Facebook logs into ; strategic benefits aplenty Stock Update Stock

Reliance Industries (RIL) and Facebook Inc (FB) have signed a binding agreement Sector: Oil & Gas for an investment of Rs. 43,754 crore by FB in Ltd for a 10% equity Event Update stake. The deal enterprise value of Rs. 462,000 crore/$66 billion for Jio Platforms (is in-line with company’s estimate of $65-70 billion) implies a one-year forward EV/EBITDA of 14-15x. The cash inflow from the Facebook deal is expected reduce Change RIL’s consolidated net debt (Rs. 153,132 crore as on December 2019) by ~29% and also improve net debt/EBITDA ratio to 1.2x in FY2021E. Moreover, the commercial Reco: Buy  partnership between Jio Platforms, and WhatsApp would accelerate Jio’s new commerce initiative and would be crucial to build a digital ecosystem and CMP: Rs. 1,363 leverage the JioMart platform using WhatsApp. We maintain our Buy rating on RIL with an unchanged price target of Rs. 1,710. Price Target: Rs. 1,710  Facebook to invest Rs. 43,754 crore in Jio Platforms for 10% stake; deal to strengthen á Upgrade  No change â Downgrade technology platform services and accelerate balance sheet de-leveraging: Reliance Industries (RIL) and Facebook Inc. (FB) has signed a binding agreement for an investment by latter of Rs. 43,754 crore in Jio Platforms Ltd (wholly-owned subsidiary Company details of RIL) for an equity stake of 10% in Jio Platforms. The investment by Facebook values Jio Platforms at Rs. 4.62 lakh crore on a pre-money enterprise value basis (or $65.95 Market cap: Rs. 864,268 cr billion, assuming a conversion rate of Rs. 70 to a US Dollar), which is in-line with company’s expectations of $65-70 billion EV for Jio Platforms. We highlight here that the investment values Jio Platforms among the top five listed companies in India 52-week high/low: Rs. 1,618/876 by market capitalisation. Concurrent with the investment, Jio Platforms, Reliance Retail and WhatsApp have also entered into a commercial partnership agreement NSE volume: (No of to accelerate its new commerce business on the JioMart platform. The transaction is, 97.0 lakh shares) however, subject to regulatory and other customary approvals. The deal is positive for RIL as an investment by a global technology giant like Facebook in Jio would further strengthen its technology platform services, drive cross-selling through Reliance BSE code: 500325 Retail and help in deleveraging of its consolidated balance sheet (we expect RIL’s consolidated net debt of Rs. 153,132 crore as of December 2019 to decline by ~29%, NSE code: RELIANCE assuming a cash inflow of Rs. 43,754 crore from the Facebook deal). Deal implies one-year forward EV/EBITDA multiple of 14-15x: As per the deal, Sharekhan code: RELIANCE Facebook will invest Rs. 43,754 crore in Jio Platforms for a 10% stake which implies a post-money equity value of Rs. 435,740 crore ($62 billion assuming Rs/US Dollar rate Free float: (No of of Rs. 70). Jio Platforms has net debt of Rs. 41,000 crore, which translates into an EV 316.8 cr shares) of Rs 462,000 crore for Jio Platforms. Hence, the implied valuation works out at 20.6x its 3QFY20 annualised EBITDA and one year forward EV/EBITDA of 14-15x (FY21E EBITDA of Rs 31,733 crore). Hence, valuation of Jio Platforms by Facebook implies sharp growth of 1.5x in Jio’s EBITDA from annualised Q3FY2020 EBITDA of Rs. 5,601 Shareholding (%) crore. Our Call Promoters 50.0 Valuation – Maintain Buy rating with unchanged PT of Rs. 1,710: RIL’s stock price has recovered sharply from the recent low of Rs. 876 but the valuation of 13.4x FY2022E FII 24.5 EPS and 9.3x FY2022E EV/EBITDA still looks attractive given 1) potential robust growth outlook for the digital services business supported by likely ARPU hike, ramp- DII 13.8 up of recently launched fibre broadband services and rollout of enterprise business and new commerce services and 2) accelerate the balance sheet deleveraging (in line Others 11.7 with target to become a net debt-free company by March 2021) post the Facebook deal and lower capex intensity going forward. Moreover, the company’s aim to increase share of EBITDA from the consumer business to 50% in next couple of years (from 37% in Q3FY2020) would play a crucial role in helping it tide over margin volatility in Price chart the cyclical downstream business. Hence, we maintain our Buy rating on RIL with an unchanged PT of Rs. 1,710 as a higher valuation for digital services business get offset 1800 by lower valuation for refining and petrochemicals businesses (as we assign lower 1600 EV/EBITDA multiple given weakness in GRM and petchem margins). 1400 Key Risks 1200 Lower-than-expected refining and petrochemical margins in case global capacity 1000 additions surpass incremental demand. 800 19 19 20 19 - - - Valuation (Consolidated) Rs cr - Apr Apr Dec Aug Particulars FY2018 FY2019 FY2020E FY2021E FY2022E Revenues 391,677 567,135 538,542 533,035 597,681 Price performance OPM % 16.4 14.8 16.0 17.7 19.2 Adjusted PAT 34,993 39,837 42,322 47,084 60,109 (%) 1m 3m 6m 12m Adjusted EPS (Rs) 59.1 67.3 71.5 79.6 101.6 % y-o-y change 17.3 13.8 6.2 11.3 27.7 Absolute 54 -11 -2 0 PER (x) 23.1 20.3 19.1 17.1 13.4 Relative to EV/EBIDTA (x) 16.6 12.7 12.4 11.3 9.3 33 13 18 19 Sensex RoCE (%) 10.6 9.7 10.0 10.1 11.2 RoNW (%) 11.9 10.3 11.2 11.2 12.5 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

