There is no point fighting over whether one ‘feels’ its a betrayal or not. Stock market is no place for emotions. The thing I like the most about stock market is discussion like these are useless. You think about something a certain way, take action. If you think its a betrayal, sell and get out of reliance. You think its the right way forward? confident about it? Great! Put in more of your hard earned money.
There are some members in the forum who had already anticipated that Demerger will be unlikely and IPO will be the way forward. So, its probably not that big of a surprise. The knee-jerk reaction from the market could be temporary.
What would be helpful for everyone is facts and estimate numbers. What do you think is the current valuation of Jio? What is its contribution to current share price? How will the holding company discount affect Jio’s share price once IPO happens? What action are you taking based on the recent news and rationale behind it?
Here are some numbers.
(Source: Why Are Reliance Industries Shares Down After Jio Platform IPO Announcement?)
Let’s break down the impact on RIL’s share price using the provided numbers:
- Current consensus target price for RIL: ₹1,634
- Jio Platform’s contribution to that price: ₹556
- Value of other RIL segments: ₹1,078 (₹1,634 - ₹556)
The Holding Company Discount
The holding company discount is the key reason for the recent drop in Reliance Industries’ (RIL) share price. A holding company discount occurs because investors often prefer direct ownership of a subsidiary rather than indirect ownership through a parent company. There are a few reasons for this:
- Reduced transparency: It’s harder for investors to get a clear picture of the subsidiary’s financials and operations.
- Taxes: There can be tax inefficiencies when profits are passed from the subsidiary to the parent company.
- Poor management: There’s a risk that the parent company’s management may misallocate capital or resources across different business segments.
Based on the NDTV Profit data, the holding company discount that will come into play is expected to be either 20% or 30%. NDTV Profit analysts estimate that this discount will shave off ₹100 to ₹150 from the actual value.
Now, let’s apply the holding company discount to Jio’s value post-IPO:
- Scenario 1: 20% Discount
- Post-IPO Jio value: ₹556 - (20% of ₹556) = ₹444
- Total RIL value: ₹444 + ₹1,078 = ₹1,523 per share
- Scenario 2: 30% Discount
- Post-IPO Jio value: ₹556 - (30% of ₹556) = ₹389
- Total RIL value: ₹389 + ₹1,078 = ₹1,467 per share
These calculations show why the market reacted negatively to the IPO announcement. It suggests a potential negative move for shareholders, which led to a near 3% decline in the share price on Friday. The shares of Reliance Industries fell as much as 2.59% to ₹1,350 apiece, their lowest level since April 28. While they pared some losses to trade at ₹1,366.80, the drop highlights the market’s immediate concern about the holding company discount.
My Action and Rationale
So, what action am I taking?
For me, this announcement is a long-term positive. Yes, there’s a short-term holding company discount, but this is a temporary hiccup. The move will allow Jio to independently raise capital and pursue its ambitious growth plans. The company is no longer just a telecom operator; it’s a full-fledged digital services provider, an AI powerhouse, and a key player in India’s digital future.
I believe the market will eventually recognize the true value of Jio and RIL’s other businesses, which include retail and new energy. The average 12-month consensus price target from analysts is ₹1,634.41, implying a significant upside of 19.6%. The fact that 34 out of 37 analysts maintain a ‘buy’ rating shows that the market’s long-term sentiment remains strong. The short-term volatility is an opportunity, not a reason to panic. I’m holding my position and considering buying more on dips, because the long-term fundamentals and growth story remain intact.