Markets favour a Jio spin-off from Reliance, with possible $112Bn valuation IPO in 2025: Jeffries report

Reliance-owned Jio, which is backed by the likes of Google, Microsoft, Meta among others, could set itself up for a staggering $112Bn IPO in the 2025 calendar year. According to a research note by Jefferies, this move is favored by investors over an initial public offering (IPO) due to concerns about the holding company discount prevalent in the Indian market.

Jefferies’ report indicates that the spinoff option is gaining traction primarily due to the significant holding company discount that affects listed subsidiaries in India. Typically, these subsidiaries trade at a 20-50% discount when held by a parent company. An IPO would allow Reliance to retain majority control over Jio, but it risks undervaluing the telecom giant within Reliance’s overall market capitalization. Conversely, a spinoff would provide a more accurate standalone valuation for Jio and potentially offer better value to Reliance shareholders.

A spinoff would involve Reliance shareholders receiving proportionate ownership in Jio, which could lead to a more accurate valuation of the telecom company. This move would reduce the controlling stake of Reliance’s owners from the current 66.3% to 33.3%. The success of the Jio Financial Services spinoff last year, which resulted in a 40% surge in stock value post-separation, serves as a promising precedent. Jefferies estimates that a public listing could value Jio at $112 billion, potentially driving a 7-15% upside for Reliance’s stock. They project a fair value of ₹3,580 per share for Reliance in a spinoff scenario, compared to ₹3,365/share for an IPO, assuming a 20% holding company discount.

Jio boasts over 475 million wireless subscribers and has been a significant player in the telecom industry. Four years ago, the company raised approximately $20 billion from prominent investors such as Meta, Google, General Atlantic, KKR, Silver Lake, Mubadala, TPG, Abu Dhabi Investment Authority, Intel, and Qualcomm. During these investments, Jio was valued at $58 billion pre-money. As a key competitor in the Indian market, Airtel has a market cap nearing $98 billion, and Bank of America valued Jio at $107 billion last year.

Reliance has been anticipated to list both Jio and Reliance Retail, the country’s largest retail chain. The company’s recent demerger of its financial services arm and subsequent listing of Jio Financial Services has been positively received by the market, with significant gains in stock value. Institutional investors appear to favor the spinoff route due to the avoidance of the holding company discount, which typically ranges from 20-50%. Additionally, the large retail investor mobilization required for an IPO is another concern. If Reliance opts for a spinoff, the valuation of Jio could be more accurately reflected in the market, benefiting RIL shareholders. On the other hand, with a 33.7% minority shareholding in Jio, RIL can fulfill IPO requirements by listing 10% of Jio. However, 35% of an IPO is reserved for the retail segment, which would necessitate significant mobilization from retail investors.