A speculative report by global brokerage Jefferies outlines the possibility of a spinoff, or an IPO, resulting in the listing of Jio (Reliance Jio Infocomm). This would unlock value from the telecom arm of Reliance Industries (RIL). It would also follow the pattern set by RIL when it listed Jio Financial Services (JFS) last year. If Jio lists separately as a pure-play telecom/digital services company, its valuation would rise. Investors are interested in owning telcos but not in exposure to energy or petrochemicals, the other businesses RIL runs. The Jefferies report assesses a likely valuation of $112 billion for Jio upon listing. As per the Jio management guidance, capex intensity is now past its peak and more free cash flow generation will be possible. Telecom service providers have hiked tariffs recently and this could drive ARPU, resulting in higher valuations. Jio has introduced tariff hikes in the range of 22-25 per cent but it has not raised tariffs for Jio Phone and Jio Bharat Phone, which constitute 10 per cent of its total mobile revenues. Bharti Airtel and Vodafone Idea have hiked across their respective tariff universes but the hikes are lower in percentage terms. If Jio is to be listed in calendar year 2025, RIL could do it in different ways. It could look at a spinoff as it did with JFS, where it offered RIL shareholders commensurate holdings. Alternatively, it could launch an IPO for Jio. Before getting into the pros and cons, let us understand what happened with JFS. RIL held a 100 per cent stake in JFS and the RIL promoters owned a 45.8 per cent stake in the RIL flagship. It opted for price discovery, followed by a spinoff, which reduced the ownership stake to 45.8 per cent. However, a spinoff is tax-efficient. Notably, the share price of JFS has risen by 38 per cent to Rs 350 since it was listed in September 2023, at Rs 253. Moreover, the promoters have bought back some stake from the market post listing and currently hold 47.1 per cent. As of now, RIL owns around 66.7 per cent of Jio, with the rest held by institutional investors,companies such as Meta. If the stock is listed after the anticipated spinoff, as with JFS, RIL shareholders would receive proportionate holdings. The owner’s stake would dip
to around 31 per cent (after the issuance of shares to current minority shareholders in Jio, and to shareholders in RIL). Note, that as with JFS, this stake could be directly held by promoters not indirectly through the entity, RIL. Given SEBI’s IPO requirements, RIL would have to offer to sell a minimum of 10 per cent of the Jio equity if it opted for an IPO. If the other investors do not offer stakes, RIL would retain a 56 per cent stake in the newly listed entity. This implies the promoters would indirectly hold around 31 per cent after an IPO, through RIL. An IPO would be less tax-efficient. RIL’s stake would be valued at a significant discount to the market price as stakes held by holding companies are generally valued at discounts of 20-50 per cent on the market price. The current investors in Jio may prefer the spinoff option. A spinoff would also avoid the need to attract retail investors, who must receive a mandatory quota in an IPO. These hypothetical calculations are based on SoTP (sum of the parts) calculations for all the RIL business divisions.