Unlocking value

RIL will gain from demerging unrelated businesses

The listing of Jio Financial Services (JFS) may have been slightly disappointing for investors since the stock hit the lower circuit. It may be partly because of profit booking. However, it would still be among the largest non-banking financial companies in terms of market value. In the long term, the spinoff from Reliance Industries Ltd (RIL) is likely to be a good decision and, in one sense it implies the group is testing the waters for other spinoffs. The initial valuation also surprised market analysts since the accounting assumption was that the JFS share was worth around Rs 130 whereas the market determined the price at Rs 261-262 in a special trading session. That was almost 100 per cent appreciation over the accounting adjustment.

The announcement that the new entity would enter into an agreement with BlackRock to move into the asset management space is being seen as ambitious. Among financial segments, the mutual funds space — and associated segments like portfolio management — is highly competitive and tightly regulated, so disrupting this successfully will take some doing. On the other hand, asset management is a huge financial segment that directly taps into household savings and, arguably, there is room for an innovator to create new products. Despite the lower circuit on listing, the basic logic of demerger remains strong. Conglomerates, especially with disparate businesses that lack synergies, receive low valuations. Investors don’t find it easy to assess each business segment and the sum of the parts is usually less than the whole as far as investors are concerned.

The parent, RIL, is India’s biggest player in energy and petrochemicals and it intends to become a green-energy giant to complement its oil and gas presence. It is also India’s largest telecom service provider and has a large presence in retail (both offline and online) and digital entertainment. While telecom, retail, and entertainment are linked in terms of value chains, there is no synergy between them and financial services, or the oil businesses. Investors who wish to own a piece of the energy business may not necessarily want to invest in telecom or take retail exposure or vice versa. Nor is it easy to set exact valuations for each segment of such a conglomerate.

The spinoff of the financial arm makes it much easier for investors to decide if they wish to have exposure to an asset management business, and they can set a valuation for JFS by assessing the valuation of listed peers in similar businesses. Admittedly, the venture with BlackRock has not yet got off the ground, but as and when it does, there will be a basis for assessment by comparison. Assuming this spinoff results in value unlocking as it should, RIL can look forward to spinoffs of the other arms sometime in the future. The telecom business and associated digital properties may receive higher valuations if demerged and the retail arm could also see value unlocking. In all these cases, it may also be easier for RIL to find business partners with technical expertise, similar to BlackRock. Given RIL’s ambitions across the energy space, that is also a consideration. It will be interesting to see how this plays out.