Reliance Industries Stock Soars to Record High, Fueled by Disney Merger News and Reduced Capex

The Indian stock market witnessed a significant development on Monday, January 29th, 2024, as shares of Reliance Industries Ltd (RIL) surged 5% to a record high. This marked the third consecutive session of gains for the stock, propelling the company’s market capitalization to a staggering Rs 19.2 lakh crore (approximately $238 billion). This impressive feat attributed to two key factors: a potential merger with Walt Disney’s India unit and positive news regarding reduced capital expenditure (capex).

Disney Merger to Reliance at a Discount

The primary catalyst for Reliance Industry’s stock surge was news reported by Bloomberg, indicating a significant revision in the valuation of Walt Disney’s India unit in its proposed merger with Mukesh Ambani’s media business. Initial negotiations had placed the value of Disney’s India assets at a hefty $10 billion.

However, reports suggest that negotiations have led to a considerable reduction in valuation, with the current estimate hovering around $4.5 billion – a potential 55% decline. This revised valuation translates to a combined entity valued at $11 billion, with Disney holding a 40% stake and Reliance Industries owning the remaining 51%. The deal is expected to be finalized in February 2024.

Reliance

This development holds significant implications for the Indian media landscape. The collapse of the $10 billion merger between Sony and Zee Entertainment had removed a potential major competitor, further paving the way for the Disney-Reliance partnership.

If successful, this merger would create a formidable media powerhouse, consolidating Disney’s strong content library with Reliance’s extensive distribution network across India. This could potentially disrupt the existing market dynamics and redefine the future of media consumption in the country.

Reliance’s Reduced Capex Ushers in Optimism

Beyond the Disney merger, another key driver for RIL’s stock rally was positive news regarding the company’s capex plans. The third quarter of FY24 witnessed a substantial 22% decrease in capex compared to the previous quarter, amounting to Rs 30,100 crore. This decline primarily stemmed from reduced spending across two key segments: Jio and Retail.

For Jio, the completion of the nationwide 5G rollout led to reduced capex requirements. Similarly, Retail witnessed lower capex due to limited space expansion plans. Analysts anticipate a further decline in Retail capex by Rs 15,000 crore in FY24 and an even steeper reduction in FY25.

Reliance

Additionally, Jio’s headline capex is projected to fall significantly in FY25, contributing to an overall improvement in free cash flow (FCF). These developments address concerns regarding rising net debt and pave the way for a more sustainable financial future for RIL.

Analyst Optimism and Future Outlook

Financial analysts across the board have responded positively to these developments, revising target prices and maintaining favorable ratings for RIL stock. Jefferies India expects the company’s retail capex to decline significantly in the coming years, leading to improved FCF and easing concerns about net debt.

CITI Research, in its latest note, emphasizes the potential for further EBITDA growth driven by anticipated tariff hikes in Jio, continued strong performance in the retail segment, and improved profitability in the O2C business. While acknowledging the recent stock outperformance, CITI maintains a “Neutral” rating with a revised target price of Rs 2,910, indicating a potential upside of 12%.

Looking ahead, key triggers for RIL’s stock performance include the magnitude of potential tariff hikes in Jio, updates on monetization strategies across Jio and Retail, and the pace of deleveraging exceeding analyst expectations.

With the Disney merger negotiations nearing completion and positive news regarding capex, RIL appears well-positioned for continued growth and market leadership in the coming years. The successful execution of these strategies will be crucial in determining the company’s future trajectory and investor confidence.

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