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Indian billionaire Ambani aims to emulate Alibaba with new digital entity

Reliance Industries' new holding company could be valued as high as $70bn

Mukesh Ambani said in 2018 that Reliance aims to have more than half its earnings come from consumer-facing business in the next 10 years. (Photo by Ken Kobayashi)

MUMBAI (NewsRise) -- Billionaire Mukesh Ambani is set to spin off his online business into a separate holding company that could be valued at as much as $70 billion, as India's richest man builds a digital venture on the likes of Alibaba Group Holding to take on and Wal-Mart-backed Flipkart.

On Friday, Reliance Industries announced a plan to invest $24 billion to create a digital services company with no debt, which could eventually attract potential investors on its own. As part of the plan, the oil-to-chemicals conglomerate will invest 1.08 trillion rupees ($15.3 billion) into the digital subsidiary, which in turn, will acquire Reliance's investment worth 650 billion rupees in its wireless unit Reliance Jio Infocomm.

The move comes as Ambani seeks to diversify his business from oils and chemicals into an online platform, encompassing mobile phone operations, e-commerce offerings, and a host of services that allow the group to tap into the growing consumer demand in Asia's third-largest economy. Ambani had, last year, said the group aims to have the consumer facing business contribute more than half of its earnings in the next 10 years.

Jio entered India's telecom market in 2016 offering free calls and cut-rate data tariffs, steadily building its market share and triggering intense price competition in the fastest-growing telecom market in the world.

"Given the reach and scale of our digital ecosystem, we have received strong interest from potential strategic partners," Ambani said in a statement. "We will induct the right partners in our platform company, creating and unlocking meaningful value for Reliance Industries shareholders," he said.

Shares of Reliance Industries rose 2.3% to a record 1,467.10 rupees in Mumbai trading on Tuesday, while the benchmark S&P BSE Sensex gained 1.5%. Shares of rival Bharti Airtel closed down 3.4%, while that of Vodafone Idea ended 8.1% lower.

In restructuring the group's operations, Ambani seeks to emulate Alibaba, which has built its online empire with a host of holding companies ranging from e-commerce to online food ordering and retail. The Chinese company has a market value of more than $450 billion.

HSBC Global Research said it currently values Jio and its digital investment at an enterprise value of about $45 billion, based on the high run-rate of subscriber addition. However, if Jio meets its targets and leverages its platform to build many revenue opportunities similar to other global platforms, the valuation could be higher as high as $60 billion to $70 billion, it said.

With more than 355 million users at the end of September, Jio has already topped India's telecom market with nearly 32% share of the industry's revenue. The operator has in the past said that it is not chasing revenue as it aims to rope in 500 million users by 2021, with a 50% share of the revenue market.

Citi Research raised its target price on Reliance Industries by 10% to 1,645 rupees, citing expectations of an earlier-than-expected monetization of the telecom business and higher valuation. Citi suggested an enterprise valuation of 3.04 trillion rupees for the business.

The brokerage values Reliance's refining and petrochemical business at 5.22 trillion rupees, while the retail business garners a valuation of 3.11 trillion rupees.

Further, a recent Supreme Court decision upholding the government's demand for recovery of charges worth $13 billion from mobile phone operators would potentially hurt Jio's rivals Bharti Airtel and Vodafone Idea, which are already grappling with a heavy debt burden, analysts said.

The court order is feared to wipe out competition, potentially consolidating the industry into a two-operator market, they added.

On Tuesday, Bharti Airtel, India's third-largest mobile phone operator by subscribers, said it is deferring its quarterly earnings announcement till Nov. 14, as it weighs the impact of the top court order.

Kotak Institutional Equities said the plan to spin off the digital businesses offers Reliance the opportunity to commercialize its services beyond telecom. Jio's key apps are leading in individual segments with high levels of customer engagements, yet the company generates modest revenues from advertisements and premium offerings, Kotak said.

--Dhanya Ann Thoppil

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