RIL-Facebook deal lifts markets

Following Monday’s oil price crash in the U.S. futures market, the benchmark indices in India had mirrored the global panic on Tuesday. And, the S&P BSE Sensex and the NSE’s Nifty 50 had closed lower by 3.2% and 3.03% each yesterday.

Overnight, there was no relieving news from international markets. Rather, the price for West Texas Intermediate (WTI) crude for June expiry contracts had corrected, and traded in the range of $10.3–14.05 per barrel. However, domestic respite came from early morning exchange intimation from Reliance Industries (RIL), the No. 1 company on the Fortune India 500 list, 2019.

In its release, RIL notified that Facebook Inc. had signed binding agreements for an investment of ₹43,574 crore by Facebook into Jio Platforms (RIL’s wholly-owned subsidiary) and a next-generation technology company whose wholly-owned subsidiary, Reliance Jio Infocomm, provides connectivity platform to over 388 million subscribers.

RIL also highlighted that Facebook had agreed to invest 9.99% in Jio Platforms at an enterprise value of ₹4.62 lakh crore, assuming a conservative conversion rate of ₹70 per U.S. dollar, the dollar valuation prior to the investment worked out to $65.95 billion. The result: RIL touched a day’s high of ₹1,384.7 a share on the BSE, 12.03% higher than its Tuesday close of ₹1,236.05.

At the end of Wednesday’s trade, RIL closed higher by ₹127.3 a share, adding 10.3% to its previous day close and lifted market sentiment positively. Just a month ago, on March 23, when there was Covid-19 propelled carnage across the market, RIL had touched its 52-week low of ₹875.7 a share. At today’s close, RIL has recovered 55.69% from that low.

The RIL-Facebook lifted the overall market sentiment too. At the day’s highs, the Sensex and the Nifty 50 had gained 2.72% and 2.54% over their respective close of Tuesday. And, at the close of trade, the respective indices closed higher by 2.42% and 2.29% each. Off the 742.84 points that the Sensex added, RIL contributed 383.25 points, or 51.6%. And, in the 205.85 points added to the Nifty 50 on Wednesday, RIL accounted for 90.17 points, or 43.8%.

According to Ajit Mishra, vice president, research at Religare Broking, Wednesday’s rally was led by RIL. “Today’s surge was largely in response to the Reliance-Facebook deal and we may again see the selling pressure emerging at the higher levels,” says Mishra.

Mishra opines that going forward, the Covid-19 updates combined with signals from the earnings front would dictate the market trend from here on. “Besides, the movement of crude oil and the currency market will also be in focus,” adds Mishra. “Participants should limit their leveraged positions and keep those positions hedged.”

The RIL-Facebook, in the opinion of Deepak Jasani, head of research at HDFC Securities, is a positive for RIL coming under the current trying times. Jasani is of the view that the two can combine their unique strengths using their network of users, share their data, develop applications (apps) for social, digital payments, gaming, shopping, flight and hotel bookings, etc. “The combination of WhatsApp expertise and user base, R Jio’s vast subscriber base and Facebook’s deeply entrenched user base and technology is theoretically a win-win for all,” says Jasani.

On the deal proceeds, Jasani adds that RIL could them to cut its debt and overcome doubts about debt reduction process following the oil price crash and doubts over its deal with Saudi Aramco. Jasani also highlighted that RIL’s stock price reaction on Wednesday, was marginally higher than the 12.2% rise noted in August 2019 post the announcement of a bigger deal with Saudi Aramco. “The reaction of its stock price to this development could be over in a couple of days and the stock could then fall in line with the overall market,” adds Jasani.

But, on Wednesday, RIL skewed the market movements. That is evident from the fact that the S&P BSE MidCap and SmallCap, respectively closed on Wednesday with just over 89 points (+0.78%) and 76 points (0.73%) higher. At their respective day’s highs, the indices were higher than their previous day close by just over 119 points (+1.04%) and 91 points (+0.87%) each.

While RIL was the instrumental in driving the market in the positive zone, and the stock has recovered over 55% in a month, Wednesday’s gain values the conglomerate at ₹8.62 lakh crore. At the latest market capitalisation, RIL trade 13.57% below its ₹10 lakh crore market capitalisation mark, a feat it had achieved in late November last year.

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