After Qatar, yet another oil-rich Gulf sovereign fund, the Abu Dhabi Investment Authority (ADIA), is now following suit in its quest to secure a larger stake in Mukesh Ambani’s expansive retail empire. According to insiders, ADIA is actively exploring the possibility of investing $600 million in Asia’s richest individual’s organized retailing business, at valuations that significantly exceed those observed in a previous transaction three years ago.
ADIA has already established itself as an investor in Reliance Retail Ventures (RRVL), having acquired a 1.2% stake for INR 5,512.50 crore ($751 million) in October 2020. This investment came as part of RRVL’s move to raise INR 47,265 crore through the sale of a 10.09% stake to a group of prominent investors, which included Saudi PIF, Mubadala, GIC of Singapore, Silverlake, TPG, and GA.
Among the previous group of investors, KKR has already proceeded with an additional investment of INR 2,069.50 crore at a pre-money equity valuation of INR 8.361 lakh crore ($100 billion). This move has propelled RRVL into the ranks of the top four companies in the country in terms of implied market capitalization.
Up until now, Qatar’s injection of $1 billion stands as the sole new investment in the ongoing fundraising round.
The present valuation represents a nearly 60% premium over the valuation from the previous financing round three years ago. However, it falls considerably short of the valuation that many equity analysts believe the privately held retail business is truly worth. Back in May, analysts at AllianceBernstein had recommended a valuation of $131 billion for Reliance Retail.
“This further cements the strategic relations between the two companies on the back of a strong government relationship between the two sovereigns,” said an official on the condition of anonymity as the talks are in private domain. “ADIA is a major investor in Indian equities, infrastructure and financial services, but it is not often that it doubles down – especially at such premium valuations.”
Interestingly, Reliance Industries itself valued RRVL at $148 billion when it decided early July to buy out minority shareholders and employee stock option holders that collectively owned 0.09% at a 60% premium to the $93 billion and $97 billion valuations determined, respectively, by two independent valuers – Ernst & Young Merchant Banking Services and BDO Valuation Advisory.
RRVL currently holds a 99.91% stake in Reliance Retail Limited, and it has plans to repurchase the remaining shares at a rate of INR 1,362 per unit. This offer represents a substantial 60% premium when compared to the valuation provided by EY and BDO. As a result of this premium, the potential valuation of Reliance Retail Limited could soar as high as $148 billion.
A formal announcement is expected to be made in the coming days.
ADIA and Reliance Retail both refrained from providing any comments.
With a valuation of $100 billion, Reliance Retail ranks as the 12th largest retail powerhouse globally, surpassing companies like JD.com, Target, Midea, and Lululemon. According to Bloomberg data, the top five in terms of market value are Amazon, LVMH, Walmart, Home Depot, and Alibaba.
While Mukesh Ambani, Chairman of Reliance Industries, did not disclose specific figures publicly, he informed shareholders during the recent annual general meeting about the significant interest from prominent investors in Reliance Retail. Recent reports in the media indicate that Reliance is exploring a fundraising round ranging from $1.5 to $4 billion. This fundraising initiative is viewed by many as an exercise to set a valuation benchmark before a potential listing.
During Reliance Industries’ annual general meeting in 2019, Ambani had stated that the retail business would be publicly listed within the subsequent five years.
In the fiscal year 2023, Reliance Retail achieved an annual revenue of INR 2,60,364 crore, demonstrating a robust year-on-year growth of 30%. It also reported an EBITDA of INR 17,928 crore and a net profit of INR 9,181 crore. Notably, approximately half of its revenues are generated from the grocery segment. However, it’s worth mentioning that the gross debt of the business has experienced a substantial increase. This is due to the retail arm’s rapid expansion into various categories and formats, coupled with the company’s venture into the fast-moving consumer goods (FMCG) sector.
As of the end of FY23, Reliance Retail’s standalone business recorded a gross debt of INR 70,937.72 crore, representing a notable increase from INR 40,756.44 crore at the end of FY22. This resulted in a net debt to EBITDA ratio of 4X. The company’s management anticipates that Reliance Retail will emerge as its most rapidly growing business in terms of both revenue and EBITDA.
Reliance Retail encompasses Reliance Industries’ fundamental retail enterprises, comprising entities like Reliance Digital and Jio Mart, along with an extensive network of over 18,000 physical stores. The current store footprint spans 65 million square feet and is projected to expand to 100 million square feet over the next 3-5 years. Additionally, the company boasts a substantial warehouse capacity of 50 million square feet. Significantly, a majority of these stores, approximately two-thirds, are strategically located in Tier II, Tier III cities, and smaller towns.
Reliance Retail is a wholly-owned subsidiary of RRVL, which, in addition to its core retail operations, encompasses international partnerships and a fast-moving consumer goods business. Notably, Reliance Industries holds an 85% stake in RRVL.
“We expect continued market share gains for Retail, which we expect to grow from circa 11% in 3QFY23 to 24% by FY26E,” Nikhil Bhandari of Goldman Sachs said in a recent report.
Reliance has ventured into the fast-moving consumer goods (FMCG) sector, emphasizing competitive pricing by acquiring and collaborating with both well-established legacy brands and regional players such as Campa Cola, Sosyo, and Lotus. Additionally, Reliance has forged partnerships with prominent companies like General Mills and Maliban. The strategic vision involves expanding its FMCG presence within India and exploring opportunities in global markets, with initial focus on Asia and Africa.
According to CLSA calculations, the capital expenditure (capex) in Reliance’s retail business surged to $6 billion during FY23. Investments from funds like QIA are expected to provide crucial financing for future capex requirements and help maintain manageable levels of debt within the retail segment. Many observers closely following the Reliance group assert that the company is presently in an “investment phase,” and consequently, it is likely to sustain elevated levels of capex and maintain strong return on equity/return on invested capital ratios.
As a result, one-third of the overall capital expenditure (specifically for warehousing) has been shifted into an Infrastructure Investment Trust (InVIT). Nevertheless, the company intends to persist with investments in physical store expansions and technology enhancements.
