30 July 2020 INDIA | OIL & GAS| COVERAGE INITIATION
RELIANCE INDUSTRIES A Giant Digital Leap
ARPU hike inevitable; Jio Digital opportunities - Entering a strong FCF on track to ~50% RMS Jio Mart, OTT apps generation phase; target in wireless & IoT Initiate with BUY 30 July 2020 INDIA | OIL & GAS| COVERAGE INITIATION
TABLE OF CONTENTS
Introduction 3 Key charts 4 Investment thesis 5 ARPU hike inevitable; Jio on track to ~50% RMS target in wireless 10 Potential digital monetisation opportunities 18 Retail - driving omni-channel capabilities across segments 29 Downstream margins outlook subdued; RIL relatively better placed 34 Debt concerns behind us; entering a strong FCF generation phase 44 Key assumptions and estimates 47 Initiate Coverage with a BUY rating & TP of INR 2,500 49 Company Profile & Board of Directors 54 Financial tables 55
Three reasons to read this report: a) Why is Telecom industry revenue set to double in the next 5 years? Refer to our analysis on sustainable APRUs from bottom-up & top-down perspectives b) Framework for analyzing long-term digital opportunities and the scope for monetisation c) Our 3-year SOTP-based valuation suggests a steady returns profile driven by earnings growth potential in the consumer business
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JM Financial Institutional Securities Limited Page 2 30 July 2020 INDIA | OIL & GAS| COVERAGE INITIATION
Reliance Industries A Giant Digital Leap
ARPU hike inevitable; Jio on track to ~50% RMS target: Since industry We initiate coverage on RIL with a BUY rating and TP of INR consolidation is largely over, we expect industry ARPUs to rise on a mix of 2,500/share as we expect RIL to enter a strong FCF generation growth in data usage and tariff hikes. Although there exists limited visibility phase with major capex completed and expectation of strong 17- on TRAI floor tariffs, we believe a tariff hike is inevitable given that the 18% EPS CAGR over the next 3-5 years, led by Digital and Retail industry needs an ARPU of INR 230-250 by FY25E for a pre-tax RoCE of 12- businesses. We expect telecom industry revenue to double by 15% to justify future investments. Further, competitor VIL needs APRUs to FY25E as an ARPU hike looks inevitable given the industry’s future more than double to +INR 270 by FY23 to avoid a duopoly market. Hence, investment needs and to avoid a duopoly market. Hence, we we expect industry revenue to double by FY25E to ~INR 2,600bn. We expect Jio ARPU to post a 10% CAGR over FY20-28 and expect expect Jio ARPU to post a 10% CAGR over FY20-28 and expect its strong its strong subscriber additions to continue; Jio should attain ~50% subscriber additions to continue; we hence expect Jio to attain ~50% RMS RMS target by FY25E (vs. 36% at end-FY20). Jio is also well- target by FY25E (vs. 36% at end-FY20). placed to tap potential digital monetisation opportunities. Further, Potential digital monetisation opportunities: Jio is ideally placed to capture in Retail, it is driving omni-channel capabilities across segments as the growing digital pie given its: a) large +390mn telecom subscriber base, well as extending JioMart to Consumer Electronics and Fashion & b) network effects by participation of marquee partners such as Facebook, Lifestyle; this has potential to become a sizeable value-creation and c) creation of a digital ecosystem, both Jio and third-party apps, opportunity. The downstream margins outlook is subdued but RIL enabling cross-selling of solutions. is better placed than peers to tide the crisis. Retail - driving omni-channel capabilities across segments: RIL expects to Our SoTP-based TP of INR 2,500/share comprises: a) Digital drive omni-channel capabilities across segments as well as extend JioMart segment at an EV of INR 952/share based on INR 780 for the to Consumer Electronics and Fashion & Lifestyle. Given its previous history telecom business, INR 67 for option value of a duopoly market of successful execution, this could as well become a sizeable value-creation and INR 105 for potential digital opportunities; b) Retail opportunity in the future. business at an EV of INR 584/share; we also value Jio Mart at an EV of INR 115; and c) Energy business at an EV of INR Downstream margins outlook subdued; RIL relatively better placed: We 838/share. expect the refining/petchem margin outlook to be subdued in the near term given the large demand contraction. However, RIL is relatively better Given the sharp +100% rally in the share price in the last 4 placed vs. peers due to its integrated and complex facility, and its feedstock months, there could be near-term weakness given that EPS sourcing and product placement strength. growth is likely to be muted in the next 1-2 quarters due to the pandemic. However, we suggest using this opportunity to BUY Entering a strong FCF generation phase: Initiate with BUY: RIL is entering a strong FCF generation phase with major capex completed and expectation as our 3-year TP suggests a potential return CAGR of ~17%. of strong 17-18% EPS CAGR over the next 3-5 years led by Digital and Key risks: a) limited APRU hike and lower-than-expected Retail businesses. Hence, we initiate with a BUY rating and TP of INR 2,500. subscriber additions in the telecom business; b) challenges in Given the sharp +100% rally in the share price in the last 4 months, there monetisation of digital opportunities and new commerce could be near-term weakness given that EPS growth is likely to be muted in business and c) continued weak downstream margins. the next 1-2 quarters. However, we suggest using this opportunity to BUY as our 3-year TP suggests a potential return CAGR of ~17%.
