Reliance-Facebook deal: Valuation on expected lines, say analysts

For most analysts, the valuation of the Reliance Jio-Facebook deal is on expected lines. Early Wednesday, Facebook announced the signing of binding agreements for an investment of ₹43,574 crore into Mukesh Ambani’s Reliance Jio Platforms that values Jio Platforms at ₹4.62-lakh crore pre-money enterprise value ($65.95 billion, assuming a conversion rate of ₹70 to a US dollar).

“The valuation of Jio is in line with our valuation where we value Jio business at ₹4.59-lakh crore (EV of ₹773/share),” said IDBI Capital.

In reaction to the deal, shares of Reliance Industries jumped 7 per cent to ₹1,325 in opening session.

“We see partnership with a strong technological partner like FB a huge positive for a global roll-out of applications which provide immense value. FB also mentioned that they would be working on a few commercial projects,” it added.

RIL’s total net debt would also come down by 28.5 per cent to ₹1-lakh crore from ₹1.53-lakh crore at the end of Q3FY20. This is a big leap in its plan to become net-debt-free by the end of the financial year.

“We remain optimistic for its core businesses like refinery and petrochem where we expect revival from H2FY20. We keep a strong ‘buy’ on the stock,” the IDBI Capital note added.

IIFL Capital too said the deal valuation is largely in-line. The entire amount will be paid in a single shot with no milestone-based funding.

“Over the next quarter, at the consolidated level, RIL will be able to mobilise cash, which should help offset any weakness in cash generation in the O2C business,” it added.

The RIL-FB deal valuations suggest that Facebook expects Jio’s EBITDA to double from current levels, said Jefferies.

“The RIL-FB deal may be construed as negative for Bharti Airtel. Believe, it is unlikely to change Jio’s tariff discipline. Deal reflects a turnaround in the sector and Bharti Airtel remains the best way to play it,” Jefferies said.

According to Equirus, the RIL-FB deal was largely priced in by the market. The deal is a win-win for both RIL and FB. Of the ₹43,600 crore, ₹15,000 crore will be retained in the company and the rest ₹28.000 crore used for redeeming OCPS of RIL, it said, and added this partnership could drive improved market share gain for Jio compared to peers.

According to Dolat Capital, the collaboration with Facebook will give Jio a significant advantage on the product and technological front to keep competitors miles away and grab a larger wallet share of consumers across domains such as telecom, payments and retail. Besides this, Jio has made investments in more than 10 start-ups and also tied up with Microsoft for cloud services. "Premium valuations and massive investments in JPL are sentimentally positive for Bharti Airtel and Vodafone Idea for future investments by other players, if any," said Himanshu Shah, VP – Analyst (Media & Telecom), Dolat Capital. However, for Jio's peers, its financial and technological competitiveness increases significantly with Facebook's investment and makes it difficult to catch up, thus proving a negative from the medium-term perspective. Jio is taking a leap whereas others are taking a step, he said.

Reliance Retail valuations Citi Research, meanwhile, said the deal is a positive not just for the higher implied valuation for Jio that it helps cement, especially in the context of the current environment, but also for potential upside in valuations of Reliance Retail. “We maintain Buy on RIL with a ₹1,530 target price,” it said. “Despite the refining business facing headwinds, we expect RIL’s consolidated EBITDA to grow at an 18 per cent CAGR over FY20-22E. RIL also continues to remain a big underweight for both DMFs and FIIs.” “The Facebook investment removes balance sheet risks and adds considerable optionality to retail, digital and internet business segments. We expect a positive reaction to this announcement and rate Reliance Industries Outperform with a TP of ₹1,530,” said Bernstein in a note. However, Credit Suisse remains neutral on Reliance Industries with a target price of ₹1,150. The deal should put RIL on course to be net debt free by March 2021, it added.