April 22, 2020 2 assuming cash inflow of Rs. 43,754 crore from Facebook deal. deal. Facebook from crore 43,754 Rs. of inflow cash assuming FY2021E in to ~1.2x improve would ratio debt/EBITDA RIL’snet and ~29% by we expect decline debt deal, net RIL-Facebook With 2019. December crore) on as 153,719 of Rs. equivalents cash and cash and crore 306,851 Rs. of debt 2021. RIL’s (gross crore March by 153,132 Rs. company zeroat debt to net become stood target debt net its achieve RIL’s to reduce company the forward help asteep would is level and deal debt RIL-Facebook The process deleveraging sheet balance to fasten deal Facebook strategy. retailing online-offline unique its by supported opportunities cross-selling multiple with initiative of Jio’s commerce new ramp-up and rollout to Moreover, accelerate likely move is base. the customer digital strong Jio’s and WhatsApp using platform JioMart the leverage and ecosystem adigital to build crucial is partnership The WhatsApp. using platform JioMart the on business commerce new its accelerate to further agreement partnership acommercial into entered also have WhatsApp and Retail Reliance Platforms, Jio investment, the with Concurrent platform toleverage JioMart WhatsApp and Retail, Reliance Platforms, Jio between Partnership Jio Platforms. of subsidiary awholly-owned to be continue will subscribers, million to over 388 platform connectivity provides which Ltd, Infocomm Jio Reliance sheet. balance consolidated its deleverage help and Retail Reliance through cross-selling drive services, platform technology its strengthen further would Jio in Facebook like giant technology aglobal by investment an as RIL for positive is deal The approvals. customary other and to regulatory subject however, is, transaction The capitalisation. market by India in companies listed top-five the among Platforms Jio values investment the that here We highlight of RIL. (OCPS) shares preference convertible optionally to redeem used be will crore 28,000 Rs. remaining the and Platforms Jio in retained be would crore 15000 ~Rs. Facebook, by crore 43,754 of Rs. total investment of the crore). Out 31,733 of Rs EBITDA (FY21E of 14-15x EV/EBITDA forward year one and EBITDA annualised Q3FY20 20.6x at out its works valuation implied The basis. diluted afully on Platforms Jio in stake a10% into translate would FB by investment The billion. of $65-70 company’s expectation the with line of Rs70), in rate largely is RS/USD which assuming billion ($66 crore 462,000 of Rs. value enterprise forward one-year implies billion); ($66 crore 14-15x: 462,000 of EV/EBITDA Rs. of EV at Platforms Jio values deal RIL-Facebook April 22, 2020 Source: Company;SharekhanResearch Implied one-yearforwardEV/EBITDA (x) Implied EV/EBITDA multiple(x)onQ3FY20annualised EBITDA Pre-money EnterpriseValue Net debtofJioPlatforms Pre-money equityvaluation Post-money equityvaluation Facebook's stakeinJioPlatforms Facebook's equityinvestmentinJioPlatforms Particulars Exhibit 1:Valuation ofJioPlatformsbyFacebook Source: SharekhanResearch Price target Less: NetDebt Enterprise Value Others Digital Services Retail Upstream Petrochem Refining Particulars Exhibit 2:RILSoTP valuation Facebook’s (FB) investment values Jio Platforms (a wholly-owned subsidiary of RIL) at an an at of RIL) subsidiary (a wholly-owned Platforms Jio values investment (FB) Facebook’s 12x FY22EEV/EBITDA 21x FY22EEV/EBITDA 7x FY22EEV/EBITDA 7x FY22EEV/EBITDA Methodology EV/BOE

Value pershare(Rs/share) 462,000 435,740 421,000 43,574 41,000 2,038 Rs cr 1,710 1,041 20.6 14.6 289 328 10% 277 371 20 40 3

Stock Update Top shareholders 10 personnel Key management Data Additional April 22, 2020 Lower-than-expected refining and petrochemical margins in case global capacity additions surpass surpass additions capacity global case in margins petrochemical incremental demand. and refining Lower-than-expected Key Risks margins. petrochemical and refining in volatility amid RIL for well bodes few years to over 50% next centric consumer of share from EBITDA to target increase company The creation. value long-term for key catalysts be would retail in business growth high sustained and business digital in services of broadband ramp-up and hike ARPU potential with of telecom business prospects growth Improving growth. earnings strong yielding started already have which capacities, of downstream expansion for expenditure capital completed its has RIL theme Investment 24.6% EBITDA. contributed to consolidated services) (retail digital and businesses customer-centric while FY2019, in EBITDA consolidated of ~69% for accounted petrochemicals and refining of Corebusinesses profits. reporting started already has business and this 2016 in JIO, September brand the under telecom services, its launched RIL complex. petrochemical level integrated complexity an and Nelson high with assets refining largest world’s the of one has company The services. digital and retail production, and exploration petrochemicals, refining, oil across interests business with conglomerate diversified a is RIL company About Source: Bloomberg Source: Bloomberg 10 9 8 7 6 5 4 3 2 1 Sr. No. PMS Prasad Alok Agarwal Mukesh D. Ambani Sharekhan Limited,itsanalystordependant(s)ofthemight beholdingorhavingapositioninthecompaniesmentionedarticle. ICICI PrudentialLifeInsuranceCo Dimensional FundAdvisorsLP HDFC AssetManagementCoLtd Republic ofSingapore SBI FundsManagementPvtLtd BlackRock Inc Vanguard GroupInc/The FMR LLC Capital GroupCosInc/The Life InsuranceCorpofIndia Holder Name Executive Director Chief FinancialOfficer Chairman &ManagingDirector Holding (%) 6.2 0.8 0.8 4.2 0.6 1.9 1.2 1.4 1.4 2.1 4

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