Reliance Industries Value Unlocking: Kotak Suggests Listing Three Subsidiaries
RIL, Kotak said, has been a "very promoter-centric entity" but the roles of the next generation are "not yet clear".
As Reliance Industries Ltd. prepares to list its subsidiaries and induct next-generation members of the founding family into key roles at the Rs 17.5-lakh-crore conglomerate, Kotak Institutional Equities lists one structure that might help.
“One option could be to reorganise RIL into three independent listed business verticals—communications, energy and retailing,” the brokerage said in a Sept. 8 report. “This would broadly entail shareholders of Reliance eventually becoming shareholders of the retailing and telecommunications entities other than the minority shareholders in those entities. Various smaller entities may be ‘clubbed’ into one of the appropriate verticals to ensure limited overlaps post the restructuring.”
Kotak’s hypothetical structure is different from:
Four listed entities (RIL+ three listed subsidiaries in communications, energy, retailing).
Three listed entities (RIL + two listed subsidiaries in communications and retailing).
The brokerage said its structure “will prevent potential large holding company discount for RIL stock relative to the value of its assets in the parent entity and holdings in various subsidiaries”.
This has been the fate of several holding cum-operating and holding companies, it said, citing the example of Bajaj Finserv Ltd., HDFC Ltd., Larsen & Toubro Ltd. and Mahindra & Mahindra Ltd., which trade at meaningful discounts to the fair value of their assets and holdings.
The structure, Kotak said, will help promoters and shareholders achieve “three mutually linked objectives of structure, succession and segregation”.
RIL Chairman Mukesh Ambani, in his address to shareholders at the company's 45th annual general meeting last month, said Akash and Isha have assumed leadership roles at Jio and retail, respectively, while Anant has joined the new energy business.
RIL, Kotak said, has been a “very promoter-centric entity” but the roles of the next generation—Akash, Anant and Isha Ambani—are “not yet clear, whether they will continue in the traditional role of promoter-managers or simply promoters”.
“In the event of the next-generation family members continuing as traditional promoter managers, their roles would have to be very clearly defined as the ‘joint’ management of a complex entity such as RIL will necessarily entail extraordinary levels of cooperation and coordination between them,” it said.
Based on current announcements, the brokerage said it seems like each next-generation family member will be responsible for one vertical. That structure might not be “ideal to reconcile any potential differences in vision, strategy and execution among family members”.
“Each of the family members as manager of their respective company or vertical would be answerable to other family members on the board of RIL for the performance of their verticals. This may not be an ideal structure, especially if there are differences among family members (again a hypothetical situation) about the direction of RIL group”.
Kotak’s 'new' structure will also address longstanding investor concerns regarding allocation of capital and large related-party transactions within the group and outside the group with various promoter entities. Several investors, it said, have highlighted these two concerns for their reasons for being underweight on RIL stock.
“We are not sure if there is much merit in the point on allocation of capital even if RIL has used the cash flows of one business to fund new and diverse businesses... However, investors may have a point on related-party transactions. As an example, investors have highlighted the limited disclosures on the transactions between Reliance Retail and Jio Infocomm.
RRL retails telecom recharges of Jio, which reflects in its revenue. These revenues are large relative to Reliance Retail’s revenue, which raises issues about the continuity of this revenue and profit stream in the future.”
"Three independent listed companies with separate boards (even if there is some overlap with the promoter family being present on all the boards) and different shareholders may result in either fewer related-party transactions... Even if such transactions were to continue, investors would have more comfort on the arms-length nature of the transactions," it said.