Recommendation and Price Target Financial Summary (INR mn) Current Reco BUY Y/E March FY19A FY20A FY21E FY22E FY23E Current Price Target 2500 Net Sales 56,92,090 59,67,430 51,27,431 66,04,605 74,87,221 Upside/(Downside) 19.2% Sales Growth (%) 45.3 4.8 -14.1 28.8 13.4 EBITDA 8,41,670 8,82,170 8,95,500 12,34,724 15,00,156 EBITDA Margin (%) 14.8 14.8 17.5 18.7 20.0 Key Data – RIL IN Adjusted Net Profit 3,98,370 4,43,240 3,91,765 6,07,810 7,82,632 Current Market Price INR2,097 Diluted EPS (INR) 67.2 69.9 60.8 89.9 115.7 Market cap (bn) INR13800/US$184.5 Diluted EPS Growth (%) 10.4 4.0 -13.1 47.9 28.8 Free Float 39% ROIC (%) 11.2 11.3 10.1 13.8 16.3 Shares in issue (mn) 6,761.6 ROE (%) 11.7 10.5 8.0 10.5 11.8 Diluted share (mn) 6,444.7 P/E (x) 31.2 30.0 34.5 23.3 18.1 3-mon avg daily val (mn) INR40,372/US$539.7 P/B (x) 3.2 2.9 2.6 2.3 2.0 52-week range 2,199/867 EV/EBITDA (x) 19.2 18.3 16.3 11.3 9.0 Sensex/Nifty 38,071/11,203 Dividend Yield (%) 0.3 0.3 0.3 0.4 0.5 I INR/US$ 74.8 Source: Company data, JM Financial. Note: Valuations as of 29/Jul/2020
Price Performance JM Financial Research is also available on: Bloomberg - JMFR
*To the BSE Sensex Dayanand Mittal Vishnu K G Krishan Parwani [email protected] [email protected] [email protected] Tel: (91 96) 19388870 Tel: (91 94) 46896452 Tel: (91 96) 62095500
JM Financial Institutional Securities Limited Page 3 Reliance Industries 30 July 2020 Key charts
Exhibit 1. Jio’s ARPU to be driven by increased data usage and tariff Exhibit 2. Jio RMS to rise to ~50% by FY25E (from 36% at end-FY20) hikes driven by subscriber addition and ARPU increase
Jio Net subscriber adds (mn) Jio ARPU (INR) [RHS] Jio Bharti Airtel VIL Others
150 250 100%
125 225 80%
100 200 ARPU ARPU (INR) 60% 75 175
50 150 40%
25 125
Revenue market share (%) share market Revenue 20% Net subscriber additions (mn)additions Netsubscriber 0 100
0%
FY18 FY19
FY20 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E
FY21E
FY22E
FY23E
FY24E FY25E
Source: Company, JM Financial. Source: Company, JM Financial.
Exhibit 3. Jio’s peak capex cycle is over, long term capex intensity Exhibit 4. INR 172/share equity value for RIL from duopoly optionality seen at 15% of sales and digital applications
Capex (INR bn) Capex / sales (%) [RHS] 200 172 14 240% 180 8 160 83 600 140
120 160% Caepx/ sales (%) 400 100
INR/share 80 67 60 Capex (INR bn) (INR Capex 80% 200 40
20
0 0 0% Optional value - Video OTT Audio OTT Consumer Total FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E Telecom Duopoly IoT/smart devices
Source: Company, JM Financial. Source: JM Financial.
