Reliance Industries’ plan to sell a stake in its retail subsidiary at an equity valuation of Rs 4.21 trillion and its proposed acquisition of Future Group’s retail business will solidify the company’s position in India’s organised retail market and strengthen its consumer business, Fitch Ratings said on Thursday.
“We believe the proposed acquisition of Future Group’s retail business will fortify its retail footprint, especially in the grocery retail sub-segment,” the ratings agency said in a statement.
“The equity stake sale will further strengthen RIL’s financial profile and competitive position beyond the proposed acquisition,” the statement said.
According to Fitch, the acquisition will add about 1,700 large stores to RIL’s 11,806 stores in the retail segment and increase its organised retail revenue market share by around 5 per cent.
“The asset acquisition will add about 2-2.5 per cent to RIL’s EBITDA in the financial year ending March 2022 (FY22). The Rs 247 billion ($3.4 billion) consideration for the acquisition is less than 3 per cent of its FY20 total assets, a relatively small impact on its balance sheet,” the statement said.
“Future Group’s solid presence in Tier 1 Indian cities with well-established retail formats, including Big Bazaar, Central, FBB, Easyday and Brand Factory, will complement RIL’s increasing strength in Tier 2 and Tier 3 cities,” it added.
Besides, the ratings agency said that RIL’s acquisition of Future Group’s warehousing and logistics business, in addition to its stores, will help expand the scale of JioMart, RIL’s online grocery platform.
“We also expect the synergies from the acquisition to enhance RIL’s bargaining power with the vendors, and its offline and online customer reach. These benefits and RIL’s proven business strategies would over time bridge the EBITDA margin gap between the 8.7 per cent for RIL’s retail segment in FY20 and around 5 per cent for Future Retail, a retail subsidiary of Future Group,” the statement said.
“The Future Group asset acquisition is subject to regulatory, shareholder, creditor and other customary approvals, which may take around six months to complete. The total consideration of Rs 247 billion would include a cash payment of about Rs 50 billion to Rs 60 billion and the balance as liabilities would be absorbed by RIL,” it added.
As per the statement, Fitch said that it retains expectations for RIL to return to a net cash position by FY22, despite the additional debt for the transaction.
“Our net cash expectation is driven by proceeds from the sale of RIL’s stakes in its telecom and retail subsidiaries. RIL has announced plans to sell a 1.75 per cent stake in Reliance Retail Ventures Limited, its retail subsidiary, to Silver Lake for Rs 75 billion, subject to regulatory and other customary approvals,” the ratings agency said.
“This is in addition to the sale of around 33 per cent of Jio Platforms for Rs 1.52 trillion. RIL also completed its Rs 531 billion rights issue in June 2020, with Rs 133 billion in cash received to date and the balance in FY22,” Fitch said.
Furthermore, the statement said that RIL’s net cash position would also be helped by the completion of a Rs 252 billion investment by Canada’s Brookfield Infrastructure Partners L.P. in Tower Infrastructure Trust, which plans to use part of the proceeds to pay down RIL’s investment in the non-convertible debentures issued by the trust.
In addition, RIL received Rs 76 billion in 1QFY21 from BP for a 49 per cent stake in RIL’s fuel retail network and aviation fuel business.