Jefferies Predicts Jio’s $112 Billion Valuation and Weighs IPO vs. Spin-Off for RIL

Jefferies, a foreign brokerage, recently released a note discussing the potential value of Reliance Industries Ltd (RIL)’s telecom business, Reliance Jio Infocomm (Jio), which could reach $112 billion if it goes public. At the current exchange rate of 83.49, this translates to 9.35 lakh crore.

Jefferies outlined two possible scenarios for Jio’s public listing: an Initial Public Offering (IPO) or a vertical spin-off. They noted that RIL investors seem to prefer the spin-off route. Regardless of the chosen method, Jefferies anticipates Jio could go public in 2025.

Jio currently has 33.7% minority shareholders. To meet the IPO requirements, RIL could list 10% of Jio’s shares. Since Jio has already completed its major capital expenditure phase, the IPO could entirely be an Offer for Sale (OFS) by minority shareholders.

For an IPO, 35% of the shares must be reserved for retail investors, which requires significant interest from this group. Any unsubscribed portion could be allocated to High Net-worth Individuals (HNI) or Qualified Institutional Buyers (QIB) based on their oversubscription. Even after the IPO, RIL would retain majority control. However, Jefferies pointed out that the Indian stock market typically applies a 20-50% discount to the value of a holding company (holdco) when calculating its fair value.

In the vertical spin-off scenario, RIL might avoid this holdco discount but would have a lower stake in Jio. In this case, RIL could spin off Jio and list it independently after a price discovery process. RIL shareholders would receive shares in Jio proportionate to RIL’s 66.3% stake in Jio. This method could unlock better value for RIL shareholders, with the owner’s stake in Jio dropping to 33.3% after listing.

Jefferies noted that the recently spun-off Jio Financial Services (JFS) saw a similar situation where the owner’s stake was 45.8% at listing. The strong performance of RIL and JFS stocks since the spin-off, along with the less-than-majority stake in JFS, might make RIL more inclined towards the spin-off route for Jio.

The primary concerns for investors include the holdco discount of 20-50% in India, which is even higher (50-70%) in conglomerates in Korea and Taiwan, and the need for large retail investor interest in the case of an IPO. If Jio is spun off, RIL might address the lower controlling stake by buying shares from private equity funds post-spin-off.

Jefferies estimates that if Jio is demerged, RIL’s fair value would be Rs 3,580, offering a 15% upside. If Jio goes public through an IPO, RIL’s fair value would drop to Rs 3,365 in the base case scenario, considering a 20% holdco discount.