Exhibit 5. Retail business ROIC improved significantly to 27.1% in Exhibit 6. RIL’s FCF and FCF yield to rise sharply FY20 aided by higher OPM and better asset turns 1,650 11% NOPAT margin - % ROIC - % Invested capital turns
30% 8 27.1% 1,100 7% 6.4 6.2 24% 5.9 6 5.0 21.2% 550 3% 18% (%)
4 bnINR 3.2 15.9% 12% 0 -1% 2 6% 8.8% 3% 5% 6.5% 2% 2% 2% -550 -5% 0% 0
FY16 FY17 FY18 FY19 FY20
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
FY21E FY22E FY23E FY24E FY25E FCF (INR bn) FCF yield (%) (RHS)
Source: Company, JM Financial. Source: Company, JM Financial.
JM Financial Institutional Securities Limited Page 4 Reliance Industries 30 July 2020 Investment thesis We initiate coverage on RIL with a BUY rating and TP of INR 2,500 as we expect RIL to enter a strong FCF generation phase with major capex phase a thing of the past and expectation of strong 17-18% EPS CAGR over the next 3-5 years led by Digital and Retail businesses. We expect Telecom industry revenue to double by FY25E as an ARPU hike looks inevitable given the industry’s future investment needs and to avoid a duopoly market. We expect Jio ARPU to grow at 10% CAGR over FY20-28 and expect its strong subscriber additions to continue; Jio should attain the ~50% revenue market share (RMS) target by FY25E (vs. 36% at end- FY20). Jio is also well-placed to tap potential digital monetisation opportunities. Further, in the Retail business, it is driving omni-channel capabilities across segments as well as extending JioMart to Consumer Electronics and Fashion & Lifestyle; this can become a sizeable value-creation opportunity. The downstream margins outlook is subdued, but RIL is relatively better placed than peers to tide the crisis. Given the sharp +100% rally in share price in the last 4 months, there could be near-term weakness given that EPS growth is likely to be muted in the next 1-2 quarters due to the pandemic. However, we suggest using this opportunity to BUY as our 3-year TP suggests a potential return CAGR of ~17%.
ARPU hike inevitable; Jio on track to ~50% RMS target in wireless Given that industry consolidation is largely over, we expect industry ARPUs to rise on a mix of growth in data usage and tariff hikes. We believe there is sufficient headroom for ARPU expansion, given that ARPU to nominal GDP per capita is at historical lows of 0.6% (vs. 1.3%-1.5% levels seen during FY14-16 i.e. before Jio disrupted the market through rock bottom tariffs). Although there exists limited visibility on TRAI floor tariffs, we believe a tariff hike is inevitable given the industry needs an ARPU of INR 230-250 by FY25E for a pre-tax RoCE of 12-15% to justify future investments. Further, Vodafone Idea Limited (VIL) needs APRU to more than double to +INR 270 by FY23 to avoid a duopoly market. Hence, we expect industry revenue to double by FY25E to ~INR 2,600bn. Further, industry capex intensity is likely to moderate, and together with improving EBITDA, would improve ROCE of players in the sector. We have built in Jio’s ARPU CAGR at 10% over FY20-28. We expect Jio to attain ~50% RMS by FY25E from 36% at end-FY20 (Exhibit 1 and 2), led by ARPU increases and strong subscriber acquisition (as Jio’s tariffs continue to be at a 10-20% discount to Bharti and VIL and aided by a strategic partnership with Google to launch low cost smartphones). Jio plans to incrementally focus on ramping up its fibre to the home (FTTH), target of 50mn customers in 3 years, and 5G/ Enterprise business.
