Towards the end of June 2019 the unlisted equity market received a fresh supply of Equity Shares of Reliance Retail Limited. What began trading at around Rs. 500 a piece is now available for Rs. 1350 a share. For some, the stock is extremely overpriced and for others, it's a bargain. Well, valuation is a matter of perception, and perceptions are formed based on comparisons. We have tried to plot a few key metrics of Reliance Retail Limited comparing it with its Domestic and International Peers.
Turnover and Growth
In Terms of Revenue Walmart is not only the largest retailer amongst the ones taken up for comparison but also the largest in the world with an annual turnover of About 39 lac crores. This is about 29 times that of Reliance Retail’s Current Top line. Amazon is not too far behind with 22 lac crores followed by Alibaba Group with about 5 lac crores of turnover in FY 2020. Amongst the Domestic Players, we have RRL as the largest Retailer with 1.4 lac crores of turnover followed by Avenue Supermarkets (D-Mart India) and Future Retail with 25k crores and 21k crores (TTM DEC 2019) respectively. This may certainly throw light on the size of the pie RRL is trying to dig into, but the likes of Walmart and future retail may not be a good comparable at this stage since RRL’s valuation is driven by its growth story. Walmart recorded a growth of 2% last fiscal and Future Retail’s TTM DEC 2019 results show a 4.9% sales growth which is likely to have an impact when the FY 2020 results are out. Alibaba Group Holdings led the growth story with a 35% y-o-y growth followed by Amazon with 27% RRL and D-Mart (India) running neck to neck with 25% and 24% respectively. This is the league of high PE companies that RRL is in for.
With a Similar Product mix D-Mart (India) and Future Retail have similar EBIT and NP margins of 7.3%, 5.2% and 7.3% and 3.2% respectively. Arch-rivals Amazon and Walmart with an overlapping core business area have similar margins (EBIT) 4.8%, (NP)3.6% and (EBIT) 3.9% (NP) 2.9% respectively. Alibaba on the other hand is way above the rest when it comes to margins with an EBIT 17.9% and NP of 29.3%. The Abnormally high NP is primarily on account of a one time gain of about INR 75k crore booked in FY 2020 which is about 14% of turnover. Apart from accounting differences, the higher EBIT margins could be attributed to its dominant market position in the core business area (China) and lower operating costs. RRL, on the other hand, has an EBIT of around 5.7% which is better than its American peers and lesser than its domestic peers and an NP ratio of 3.9%.
Employee Stock Option Plans(ESOPs) have long been an effective tool by startups to limit attrition and improve engagement by employees as the growth of their salary is linked to the growth of a company.
They have proved lucrative for employees of several startups in India. For instance, in December 2017, Flipkart bought back ESOPs worth $100 million, making it the largest share buyback program by an unlisted company in the country.
Similarly, Paytm, Ola Cabs, Rivigo have provided opportunities to existing and former employees to liquidate ESOP units through secondary share sales.
But the problem with ESOPs is that generous exits for employees of the kind mentioned above are rare. Typically, there is a long wait for current and former employees. That apart, there is the vesting period —a condition to remain with the company, usually four years, for an employee to be issued these shares.
Employees then have to wait for the respective companies to get public. The best bet for employees then is a company announcing an ESOP repurchase or when a new investor wants to buy additional shares from the ESOP pool. All these are big ‘ifs’.
But there seems to be an end to years of sobering news for employees. A new crop of dealers trading and facilitating trading in shares of unlisted companies and ‘pre-IPO companies’ — industry jargon for companies that are actively exploring listing — has emerged in India. These dealers are witnessing a sudden rush in demand for startup shares from their clients in the secondary market.
Altaf Siddiqui, managing director and CEO of Enrich Partners, another firm which deals with unlisted securities, said the ticket size for such deals ranges between a few lakhs and a few crores per transaction. “The list of buyers includes high net-worth individuals, family offices and also some retail investors who are willing to diversify their portfolio by investing in these lucrative startups.”
There are various methods being used for valuation of unlisted companies such as earnings multiples approach, discounted cash flow (DCF) comparing it with listed peers, etc.
These methods are certainly appropriate for mature companies or publicly-traded firms; but are much more challenging to apply to early-stage startups that have not yet generated consistent revenues, much less reliable earnings.
Siddiqui of Enrich, for example, said his firm uses a combination of valuation metrics. “The simplest metric is the DCF method but it has its own limitations. So we club it with other matrices such as valuation by comparable. We look at the valuation at which its peers recently raised fund etc.,” he said. Siddiqui said price discovery becomes very tricky in the cases of unlisted companies, especially for technology startups because the business models are niche. “It is difficult to find a comparable peer for many tech-startups. In case of Nazara Technologies, there are no comparable peers in India in both listed and unlisted space."
"The closest comparable is China’s Tencent Games. We also look at comparable companies outside if we are not able to find one in India. We then make adjustments according to the difference in size of the companies, market size and market potential to arrive at a fair valuation.”
