Stake sale, Future Group asset acquisition to boost Reliance's retail business: Fitch

Singapore, September 10 : Reliance Industries Ltd's (RIL's) plan to sell a stake in its retail subsidiary at an equity valuation of Rs 4.21 lakh crore and its proposed acquisition of Future Group's retail businesses will solidify RIL'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 equity stake sale will further strengthen RIL's financial profile and competitive position beyond the proposed acquisition," said Fitch analysts Girish Madan and Nitin Soni.
The acquisition will add about 1,700 large stores to RIL's 11,806 stores in its retail segment and increase its organised retail revenue market share by around 5 per cent. The asset acquisition will add about 2 to 2.5 per cent to RIL's EBITDA in the financial year ending March 2022 (FY22).
The Rs 24,700 crore (3.4 billion dollars) consideration for the acquisition is less than 3 per cent of its FY20 total assets, a relatively small impact on its balance sheet.
"Future Group's solid presence in tier one Indian cities with well-established retail formats including Big Bazaar, Central, FBB, Easyday and Brand Factory will complement RIL's increasing strength in second- and third-tier cities," said Fitch.
RIL's acquisition of Future Group's warehousing and logistics business in addition to its stores will help to 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 vendors, and offline and online customer reach."
These benefits and RIL's proven business strategies will 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 Ltd, a retail subsidiary of Future Group.

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 24,700 crore will include a cash payment of about Rs 5,000 crore to 6,000 crores and balance as liabilities will be absorbed by RIL. "We retain our expectations for RIL to return to a net cash position by FY22 despite the additional debt for the transaction."

Fitch said its 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 Ltd, its retail subsidiary, to Silver Lake for Rs 7,500 crore.
This is in addition to the sale of around 33 per cent of Jio Platforms for Rs 1.52 lakh crore. RIL also completed its Rs 53,100 crore rights issue in June with Rs 13,300 crore in cash received to date and the balance in FY22.
RIL's net cash position will also be helped by the completion of a Rs 25,200 crore investment by Canada's Brookfield Infrastructure Partners LP in Tower Infrastructure Trust which plans to use part of the proceeds to pay down RIL's investment (Rs 12,800 crore as of March 2020) in the non-convertible debentures issued by the trust.
In addition, RIL received Rs 7,600 crore in Q1 FY21 from BP Plc for a 49 per cent stake in RIL's fuel retail network and aviation fuel business.