Jio Financial Services Nifty entry: Buy RIL shares before record date, says Axis Securities

National Stock Exchange will be conducting a special pre-open session for Reliance Industries Ltd (RIL) on July 20 as Jio Financial is set to enter the NSE barometer Nifty. As per the index methodology, the spun off entity would be included in indices effective from July 20 (close of July 19).

In a latest note, Axis Securities recommended investors to buy Reliance Industries shares before the record date i.e. 20th July as it believes it to be a more economical way to buy Jio Financial Services that is likely to list at Rs 160 per share.

Axis Securities said it values Jio Financial Services at the treasury stock valuation of Rs 1,08,597 crore at 1 time RIL’s treasury stock valuation. The company’s total outstanding shares stand at 676.6 crore, implying each share’s valuation would be Rs 160 per share, Axis Securities said.

"The shareholding pattern will be the same as that of Reliance Industries Ltd. We value JFSL at treasury stock valuation as the business model of the company is yet to be announced. Even if the entire allocation is not directed towards JFSL, the company might be able to leverage the same for regulatory funds," Axis Securities said on July 17.

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The RIL stock has gained 7.9 per cent over the past month. Nuvama suggested that when Reliance Industries demerged four of its entities in 2005, the market actually rewarded RIL stock.

After the split, shareholder wealth swelled 38 per cent. "Should the market have a déjà vu moment this time too, shareholders’ wealth could potentially increase by 3–5 per cent. The demerger of financial services is a spin-off of RIL’s 6.1 per cent treasury shares," Nuvama Institutional Equities said in a note.

Nuvama noted that RIL board had permitted RIL split on June 19, 2005. Among RIL’s group companies, Reliance Industries and Reliance Capital were already listed. The remaining companies were listed in February and March 2006 with the creation of three new subsidiaries (Reliance Natural Resources Ventures, Reliance Energy Ventures and Reliance Communications).

"Each of these subsidiaries issued its shares to shareholders of RIL in the ratio of 1:1. After the split, there was an increase of 38 per cent in shareholder wealth as RIL shares did not fall post-split, in addition to which investors got the additional entities, effectively for free," Nuvama noted.

Reliance Industries will be declaring its June quarter results on July 21.

Nuvama estimates a value of Rs 168 per share for JFS, which is currently a part of non-operating assets in its SoTP valuation. It ascribed a value of Rs 323 per share to non-operating assets. In addition, it value treasury shares at Rs 168 per share based on RIL’s closing price on July 14.

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"We argue that RIL stock could be least impacted by this demerger and instead see an upside of 3-5 per cent," it said.

Nuvama said RIL’s O2C (refining) should benefit greatly from "the Golden Era of Refining." RIL’s upstream division is likely to remain the key beneficiary of elevated gas prices along with faster-than-anticipated KG-D6 production ramp-up, it said.

"We argue, it shall nearly match retail EBITDA by FY24. RIL’s venture in new energy business shall unleash the next leg of growth, besides aiding its conventional business (New energy upgrade). RIL aims to progressively transition to green hydrogen from grey hydrogen by 2025. It plans to launch FMCG business in its retail division to develop and deliver high-quality and affordable products," it said while suggesting a target of Rs 3,205 for the stock.

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