Reliance Industries Ltd - Stock Valuation and Financial Performance

Company reported tepid performance overall- growth in digital services and Oil to Gas (O2G) segment was negated by weak O2C performance. Retail segment performance was a mixed bag. 

Digital Services:  Strong revenue growth led by scaling up of digital services and partial impact of tariff hike

• Jio Platform's consolidated revenue came in at Rs. 31,709 Cr (18% YoY increase) and EBITDA grew ~18% to Rs. 15,931 Cr. This has been led by the combination of both, 4.2% increase in subscribers and 7.4% increase in ARPU to Rs. 195. 
• The company is focusing on upgrading customers to higher plans as their consumption improves and then bundling some of the additional services to increase the ARPU.

Reliance Retail: Revenue growth impacted by weak F&L demand, company focusing on streamlining of operations to enhance margins

• Retail business revenue fell 1.1% YoY to Rs. 76,302 Cr while footfalls and number of transactions were up 14% and 9%, highlighting a decrease in average bill value. This was due to weak market demand, especially in their fashion & lifestyle segment. 
• EBITDA was flat at Rs. 5,850 Cr. Company is working on streamlining of operations in the B2B business which is aimed towards improving margins.
• Company launched a youth focused fashion format “Yousta” and has scaled it to 50 stores.

O2C (Oil to Chemical): Product mix optimization measures and enhanced manufacturing capabilities helped navigate volatile market

• Performance impacted by unfavourable demand-supply fundamentals (lower global demand and adequate product supply), leading to sharp decline in fuel cracks and downstream margins.
• EBITDA lowered to Rs 12,413 Cr (declined 24% YoY; 5% QoQ) due to sharp correction in margins across key products.
• RIL maintained edge with favorable ethane cracking economics and improved domestic fuel marketing economics (fuel retailing volumes up 28%).
• Throughput (volumes) increased on debottlenecking and optimization measures. 

O2G (Oil to Gas): Sustained production and improved volumes helped deliver strong performance

• While revenues declined 6% YoY on gas price realization, EBITDA increased 11% YoY to Rs. 5,290 Cr (improved margin to 85%).

RIL also has received approval for bonus issue of shares (record date - 28^th Oct; ratio 1:1). 

Reliance industries delivered a strong operating quarter on back of sustained performance from Telecom, Retail and O2G segments; earnings growth impacted by weak O2C division performance. Segmental commentary as follow- 

Telecom: 

• Jio strengthened its market leadership by adding 8 mn users during the quarter. ARPU for the quarter came in at Rs. 182 (flat YoY). 
• Revenue and EBITDA were up 12.8%/11.6% to Rs. 34,548 Cr and Rs. 14,638 Cr respectively.
• Data traffic was up 33% YoY at 44.1 bn GB aided by network scale-up and increasing 5G adoption. ~130 Mn subscribers migrated to Jio True5G.
• With the aim of a sustainable telecom industry, Jio had launched new unlimited plans with 13-25% higher tariff effective 3rd July 2024. This shall improve margins and ROEs going ahead.

Retail: 

• The Company added 331 stores in the quarter totaling to 18,918 stores with 81.3mn sq. ft. retail space, serving 316mn (+18% YoY) registered customers and managing 296mn footfalls.
• Streamlining of operations with focus on margins led to EBITDA margin improvement 30 bps YoY to 8.5%. 
• Company is focusing on enhancing tech platform, supply chain and distribution capabilities to sustain growth momentum in near and medium term.

O2C (Oil to Chemical):

• In this segment, the business environment has remained challenging for Q1FY25. Weak fuel cracks weighing on performance.
• EBITDA fell by 14% (YoY) to Rs.13,093 Cr due to sharp decline in product margins of Gasoline (-30%), PE (-17%), PP (-16%) , Polyester chain deltas down 15%.
• Energy market volatility impacted short-term earnings; structural business dynamics remain constructive.
• India demand for fuels and downstream products is expected to remain resilient reflecting strong economic growth.

