Jio IPO update:
Jefferies predicts that the telecom business of Reliance Industries Ltd (RIL), Reliance Jio Infocomm (Jio), could be valued at $112 billion (approximately Rs 9.35 lakh crore at an exchange rate of 83.49) upon its public listing. They outlined two scenarios for the public listing: an IPO or a vertical spin-off. Investors appear to prefer the latter, which could potentially happen in 2025.
Jio has 33.7% minority shareholders, and RIL could meet the IPO requirement by listing 10% of Jio’s stake. Given that Jio has surpassed its peak capex phase, the entire IPO could be an Offer for Sale (OFS) by minority shareholders, according to Jefferies.
Jefferies noted that a 35% allocation in an IPO is reserved for the retail segment, requiring substantial mobilization from retail investors. Any unsubscribed portion could be allocated to High Net Worth Individuals (HNIs) and Qualified Institutional Buyers (QIBs) based on their oversubscription. Although RIL would retain majority control post-listing, the Indian stock market typically applies a holding company (holdco) discount of 20-50% to a listed subsidiary when determining the holdco’s fair value.
In the vertical spin-off scenario, RIL could avoid the holdco discount but would have a lower stake in Jio. RIL could spin off Jio and list it after price discovery, with RIL shareholders receiving a proportional share in Jio adjusted for RIL’s 66.3% stake in the latter. This approach could avoid the holdco discount and unlock better value for RIL shareholders. Post-listing, the owner’s stake in Jio would drop to 33.3%, similar to the recently spun-off JFS, which had a 45.8% owner’s stake at listing. The positive performance of RIL and JFS stocks since their spin-off suggests that the spin-off route may be favorable for Jio as well.
Jefferies highlighted concerns over the holdco discount in India (20-50%) and even steeper discounts (50-70%) for conglomerates in Korea and Taiwan. Additionally, large-scale retail investor mobilization in an IPO presents another challenge. The issue of a lower controlling stake in Jio post-spin-off could be mitigated by purchasing shares from private equity funds after the spin-off.
Jefferies estimates that if Jio is demerged from RIL, RIL’s fair value would be Rs 3,580, implying a 15% upside. However, if an IPO is chosen, RIL’s fair value would drop to Rs 3,365, factoring in a 20% holdco discount.
