Valuation of Jio's digital business expected to improve, say analysts

RIL says it intends to transfer the telecom business and other digital initiatives to a wholly-owned subsidiary, while Jio’s debt will move to RIL.
Analysts see an upgrade on the way to the estimated valuation of the digital business of Reliance Industries (RIL). So far, it has been valued only on the telecom arm, Jio.

This is a sequel to Friday's announcement from RIL on a structure to make Jio debt-free. This is seen as a move towards a likely listing of the latter's shares. 

“In most valuations used by the Street, including ours, Jio is valued mainly as a telecom service provider. No value is ascribed for Jio’s suite of apps, digital investments and capabilities like AI, IoT, etc. This exercise aims to correct that positioning. Indeed, some of Jio's apps like TV, music and cinema are among the best in their respective categories," says Vikash Kumar Jain, research analyst at CLSA.

After this transfer, Jio’s net debt will fall to Rs 46,300 crore (including deferred spectrum payment) and its ratio of net debt to FY21/FY22 operating earnings to only 1.5/1.2. This scheme is expected to get regulatory closure within three months. CLSA has a current sum-of-the-parts enterprise value (EV) of $45 billion for the digital arm. 

RIL says it intends to transfer the telecom business and other digital initiatives to a wholly-owned subsidiary, while Jio’s debt will move to RIL. 

“The reorganisation will increase standalone liabilities but Reliance hopes that will be able to monetise its stake in the platforms business at premium valuations. An EV of $65-70 billion for the platforms entity will imply a hefty estimate of 1.75 times the net invested capital, in our estimate,” note Somshankar Sinha and Piyush Nahar, analysts at Jefferies, in a note to investors. 

Bank of America Merrill Lynch values RIL’s digital businesses, including Jio, at an EV of $64 bn. 

In 2018-19, RIL made strategic investments in start-ups such as pharma software provider C-Square, citizen SaaS provider EasyGov, AI learning platform Embibe, retail solution provider Fynd, logistics platform Grab, AI assistant platform Haptik, music streaming platform Saavn, deep tech start-up Tesseract, and vernacular language platform Reverie. These now get transferred to the wholly-owned subsidiary. 

RIL has also made significant investments in global tech start-ups such as DEN, Hathway, Eros International, Edcast, Karexpert Technologies, Vakt Holdings, Indiavidual Learning, Radisys Corp, and Kai OS Technologies.

“There is a lot of talk on Jio transforming itself to a SuperApp around content, e-commerce, and online grocery — something on the lines of Wechat. Today, nothing much is visible on digital revenues but the fact that all digital properties are part of the Jio eco-system suggests Jio, with its captive subscribers of 350 million, stands a chance to monetise these digital services,” wrote Rajiv Sharma, head of research at SBICap Securities.  

He aslo notes Jio has a payments bank licence and is likely to launch its enterprise offerings with a focus on the micro, small and medium enteprises space. This could pit it against Amazon in the cloud computing and alternate network segments.

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