Reliance Retail sells a sliver of a stake to Silver Lake, gets Rs 7,500 crore

Before the Future Group purchase, RR was operating a total area of 29 million square feet.

Even as it builds scale by buying out retail chains, Reliance Retail (RR) is strengthening its balance sheet. On Wednesday, the company sold a 1.75% stake to US private equity firm Silver Lake for Rs 7,500 crore. The transaction values RR, which reported revenues of Rs 1.63 lakh crore in FY20, at Rs 4.21 lakh crore. The PE investor had earlier bought a 2.1% stake in Jio Platforms, also a subsidiary of Reliance Industries, for Rs 10,202.5 crore.

The investment comes at a time when RR has bolstered its presence in the retail arena by buying out the Future Group’s grocery, fashion and lifestyle segments. The acquisition will bring into its fold around 1,300 grocery stores— supplementing the existing networkof 800 stores— and also 440 fashion and lifestyle outlets.

Before the Future Group purchase, RR was operating a total area of 29 million square feet. Analysts at Jefferies noted RR’s core retail revenues get a 33% boost led by 40% increase in grocery and 95% increase in fashion & lifestyle. In FY20, RR reported an ebitda of Rs 9,654 crore, up 55.7%. They believe the considerable scale that RR will now enjoy post the Future Group acquisition along with fresh capital would raise its might with the suppliers like FMCG firms, vendors for general merchandise and logistic partners.

In April, Reliance Retail had signalled its entry into the e-commerce business, readying to take on giants Amazon and Flipkart,with a tie-up between JioMart and Facebook’s popular platform, WhatsApp. JioMart has already been launched in around 200 cities.

Analysts at Credit Suisse noted on Wednesday the benchmark retail valuation at Rs 4.21 lakh crore is less than consensus expectations of Rs 4.8-5.0 lakh crore. “Benchmark valuation for Jio largely factored in telecom operations but upside from apps–education,health, agriculture, entertainment– was not accounted for. Similarly, upside in the retail segment from a further ramp-up in e-commerce and kirana store integration is not fully factored in,” they observed. Analysts at Morgan Stanley noted that while the sale was not anticipated after RIL chairman’s AGM speech in July-20, the price should help reduce investor concerns on RIL’s retail valuations.

While the developments at RR could worry investors in other local retailers such as DMart or Trent experts believe the Indian market is big enough, given favourable demographics and a huge unorganised market , to accommodate several players.

RR reported revenues of Rs 31,633 crore in Q1FY21, down 17.2% year-on-year basis and an Ebitda of Rs 1,083 crore, down 47.4% y-o-y. The Ebitda margins during the quarter came in 220 basis points lower on a y-o-y basis at 3.8%.