Exhibit 7. India’s ARPU to GDP per capita has declined to record low Exhibit 8. Industry revenues to double by FY25E, with Jio attaining of 0.6% in FY19-20 vs. 1.3-1.5% during FY14-16 close to ~50% of revenue market share
Historical ARPU/ GDP per capita for India Industry AGR (INR bn) ARPU (based on AGR,INR) [RHS]
3000 300
2.0% ARPU ( based onAGR,INR)
2500 250
1.5% 2000 200
1500 150 1.0% 1000 100
Industry AGR (INR bn) (INR AGR Industry 500 50 0.5%
ARPU/GDP per capita (%) capita per ARPU/GDP 0 0
FY13 FY14 FY15 FY09 FY10 FY11 FY12 FY16 FY17 FY18 FY19 FY20
0.0% FY08
FY21E FY22E FY23E FY24E FY25E
FY16 FY15 FY17 FY18 FY19 FY20 FY14 Source: TRAI, JM Financial. Source: TRAI, JM Financial. Limited visibility on implementation of Trai’s floor tariff concept; but tariff hike inevitable given the future investment needs We believe that the regulator may not implement floor tariffs in the near term in light of the ongoing pandemic, but it may also not oppose any fresh hikes in tariff, if the telcos choose to do so, especially for higher ARPU broadband customers. Also, in our view, it is likely that the
JM Financial Institutional Securities Limited Page 5 Reliance Industries 30 July 2020 telcos could opt for a hike in tariff, given the impending investments for spectrum and 5G rollout. Our calculation suggests that industry ARPUs might need to reach INR 230-250 levels by FY25E for a reasonable pre-tax RoCE of 12-15% considering the future investment needs (cumulative investment of ~INR 8,000bn till end-FY25e).
Exhibit 9. Estimated ARPU of INR230-250 for a pre-tax RoCE of 12% and 15% based on future investment for private telcos For 12% ROCE For 15% ROCE Comments Required return 12% 15%
Total invested capital (INR bn) 8,012 8,012 Book value of net invested capital at the end of FY20 + estimated capex over FY21-25E Required EBIT (INR bn) 961 1,201
Actual non-statutory opex (INR bn)* 1,338 1,338 4QFY20 annualized opex ex-License Fees and Spectrum Usage Charges [SUC] License Fee + SUC (%) 13% 13% License Fee taken at 8% and SUC at 5% Required revenue (INR bn) 2,642 2,918 Number of subscribers (mn) 962 962
ARPU (INR ) 229 253 Source: Company, JM Financial.* Pre-IND AS numbers used Significant ARPU increase required to avoid a duopoly market VIL requires a significant ARPU increase in order to meet its payment obligations without any further equity injection. Our calculations suggest VIL needs ARPU to rise from current INR 121 to +INR 270 by FY23 to meet its payment obligations in FY23E (Exhibit 32). A significant ARPU increase for VIL would, however signify an ARPU uplift for other players as well. However, if the required tariff hike does not come through, VIL might not be able to meet its payment obligations. We value RIL’s share of the telecom business at an EV of INR 780/ share; additionally we also valued the option value of a duopoly market at INR 67/share for RIL assuming a 50% probability for duopoly market and Jio garnering 40% of VIL’s total subscriber base. Potential digital monetisation opportunities RIL’s foray into Digital services has been accelerated by strategic investments by various marquee tech and PE players in Jio Platform (JPL). Covid-19 has accelerated both data consumption due to virtual working and adoption of Digital apps. Jio is ideally placed to capture a major share of this new and growing Digital pie given: a) the large +390mn subscriber base of Jio; b) network effects provided by participation of marquee partners such as Facebook; and c) creation of a digital ecosystem, consisting of both Jio and third-party apps, enabling cross-selling of solutions. We have looked at the value arising from applications having greater visibility – namely, monetisation of video OTT apps, audio OTT and ramp-up of consumer Internet of Things (IoT) / smart sensors business. Cumulatively, these contribute INR 105/share to our RIL target price (Exhibit 4). Platform business: A case of 1+1>2 We believe the logical conclusion of the ramp-up in digital applications would be the development of a ‘Super App’ kind of structure, enabling consumers to use their smartphones / devices for a variety of purposes – social media, ecommerce, gaming, payment solutions, online learning and telemedicine, all within the Jio ecosystem. Retail — driving omni-channel capabilities across segments RIL’s ambition for organised retail business is even larger now and it expects to drive omni- channel capabilities across segments as well as extend JioMart to Consumer Electronics and Fashion & Lifestyle – JioMart has started off in the grocery space at present to begin with - similar to how Reliance Retail initially began. Given its previous history of successful execution, this could as well become a sizeable value-creation opportunity in the future. For the near term, we expect larger value-creation potential from the Grocery and Consumer Electronics businesses over FY20-23 while Fashion & Lifestyle segment is likely to take relatively more time to recover from the pandemic. We value the Retail business at an EV of INR 584/share (or INR 3,706bn) based on 25x forward EBITDA. Further, we value Jio Mart at an EV of INR 115/share (or INR 732bn), factoring the opportunity of digitisation of Kirana store (Exhibit 63). We expect Jio Mart to get +10% market share in the digitised General Trade market (expecting it to be 50% of the total GT market by FY30) by FY30 and given the profitability potential, we peg the value of this business at INR 1,600bn by Mar’29, which implies INR 732bn in present value terms.