O2G (Oil to Gas):

• EBITDA grew by 30% (YoY) to Rs.5,210 Cr driven by 44% increase in KG D6 gas production partly offset by lower price realization.
• Overall strong EBITDA growth driven by higher production and stable operations.

Reliance Industries (RIL) has delivered good results for the quarter and closed the year on a high note. Milestones include consolidated EBITDA crossing Rs. 1.75 lakh crore mark, PBT surpassing Rs. 1 lakh crore, and market capitalization exceeding a staggering Rs. 20 lakh crore. These numbers are a testament to the scale at which it operates. Segmental performance is as follows-

Telecom: 

• Jio strengthened its market leadership to 40.1% in subscriber market share by adding 10.9 mn users during the quarter. ARPU for the quarter came in at Rs. 182 (+2% YoY). Data traffic was up 31% YoY at 148.5 bn GB aided by network scale-up and increasing 5G adoption. Jio AirFiber is now available across 5,900 towns in the country.
• EBITDA margin for Jio Platforms stood at 50.2%, up 50 bps driven by a higher customer base and operating leverage.
• Expectations of raising tariff rates in FY25 and increasing adoption of Jio AirFiber could further boost revenues. 

Retail:

• The company opened 562/1,840 new stores with gross area addition of 7.8/15.6 mn sq. ft. in Q4FY24 and FY24 respectively; total store count stood at 18,836 with 79.1 mn sq. ft. retail area. 
• Revenue in the quarter grew 11% YoY, led by consumer electronics and fashion & lifestyle consumption baskets. EBITDA for Q4 grew by 19% YoY; margin came in at 8.3% (+60 bps YoY). 
• Going ahead consumer durables can show growth in average bill value which should drive future growth.

O2C:

• In this segment, the business environment has remained challenging for FY24. Fuel cracks fell between 20% and 45% from elevated levels to some extent offset by lower SAED (special additional excise duty). 
• On the petrochemical side, the decline was also sharp for polymers (8% to 21%), and for polyester chain delta (about 6%). Despite the challenging environment company was able to deliver an EBITDA of Rs.62,393 Cr (+0.5% YoY). 
• Going forward domestic demand for fuels and downstream chemicals is likely to remain strong on account of continuing emphasis on infrastructure projects, increased mobility, and positive consumer sentiment.

O2G:

• The segment registered an EBITDA of Rs 20,191 Cr (YoY +1.5%) which is on the back of higher production. KG D6 field performance was as per expectations contributing ~30% to India’s domestic gas production. 
• Price realization was slightly lower during the year, but that has been more than offset by the higher production.

We had previously given a buy call at Rs. 2,300, and the stock has already surpassed Rs. 2,900, yielding a 26% return. With new avenues for growth, a strong execution history, scalable businesses, a comfortable debt-to-equity ratio as well as robust free cash flow generation, RIL is a company we want to remain invested in. We upgrade our MRP to Rs 2,845. 

Strong performance led by retail segment and sustained performance in other segments. 

Reliance industries limited (RIL) is an economic powerhouse that doesn't just span industries but also defines them. Reshaping telecommunications and digital technology, RIL has a knack for making the future its own. Join us as we dive into its world, that's rewriting the rules and setting standards for scale and execution.

We will examine the catalysts and progression of both its energy and consumer businesses while gaining insights into the factors driving growth and their strategies for capital allocation.

Reliance Jio- Attractive oligopolistic market 

Reliance Jio Infocomm Limited (RJIL) has redefined the Indian telecom landscape with affordable data, high-speed internet, and a range of digital services. Jio has connected millions, bridged the digital divide, and set new industry standards. It currently holds 42% market share in Indian Telecom. 

Performance:

In FY 2023, RJIL reported gross revenue of Rs. 1,19,791 Cr. The subscriber base at the end of the fiscal year stood at 44 Cr, with EBITDA margin of 49%. These numbers were propelled by consistent market share growth, advantages stemming from reduced spectrum usage charges and operating leverage benefits. Customer engagement on the Jio network witnessed an upswing, as reflected in per capita data consumption of 23.1 GB/month and voice usage of 1,003 minutes/month for Q4FY23.

