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Published on 6/06/2020 9:29:28 AM | Source: Motilal Oswal Financial Securities Ltd

Buy Reliance Industries Ltd For Target Rs. 1743 - Motilal Oswal

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Another day, yet another deal!

Global investor Mubadala to buy 1.85% stake for INR90.94b

* In less than six weeks, Reliance Industries (RIL) has sealed its sixth stake sale deal in Jio Platforms. On 5th Jun’20, RIL announced that global investor Mubadala Investment Company would invest INR90.94b in Jio Platforms for 1.85% equity stake at post-money equity value of INR4.91t (in-line) and enterprise value (EV) of INR5.2t.

* Similar to the previous four deals (Silver Lake, Vista, General Atlantic and KKR), the Mubadala investment is also fresh equity infusion in Jio Platforms and does not dilute the stake of earlier investors (Facebook, Silver Lake, Vista, General Atlantic and KKR) as it is done through conversion of OCPS (held by RIL’s wholly-owned subsidiary or WOS).

* Only 10% of the amount would be retained in Jio Platforms. Subsequently, with the recent capital reorganization, creation of InvIT and six stake-sale deals (including the Mubadala deal), Jio Platforms has reached net debt of INR219b from peak of INR2.17t.

* We value Jio Platforms by assigning an EV/EBITDA multiple of 13x on FY22E to arrive at a target price of INR885/share.

 

Contours of RIL-Mubadala deal

* RIL has announced that Mubadala would invest INR90.94b in Jio Platforms for 1.85% equity stake at post-money equity value of INR4.91t and at EV of INR5.2t.

* Jio Platforms’ valuation in this deal is in line with the previous four deals – Silver Lake (see report), Vista Equity Partners (see report), General Atlantic (see report) and KKR deal (see report) – at INR4.91t post-money equity.

* Mubadala’s investment is fresh equity infusion into Jio Platforms (like the previous deals) and would not dilute the stake of earlier investors (Facebook, Silver Lake, Vista, General Atlantic and KKR) as RJio’s capital structure is fixed and this is fresh equity through conversion of OCPS (held by WOS of RIL).

* Similar to the previous deals, Jio Platforms is expected to retain 10% of the cash and the rest would be transferred to its parent company, which could be subsequently used for deleveraging.

* The company has raised INR876b in a short span of six weeks through six high profile investments with equity dilution of ~19%.

 

RJio – virtually debt free

* RJio’s net debt would reduce to INR219b with Mubadala’s investment of INR90.94b, from peak of INR2.17t before the InvIT formation. Moreover, 10% of Mubadala’s investment (INR90.94b) would flow to Jio Platforms and the rest would to the parent company. Before this deal, RJio’s net debt had reduced to INR228b from capital reorganization, the InvIT structure and stake sales via the five deals (FB, Silver Lake, Vista, General Atlantic and KKR).

 

Valuation and view

We expect RJio to garner revenue/EBITDA CAGR of 22%/44% over FY20-22E along with healthy EBITDA margin expansion Although the company has witnessed subdued ARPU growth in 4QFY20, we believe this could be due to longer validity plans. RJio is expected to accrue full benefit of the price hike in FY21. Additionally, the favorable competitive landscape in the Indian telecom sector should offer healthy incremental EBITDA either through ARPU hikes or market share gains. Due to RJio’s continuous debt reduction, we have marginally increased our TP to INR885/share (v/s INR855 earlier) by assigning 13x EV/EBITDA on FY22E. Subsequently, the TP of RIL increases to INR1,743 (v/s INR1,713 earlier).

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