As Reliance Industries’ demerged financial services arm Jio Financial Services is set to be listed tomorrow, investors and traders must not fret if they see the share price of Reliance Industries taking a tumble. Since Jio Financial Services has been spun-off from Mukesh Ambani-led RIL, the pre-open session that will occur on 20 July will determine the value of RIL without the inclusion of JFS. Analysts peg the valuation of JFS shares at Rs 160-190 apiece, meaning RIL share price could fall by up to that amount.
Understanding the pre-open auction session
In a bid to determine the market’s valuation for Reliance Industries’ demerged entity Jio Financial Services (JFS), a pre-open call auction is scheduled on July 20, during 9-10 am. This session aims to facilitate price discovery, which is crucial in establishing the initial trading range for JFS shares. Regular trading in RIL shares might not be available till 10 am.
During this pre-open session, traders will have the opportunity to gauge the street’s sentiment and assess the fair value of Reliance Industries post-demerger. The resulting difference between RIL’s pre-demerger closing price and the discovery price during the pre-open auction will be used to calculate the initial stock price of Jio Financial Services. For instance, if RIL’s closing price on July 19 stands at Rs 2,000 per share and the pre-open auction settles at Rs 1,800 per share the following day, then JFS shares will be valued at Rs 200 apiece.
Jio Financial Services valuation
In 2005, when RIL demerged into four separate entities, Nuvama said, “The market actually rewarded RIL. After the split, shareholder wealth swelled 38%.” RIL announced the demerger of its financial services undertaking, which is set to be rechristened to Jio Financial Services. The demerger is a spin-off of RIL’s 6.1% treasury shares, which Nuvama had valued at Rs 117 apiece, coming in at 4% of Reliance Industries’ closing price on July 14 of Rs 2,740.7 apiece. This valuation assumes a 30% holdco discount, without which, the valuation per share will be Rs 168 per share, at 6% of Friday’s closing price ex-discount. “We argue that RIL stock could be least impacted by this demerger and instead see an upside of 3-5%,” said Nuvama.
Post demerger, Axis Securities values Jio Financial Services at the treasury stock valuation of Rs 1,08,597 crore (1x RIL’s treasury stock valuation). The company’s total outstanding shares stand at Rs 676.6 crore, implying each share’s valuation would be Rs 160/share. The shareholding pattern will be the same as that of Reliance Industries. “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,” said Axis Securities.
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