Key Triggers & Developments:

The evolving landscape of the Indian telecom industry has led to a situation where only 2-3 major players exist. Most of the capital investments required for the industry have already been executed, signifying a shift in focus. Looking forward to the FY25, RJIL is poised to generate substantial free cashflows. The key challenge, therefore, lies in reinvesting these cashflows into ventures with high margins and high returns on equity (ROE), thus laying the groundwork for future growth and expansion.

Valuation: 

We assess that most of the 5G capex is already done and 6G capex looks some time away. High operating margins and positive free cash flow generation makes RJIL a potent candidate for further rerating. We value RJIL at 16x FY24 EV/EBITDA, resulting in an Enterprise value of Rs. 8.4 lakh Cr. Reliance Industries retains an 67% stake in RJIL, translating to a per-share value of Rs. 829 for Reliance shareholders.

Reliance Retail- Growth accelerating

Reliance Retail stands as India's largest retail entity, holding the distinction of being the sole Indian retailer featured among the top 100 global retailers. It secures a place in the list of the world's fastest-growing retailers, with a diverse presence in various segments through in-house brands and global partnerships. These brands include Superdry, Trends, Trends Footwear, AJIO, Azorte, Centro, Zivame, Clovia, and Amante.

Performance: 

Reliance Retail achieved revenue of Rs. 2.2 lakh Cr in FY23, this is about 5 times the revenues of Dmart. The EBITDA margin improved to 7.4% in FY23 from its earlier standing at 6.1%. Anticipated improvements in margins are attributed to a change in the revenue mix and the ramp-up of new stores. Sales per store trend has been positive, however Sales per square feet of store area has been benign because of recent store additions. 3 Years sales & store growth has been 19% & 15% CAGR respectively.

New Initiatives:

E-Commerce: Reliance Retail is making strategic strides to bolster its online presence, with a strong focus on AJIO and JioMart. Moreover, the company has unveiled new brands, 'Independence' in FMCG and 'Tira' in Beauty & Personal Care. Notably, Reliance's in-house FMCG brands are priced approximately 20-30% lower than competing brands.

Merchant Digitization: Recognizing the predominance of small merchants in India's retail market, Reliance Retail is actively engaged in digitizing these businesses. This initiative not only creates a network for consumer brands and advertisers but also fosters substantial growth. The company currently collaborates with over 3 million partners and aims to extend its reach to cover more than 7,500 towns and 3 lakh villages.

Global investors interested in piece of the pie

ADIA Investment: The Abu Dhabi Investment Authority invested $600 million in Reliance Retail at a valuation of $100 billion.

KKR & Co Inc Investment: KKR & Co Inc increased its stake in the company by investing an additional $250 million at similar valuation of $100 billion.

Key Drivers & Developments:

The company undertook substantial expansion in its store space during FY23, increasing it to 66 million sq ft from 41.6 million sq. ft. A capital expenditure of about R. 22,000 Cr. was allocated during this period, with the fruits of revenue growth expected to manifest in the years ahead. Reliance is trying to build a house of brands strategy in the retail segment along with increasing E-commerce share with its flagship app AJIO.

Valuation: 

We like reliance retail because of potential opportunity size it is targeting (presently it is ~3% of domestic retail market). Organised retail is less than 15% in India which is expected to grow on back of urbanisation trend. E-commerce segment provides potential for further value unlocking. We value Reliance Retail at 21x FY27 EV/EBITDA, resulting in an enterprise value of Rs. 8.78 lakh Cr. Reliance Industries retains 85% stake in Reliance Retail, translating to a per-share value of Rs. 1,102 for Reliance shareholders.

Oil to Chemical- Steady state business

Under this segment, the company primarily refines crude oil to manufacture/ extract transportation fuels, polymers and elastomers, intermediates and polyesters. It has plants and manufacturing assets located across India in Jamnagar, Hazira, Dahej, Nagothane, Vadodara and others. It has a crude refining capacity of 1.4 million barrels per day (MMBPD). It also has the largest single site refinery (complex globally) with complexity index of 21.1.

