Reliance Retail Ltd is an obvious IPO candidate if we ever saw one. It has everything investment bankers and IPO investors dream of. It is the largest in its industry (its revenues are nearly double the size of D-Mart), it is growing at a brisk pace (37% growth last year), and it has improved margins (from 4.2% in FY17 to 6% last year). All of the numbers pertain to its core retailing business.

But here is the clincher—retail stocks are hot. Avenue Supermarts Ltd, which runs the D-Mart chain of stores, trades at over six times FY18 revenues and nearly 70 times operating profit. What’s more, its massive rally post listing has rubbed off on other retail stocks.

If Reliance Retail goes ahead with an IPO anytime soon, it would be striking while the iron is hot. Brokerages such as CLSA and Kotak Institutional Equities already ascribe an enterprise value of over ₹ 1 trillion for Reliance Retail, and valuations can be far higher on a listing. If it’s marketed well, which isn’t asking for much from the Reliance group of companies, the company can be valued at over $20 billion. And a mere 10% float can help it raise roughly over $2 billion. That is nothing to sneeze at—except when you are Reliance Industries Ltd.

In fact, analysts say, there may never even be a Reliance Retail IPO. From the sounds of it, the company’s parent has grander plans. Whenever it is ready, Reliance Industries is likely to float a mega IPO of its consumer businesses combined together.

Also read: RIL may go for a Reliance Jio IPO in 2-3 years

It has been talking about its retail business in almost the same breath as its telecom venture, Reliance Jio Infocomm Ltd, referring to them as “consumer businesses”.

“The year saw our consumer businesses attain a threshold, wherefrom they will start contributing meaningfully to consolidated profits. From a mere 2% in FY 2016-17, Jio and Retail accounted for 13.1% of RIL’s consolidated Segment EBITDA in FY 2017-18. Our aim is to have the consumer businesses contribute on par with the energy and materials business over the next decade, when we celebrate our Golden Jubilee,” chairman Mukesh Ambani wrote to shareholders in the annual report.

Apart from the fact that the two companies already work closely together—Reliance Retail is the master franchisee for Reliance Jio—the parent also sees a great number of synergies going forward. For instance, when a Reliance Jio customer wants to shop for groceries online, revenues can stay within the family, if an app can direct him to Reliance Retail’s e-commerce wing. Besides, vouchers that can be used on both platforms can result in increased customer stickiness and cross-selling opportunities for both businesses.

Possibly, the company also thinks that a Reliance Retail IPO alone wouldn’t bring much to the table, especially seen in comparison with its overall investments in its non-energy businesses. Capital expenditure in the telecom business stood at ₹ 49,000 crores, or over $7 billion, just last year. This year isn’t expected to be very different. As and when Reliance decides it’s time for outside investors to share part of the burden of funding its grand plans, it would like it to be large enough to recoup a sizeable portion of its own investments. Perhaps, clubbing the telecom and retail businesses may provide the heft needed to raise large amounts and deleverage the balance sheet.

And if we were willing to get excited about just retail and e-commerce, imagine how delirious investors would get when more exciting terms such as data, digital services, content, connectivity, and cloud are thrown into the mix.

But having said all this, it still makes sense for the company to explore a separate listing of its retail and telecom arms. First, the two businesses will attract different sets of investors. The basic tenet for unlocking value in a subsidiary is to attract investors who have an appetite for a specific business vertical and thereby get rid of the embedded holding company discount. For all we know, if a combined consumer business arm is listed, there will eventually be a demand to split the two divisions.

And finally, as the saying goes, ‘A bird in the hand is worth two in the bush’. Why wait for a mega IPO when you can do a large-sized one now? In Reliance’s books, maybe we’re all just thinking too small.

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