Reliance Industries Limited (RIL) is the most-valued Indian company, harnessing a gigantic valuation of USD 202 billion, as of 2022. In terms of global rankings, it enjoys the 34th position, as cited by Hurun Global 500.
And while the country basks in these impressive figures, the conglomerate is in the news for slightly different reasons – the RIL demerger.
Reliance Industries (RIL) is on fire as its shares jump over 4.5% and reach a 52-week high of Rs 2,755 on 10th July,23. But what’s causing this rally, and what’s the deal with the demerger of its financial services arm? Let’s find out!
Latest reports state that RIL has initiated the “demerger” of its financial services arm a.k.a., Reliance Strategic Industries Limited (RSIL). Post-demerger, RSIL would be renamed as “Jio Financial Services Limited (JFSL). The question is – why this sudden demerger?
All about demerger
RIL is all set to unlock value for its massive shareholder base of 36 lakh. How? By demerging its financial services arm, which will be renamed as Jio Financial Services (JFSL). This move aims to enhance the company’s focus on its core businesses and create new opportunities for investors.
Why do companies demerge?
Before entering the realm of RSIL-RIL demerger, you need to get some basics right. First off, demerger is the opposite of merger (no kidding, Sherlock). Essentially, demerger is an act wherein a company separates from its subsidiary(ies) to create new business units. Or transfer a unit to another existing company.
When an altogether new entity is formed, you call it a plain vanilla demerger. Brand new business. Just like a new chapter of life, if you will. Except with better flavours.
If the demerger involves the transfer of business from one company to another existing company, it’s called a “composite demerger”. In the case of RIL demerger, it’s plain vanilla because its financial services arm is being converted into a new entity entirely.
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Reasons why companies demerge
A common reason why companies demerge is to focus on a specific core business. Let’s consider a hypothetical example –
Supposedly, there exists a company ABC focused primarily on the confectionery business. This involves manufacturing snackable options like cookies, chocolates, candies, etc.
After flourishing in the confectionary business, ABC decided to enter the aerated drinks zone, competing against the likes of Pepsi, Coca-Cola, Thums Up, etc.
Although both aspects are related to food, they require a different marketing strategy. Why? Because each arm has specific core values or undertakings to fulfil.
Thus, ABC decided to demerge from the main confectionery business to focus on the aerated drinks arm. Thus, two separate business units are formed.
Another potential reason to initiate demerger is if a particular unit is loss-making. Take the case of Reliance Industries Limited. Its USD 200 billion valuation is the sum-total of the valuation of its subsidiaries like Reliance Retail, TV18, Jio Payments Bank, Jio Platforms, Reliance Life Sciences, etc.
Now, what if one subsidiary is consistently loss-making? Of course, it would impact the conglomerate’s total valuation. So, what’s the solution? Apparently, a demerger.
Once the loss-making unit is demerged, it can be sold-off to interested buyers at a subsidised price. Or align it with a strategic partner. There are multiple possibilities. But demerger is a solution to improve the company’s overall valuation.
Other reasons for demerger can include:
- Self-sufficiency in the business unit
- Attracting shareholders i.e., the demerged arm can be listed separately for potential shareholders to invest in the main business and the demerged one
- In case of high debt – logically speaking, debt can be distributed across the ‘x’ number of demerged entities and raise independent funds, accordingly
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Why is RIL demerging from RSIL Reliance?
Evidently, there exist several reasons for top-notch companies to announce a demerger. In the case of RIL demerger, the reason has more to do with “focusing on a specific core business”, as explained before.
Before getting into the depths of the demerger, let’s see what RIL had to say:
Jio Financial Services plans to launch a consumer and merchant lending business to complement and supplement the traditional credit bureau-based underwriting.
Economic Times
In a nutshell, JFSL, apparently, aims to become a full-fledged NBFC player.
The potential of disrupting NBFC sector
Here are some key points to understand the demerger –
- After the demerger, RSIL Reliance would be renamed as Jio Financial Services Limited (JFSL)
- This separate entity would function as an independent entity in the NBFC sector
- Non-Banking Financial Sector (NBFC) includes players other than banks which can provide loans, investment options and other products. So, banks without a banking licence are NBFCs
Currently, the NBFC sector in India is dominated by key players like Bajaj Finance (Revenue = Rs. 22,413 cr), Shriram Transport Finance Company (Revenue = Rs. 16,127 cr) and Aditya Birla Capital (Revenue = Rs. 16,131 cr).
Clearly, NBFCs are a growing sector in India. This is why RIL plans to enter this sector with its soon-to-be independent NBFC. And experts suggest that the upcoming NBFC has the capacity to disrupt the financial services sector.
In fact, according to an Economic Times report, JFSL can potentially become the fifth-largest financer in the country, surpassing well-known giants like Kotak Mahindra Bank, with a net worth reaching Rs. 10.84 lakh crore.
Currently, under RIL, the turnover of Reliance’s financial services arm amounts to Rs. 1,387 crore, more than 700 times less than the estimated future net worth.
The giant existing consumer base of Reliance
Usually, an independent NBFC not attached to any existing business has to walk giant leaps to become a powerful player. However, JFSL is already miles ahead owing to RIL’s gigantic customer base.
Currently, RIL enjoys a nationwide, omnipresent channel of customers. And even though JFSL would be demerged soon, it would surely take advantage of this presence.
According to a report by Business Today, JFSL’s strategy may involve targeting Jio’s customers first i.e., approx 40-45 crore. Moreover, as JFSL gets listed on BSE and NSE separately, investors would further get enticed to invest in the venture, if not directly use its services.
Can you imagine the JFSL reliance share price once the company gets listed?
Clearly, with the entry of JFSL, Reliance will most likely tighten the NBFC as well as Fintech spaces in India with respect to competition.
Even though not vehemently specified, JFSL would be the key NBFC player in the country. Of course, after applying a specific strategy different from its parent firm, RIL.
How would existing shareholders benefit?
A Bloomberg report suggests that post RIL demerger, JFSL might get listed on both stock exchanges by October 2023. An exciting new venture for potential investors. But what about the existing shareholders in RIL?
Reports suggest that existing RIL stakeholders will receive one share each of Jio Financial in the 1:1 ratio i.e., 1 Jio Finance Share for 1 RIL share. This means more value and potential upside for existing shareholders. No wonder the reliance stock is already up by a whopping 13% in the last three months!
Currently, the per-share value of JFSL ranges between Rs. 147-178. The share price post-demerger is yet to be predicted. July 20, 2023, is fixed as the record date, which determines the eligible equity shareholders of RIL who will receive the new equity shares of Jio Financial.
Big news for investors! Jio Financial Services is making its way into the Nifty 50, Nifty 100, Nifty 200, and Nifty 500 indices, along with other sectoral indices, as confirmed by the National Stock Exchange.
And that’s not all! The NSE has also scheduled a special pre-open session for Reliance Industries Limited in the Capital Market segment on July 20, 2023, all thanks to the exciting demerger of Jio Financial Services.
Looking at the overall situation, however, it’s a clear win-win for both parties – the conglomerate and the stakeholders.
The question is – will you be investing in JFSL reliance share price?
Of course, there’s plenty of time to consider before JFSL goes public as an independent entity.
And there are endless factors to consider for you, too, as an investor/trader!