Performance:

In FY23, revenues increased on account of improved price realisation for transportation fuel, tracking higher average oil prices for the year. O2C business EBITDA stood at Rs. 62,075 Cr. with healthy 18% increase as compared to FY22 despite considering the Special Additional Excise Duty (Windfall Tax) levy of Rs. 6,648 Cr. 

The integrated O2C business structure enables an integrated decision-making approach that helps to optimise the entire value chain from crude to refining to petrochemicals to the B2B/B2C model.

The growth in EBITDA can be attributed to factors such as enhanced feedstock flexibility, notable improvements in fuel cracks, and advantageous ethane cracking. A review of historical trends reveals the company's consistent ability to maintain a stable EBITDA margin.

Outlook

The Oil to Chemical segment has made a significant contribution, accounting for ~41% of the total EBITDA in FY23. It is expected that oil prices and product margins will remain stable, especially as the global trade landscape readjusts in the wake of the Russia-Ukraine conflict. Robust oil demand can be attributed to consistent domestic economic growth.

Domestic demand for polymers is likely to remain strong, primarily fueled by growth in e-commerce, packaging, durable goods, automotive, and infrastructure sectors. The pipe sector is expected to continue benefiting from infrastructure projects, ensuring sustained demand. 

Looking at the stability of this business and its cash flow prospects, we are valuing Oil to Chemical segment at 7x FY26 EBITDA , translating to Rs. 796/share.

Oil to Gas- Ramp-up on higher production

Reliance Industries (RIL), as a fully-integrated Exploration & Production operator, holds the leading position in deepwater operations within India. Its domestic portfolio encompasses conventional oil and gas blocks located in the Krishna Godavari and Mahanadi basins, along with two Coal Bed Methane (CBM) blocks, Sohagpur (East) and Sohagpur (West) in Madhya Pradesh. The business has witnessed a notable increase in gas production primarily attributed to the expansion of production activities in the KGD6 block situated in the Krishna-Godavari Basin. In the FY23, gas production from this block has been significantly scaled up to 20 million metric standard cubic meters per day (MMSCMD), contributing to approximately 20% of India's total gas production. 

Performance:

In FY23 the revenue has doubled and EBITDA multiplied 2.5x YoY to Rs. 13,589 Cr. The growth was primarily on account of improved gas price realisation and higher gas production in the KGD6 block. Domestic production was at a 10-year high. At peak production of ~30 MMSCMD KGD6 block will contribute ~30% to total domestic gas production. 

Outlook

We expect that gas is expected to play a key role as a transition fuel and share of gas in energy mix is expected to increase from 6% to 15% by CY 2030.Reliance’s current portfolio mix is ideally placed for helping meet this increased demand. At their peak, RIL can expect to produce nearly 30% of India’s domestic production. Further exploration efforts are underway to augment the gas reserves.

We are valuing Oil to gas business at 4x FY26 EBITDA based on comparable peer multiples and healthy demand outlook which translates to Rs. 97/share.

New Energy – Preparing for greener future

RIL has vision to build one of the world’s leading new energy and new materials business with the aim of bridging the green energy divide in India and globally. As part of this RIL, has made strategic investment of ~Rs. 6,700 Cr till FY23.

The company's strategic vision involves forming partnerships with prominent global technology providers, with the aim of expediting and facilitating the achievement of a minimum of 100 gigawatts (GW) of renewable energy generation by the year 2030. 

We are valuing new energy business at 5x of the P/B which translates to Rs. 49/share.

Consolidated Valuation:

Across the sectors, RIL is well placed to capitalize on growth driven by targeting attractive markets with proven executional capabilities and unparalleled reach across India through physical as well as digital channels.  This growth is coupled with prudent capital allocation – free cash flow from both O2C and Jio platforms is deployed in value-accretive, high margin projects with focus on improving returns. Optionalities arise from plans to build data centers, acquire new retail brands, expand existing brand portfolio globally and scale up media offerings.