Holding company discount
A company owns businesses worth Rs 100, but its shares are worth Rs 80. The Rs 20 gap is called a holding company discount.
Why the gap is not free money
The problem is that owning shares in the parent is different from owning the businesses yourself. The parent decides where the cash goes. It can pay it out, buy another business, or spend it on a project you would never have chosen.
Jio
I used Rs 13 lakh crore for Jio Platforms. Reliance owns about 66.5%, and I put its share at roughly Rs 8.5 lakh crore. The Rs 11 lakh crore IPO figure reported since then is lower. This is still my earlier model, not the IPO valuation.
Reliance Retail
For Retail, I used Rs 9.5 lakh crore. Reliance owns about 83.5%, giving it a stake worth roughly Rs 8 lakh crore. DMart was my comparison, though it isn’t a close one - groceries mostly, while Reliance Retail is groceries, clothes, electronics and consumer brands. There is room to disagree.
The businesses people now ignore
For the rest: refining Rs 3 lakh crore, petrochemicals Rs 1.8, oil and gas Rs 60,000 crore, new energy and investments Rs 1.7, minus Rs 50,000 crore net debt.
Adding the pieces
That adds up to Rs 23.1 lakh crore. Reliance’s market value at the 18 September close was Rs 16.8 lakh crore. The difference is Rs 6.3 lakh crore, or about 27%.
What is the market paying for the old Reliance?
The other direction is more interesting. Subtract my Jio and Retail stakes from Rs 16.8 lakh crore and only Rs 30,000 crore is left for everything else, before net debt - the refinery, petrochemicals, oil and gas, new energy, the investments. Businesses that still make money.
Update, 6 October: Jio is reportedly seeking about ₹11 lakh crore in its IPO, below the ₹13 lakh crore I used here. Read: Jio IPO
A company owns businesses worth Rs 100, but its shares are worth Rs 80. The Rs 20 gap is called a holding company discount.
On paper, it looks cheap. Add up what the company owns and you’re getting Rs 100 for Rs 80.
The problem is that owning shares in the parent is different from owning the businesses yourself. The parent decides where the cash goes. It can pay it out, buy another business, or spend it on a project you would never have chosen.
Reliance isn’t quite a holding company. It runs businesses as well as owning stakes in them. But I wanted to see what its price left for the businesses outside Jio and Retail.
I used Rs 13 lakh crore for Jio Platforms. Reliance owns about 66.5%, and I put its share at roughly Rs 8.5 lakh crore. The Rs 11 lakh crore IPO figure reported since then is lower. This is still my earlier model, not the IPO valuation.
For Retail, I used Rs 9.5 lakh crore. Reliance owns about 83.5%, giving it a stake worth roughly Rs 8 lakh crore. DMart was my comparison, though it isn’t a close one - groceries mostly, while Reliance Retail is groceries, clothes, electronics and consumer brands. There is room to disagree.
For the rest: refining Rs 3 lakh crore, petrochemicals Rs 1.8, oil and gas Rs 60,000 crore, new energy and investments Rs 1.7, minus Rs 50,000 crore net debt.
That adds up to Rs 23.1 lakh crore. Reliance’s market value at the 18 September close was Rs 16.8 lakh crore. The difference is Rs 6.3 lakh crore, or about 27%.
The other direction is more interesting. Subtract my Jio and Retail stakes from Rs 16.8 lakh crore and only Rs 30,000 crore is left for everything else, before net debt - the refinery, petrochemicals, oil and gas, new energy, the investments. Businesses that still make money.
But that’s not a free bargain. If I’ve overvalued Retail by Rs 2 lakh crore, what’s left for the rest goes up by the same amount. Much of the gap depends on two estimates for businesses without their own share prices. Jio’s listing removes one of them. My numbers leave very little for the old Reliance. They’re also my numbers.
A quoted price for Jio won’t make that money available to Reliance shareholders. The listing lets people buy Jio without the rest of Reliance - but the discount lives in what the parent does with the cash, and that doesn’t change.