing with RIL.

This would avoid the holding company discount but the owner’s stake would dip to around 33 per cent (after issue of shares to current minority shareholders in Jio, and to minority shareholders in RIL).

In JFS, the spinoff saw owner stake dip to 45.8 per cent (from 100 per cent) and the value-unlocking has been successful with the new listing comfortably outperforming Nifty by around 26 per cent.

The current minority investors in Jio may prefer the spin off route and RIL could also consider buyout of current institutional stakeholders in Jio after the spinoff if it wanted to shore up stake. A spinoff would also avoid the need to attract retail investors who have a mandatory quota in an IPO.

The report concludes a spinoff could create 15-18 per cent upside for RIL, while an IPO would see the 20 per cent holding discount (or greater) coming into play. 

In case ARPU disappointed, and other business divisions underperformed, the RIL share could see a downside of around 14 per cent.

These hypothetical calculations are based on SoTP (sum of the parts) for all the business divisions, with the report modelling for different levels of holding-co discounts and adjusting for movement of net debt in case of a spin off.

Jio has initiated higher tariff hikes in the range of 22-25 per cent but it has not touched the plans of Jio Phone and Jio Bharat Phone, which constitute perhaps 10 per cent of total mobile revenues.

Bharti Airtel and Vodafone Idea have hiked across their respective entire universes but the hikes are lower in per cent terms. Given consolidation in the sector, the telcom operators have the pricing power to carry this through. In Jio, management guidance is that capex intensity is now past its peak and more free cash flow generation will be possible.