“Once we arrive at a fair valuation, then the actual price discovery happens through the usual demand-supply law. If there are more buyers for a particular startup share, price moves up and visa-versa,” he added. Brokers also act as ‘market makers’ in many cases. “If we have a seller but no buyer is readily available and if they feel the startup has potential and the price is right, we buy those shares to sell it later at a higher valuation,” said the owner of a Mumbai-based firm which deals with unlisted securities.
Startup employees are understandably pleased with the demand uptick for ESOPs. “The liquidity provided by this secondary market is very helpful for employees to get a smooth exit at a fair value,” said an ex-employee of a fintech startup who recently sold his shares after his exit.
Excerpts From CNBC Interview
After a long wait and a series of steps taken by the company, the BSE Ltd. has finally received SEBI’s clearance for its IPO (OFS). The focus will now shift to bse valuation of the Continent’s oldest bourse and the price band of the IPO.
Before we try to arrive at an expected price band, let’s see what is working for BSE and what is not.
Clearly the market share of BSE in the equity cash segment has been falling steadily and its rival NSE has surged miles ahead. In the equity derivatives market, BSE has negligible presence with NSE enjoying almost a monopoly.
However, there are a lot of fronts where the BSE scores pretty well.
For starters, the 140 years’ legacy and brand of BSE (erstwhile Bombay Stock Exchange) is almost impossible to replicate.
BSE is steadily gaining market share in the currency derivatives segment at the cost of NSE. The Wholesale debt market is also doing pretty well.
BSE also has a head start in the approval for setting up an international stock exchange at the GIFT city. This stock exchange is expected to be functional almost round the clock.
The NSE will surely be hurt by corporate governance charges of preferred access to select brokers for algorithmic trading and the sudden exit their MD, Ms. Chitra Ramkrishna. We don’t yet know whether both these events are connected. The rumored tussle between the investors and the management over the IPO hasn’t helped much either.
Now even those who were quick to write off BSE; are waiting and watching as things unfold as BSE seems to be rising against the turn of the tide.
BSE Ltd. expected valuation:
If reports of the targeted listing price of NSE’s shares is to be believed, it means that the NSE IPO will be a 10,000 crore blockbuster. As per the DRHP NSE will offer upto 11.14 crore equity shares in the OFS (IPO). This translates to roughly around Rs. 900 per share of Face value Re. 1/- and values the exchange around 43000 crores!
Similarly, as per the DRHP of BSE, it will offer upto 1.5 crore shares (adjusted for Face value consolidation). The issue size is expected to be between 1300-1400 crores. This will value the exchange between 4,600 – 5000 crores and each share of Face Value 2 being valued between Rs. 870 -930/-.
Valuation by comparables:
Depository services provider Central Depository Services (India) Limited (CDSL) which is promoted by Bombay Stock Exchange (BSE) has filed a draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (SEBI) on 28th December 2016 for its initial public offering (IPO).
According to the draft red herring prospectus (DRHP) the initial public offering (IPO) will purely be an offer for sell of up to 33.65 % of its Stake (i.e. 3.52 crore shares) by existing shareholders such as BSE, Bank of Baroda, Calcutta Stock Exchange and State Bank of India.
As on December the top 10 shareholders of CDSL were, Bombay Stock Exchange holding 50.05%, State Bank of India holding 9.57%, Standard chartered Bank holding 7.18%, HDFC Bank holding 7.18%, Canara Bank holding 6.45%, Bank of India holding 5.57%, Bank of Baroda holding 5.07%, LIC holding 4.15%, Union Bank holding 1.91% and Bank of Maharashtra holding 1.91%.
CDSL has appointed Edelweiss Financial Services, SBI Capital Markets, Axis Capital, Nomura Financial Advisory and Securities (India) Pvt. Ltd, Haitong Securities, IDBI Capital Markets, and YES Securities. To manage its shares sale.
Post IPO, the shareholding of BSE, SBI, and Bank of Baroda all together will come down to 32%, according to the DRHP. BSE will be divesting the largest portion of shares, of 24% as the exchange looking to sell 26% stake among its 50% of Stake of CDSL. Calcutta Stock Exchange's which holds 0.96% will cease to be a shareholder after the IPO.
National Stock Exchange of India Ltd (NSE) on 28th Dec 2016 filed its draft red herring prospectus (DRHP) with market regulator Securities and Exchange Board of India (Sebi) which is expected to be an ambitiously large initial public offering (IPO). It will be the biggest IPO in past six years. The share sale is believed to be India’s second-biggest Initial Public offering (IPO). The NSE IPO could raise around Rs10,000 crore, as reported through sources, making it the largest public listing since Coal India Ltd.’s which raised around Rs15,200 crore in its IPO in October 2010.
According to, draft red herring prospectus (DRHP), available on the website of Securities and Exchange Board of India (Sebi) as wells as investment banks managing the IPO, existing shareholders of NSE are diluting a 23% stake in the exchange through an offer for sale.
The book running lead managers to the issue are Morgan Stanley India Co. Pvt. Ltd, HDFC Bank Ltd, ICICI Securities Ltd, IDFC Bank Ltd, Citigroup Global Markets India Pvt. Ltd, JM Financial Institutional Securities Ltd, Kotak Mahindra Capital Co. Ltd and IIFL Holdings Ltd.
American investor Tiger Global Management is looking to sell its entire 3% stake in the exchange, according to DRHP. Other significant shareholders that will be selling stakes in the IPO include Aranda Investments, SAIF Partners, Norwest Venture Partners, Citigroup Strategic Holdings, IDBI Bank Ltd, Goldman Sachs, State Bank of India Ltd and SBI Capital Markets Ltd. Twenty-seven investors are expected to be selling their shares through the (Initial Public Offering) IPO.
Shareholders such as Stock Holding Corporation of India Ltd (4.4%), Life Insurance Corporation of India (12.5% stake) and Veracity Investments (5%), an investment division of Private equity fund ChrysCapital, will not be selling shares in the IPO.
For the financial year 2015-2016, the exchange announced turnover of Rs2,359.1 crore compared, with turnover of Rs2,291 crore the previous financial year 2014-15. Data from the DRHP shows, in 2015-16, the exchange gained a profit of Rs985.3 crore, down from a profit of Rs991.7 crore the previous financial year 2014-15.
UTI Mutual Fund is on course to go public with an intial share sale in the second half of the year with a valuation of over USD 1 Billion and is also looking at inorganic growth to reclaim the prime position it had enjoyed before the US 64 Scheme went bust in early 2001.
As and when the IPO happens, UTI will be first fund house to be listed in the country.
The IPO will allow partial exit for the nation's oldest fund house's four sponsors-SBI, LIC, BOB and PNB which own 18.5% each in it, while the remaining 26 percent is held by US-based Investments firm T Rowe Price.
"We continue to believe IPO will happen in the second half of 2017. We are awaiting Government go-ahead . Once that is in, we'll appoint merchant bankers and seek SEBI nod,"UTI Managing Director Leo puri told PTI in an Interview.
UTI mutual fund was created after Parliament passed the Unit Trust of India Act in 2002 after the the flagship US 64 scheme went belly up. Post the Act, the then mighty UTI was bifurcated into Specified undertaking of Unit Trust of India(Suuti), which owns almost 11.8 per cent in Axis Bank and UTI asset Management Company
Sixty four companies to be delisted from Bombay Stock Exchange Platform
These companies have remained Suspended for more than 13 years. This is an addition to 194 firms already being delisted by the stock exchange in august
The securities of these firms have been under suspension for more than 13 years on account of non-compliance of various clauses of listing regulations, the securities of these firms have been under suspension for more than 13 years on account of non-compilance of various clauses of listing regulations.
"64 companies that have remained suspended for more than 13 years would be delisted from the platform of the exchange with effect from december 13 pursuant to order of Delisting Committiee of the exchange in terms of of SEBI Regulations" BSE said in a circular
These scripts will be moved to the dissemination board of the bourse for 5 years as directed by markets regulator Sebi
The companies include Ambuja zinc, Asian Alloys, Elder Telecom, Hindustan Breweries & Bottling, Zenith Steel tubes and industries
The Bombay Stock Exchange (BSE) is the 11th largest stock exchange in the world. It is also the first stock exchange of Asia.
The listing of BSE was delayed due to the integration of the FMC with SEBI and due to regulations for listing of Stock Exchanges. Towards the end of 2015, the SEBI gave permission to the stock exchanges to go ahead with listing.
In March 2016, the SEBI has given an in-principle go ahead to BSE for listing its shares on another stock exchange.
The shares of BSE Ltd are currently being traded in the unlisted shares' secondary market around Rs 340/ share.
Investing in BSE shares can be an excellent long term bet due to the following reasons:
• The market capitalization of the stock exchange is over USD 1.6 trillion.
• There are only two major players in the market - BSE and NSE.
• There are huge entry barriers so threat of new entrants is very low.
• The market size is expected to grow significantly due to the growing GDP, and increased market participation.
Asset allocation is the key to long term portfolio appreciation. Adding uncorrelated securities reduces the overall risk in an investment portfolio. Unlisted equities have surprisingly low price correlation with the listed ones. Hence including unlisted equities in the portfolio reduces the overall risk in the portfolio.
Many young companies grow much faster than mature companies due to their lower base and hence they tend to significantly outperform the benchmark returns. However, a lot of this growth happens before the company goes public with an IPO. Hence participating in such companies in the Growth / Pre IPO stage can provide superior returns to the investor and carefully chosen unlisted/Pre-IPO shares can give much higher portfolio risk adjusted returns than the benchmarks!
The journey of RBL bank so far is nothing short of a classic Bollywood drama. Starting in a rural pre independence setting; the then Ratnakar Bank did steady business for several decades before a change in management ushered in an era of transformation, expansion, high growth, digitalisation and the glamour of Private Equity investors lining up with growth capital!! Then started the process of the Initial Public Offering of the bank to comply with RBI’s directions, to raise further capital and to provide exit to some of the investors. In the same parlance; this was probably just the interval.