JM Financial Institutional Securities Limited Page 6 Reliance Industries 30 July 2020 Downstream margins outlook subdued; RIL relatively better placed We expect refining and petchem margins outlook to be subdued in the near term given the huge ~8% global oil demand contraction likely in CY20 (Exhibit 65 and 66), ongoing capacity additions and the resultant excess inventory build-up. However, RIL is relatively better placed to mitigate this challenge due to its integrated and complex facility, locational advantage and its strength for feedstock sourcing and product placement. Hence, we expect RIL to continue to operate its plants at optimum utilisation despite near-term demand concerns. We expect RIL’s GRM at USD 7.5/9.0/10.0/bbl in FY21/22/23 (vs. USD 8.9/bbl in FY20) and petchem EBITDA margin at USD 192/221/243/tn in FY21/22/23 (vs. USD 218/tn in FY20). We value Refining and Petchem business at an EV of INR 346/share and INR 424/share, respectively, based on 7.5x EV/EBITDA. Debt concerns behind us; entering a strong FCF generation phase We take comfort from RIL’s deleveraging efforts via stake sale in JPL and rights issue to become zero-net-debt ahead of its Mar’21 target. Although the RIL-Aramco deal for a proposed 20% stake in RIL’s O2C has been delayed, we still see a possibility of this deal going through given its strategic importance for Saudi Arabia to secure its future crude markets. RIL is entering a strong free cash flow (FCF) generation phase with major capex completed and expectation of strong 17-18% EPS CAGR over next 3-5 years led by growth potential in the Digital and Retail business. We expect RIL’s FCF yield to improve from 2% in FY20 to 7% in FY25 as RIL would generate FCF of INR 235bn in FY21 and grow to INR 993bn by FY25 (Exhibit 6).
Exhibit 10. RIL’s net debt flow chart based on recent and proposed stake sale (INR bn) 2,560 436 2,700 337 2,100 950 747 1,500 76 531 1,610 950 900 432 300 -300 -900 -693
-1,500 -1125
Rights issueRights
FY20
deal
RIL-BP fuel RIL-BPfuel JV
deals
investors ininvestors JPL
Stake sale toStake sale other
at FY20 end
Stake sale into JPL sale Stake
Stake sale into JPL sale Stake
deal is executed isdeal
Reporteddebtnet
Other liabilities Other
considereddebtas
Total net debt Totalend debt net at
PotentialSaudiAramco Total net debt Aramcodebt netTotal if
Total net debt Totalabovedebt net after Source: Company, JM Financial
Exhibit 11. RIL’s major capex (INR bn) phase is behind us 1,250 1,200 1,135 1,149 RIL's major capex phase is behind us 1,003 1,000
757 731 750 706
516 493 500 418 429 452 327 269 246 250 101
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
FY22E FY23E FY24E FY25E FY21E Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 7 Reliance Industries 30 July 2020 Initiate coverage with a BUY rating with TP of INR2,500 Our Target Price for RIL of INR 2,500/share (Sep’21 basis) is computed on a sum-of-the-parts (SOTP) valuation method: a) Petchem segment at an EV of INR 424/share based on 7.5x forward EV/EBITDA, in-line with the implied Saudi Aramco deal multiple; b) Refining segment at an EV of INR 346/share based on 7.5x forward EV/EBITDA, in-line with the implied Saudi Aramco deal multiple; c) E&P segment at an EV of INR 68/share based on 9.0x forward EV/EBITDA; higher multiple as we EBITDA is likely to jump 3x due to a rise in gas production from new fields; d) Digital segment (RIL’s 67.05% stake in JPL) at an EV of INR 952/share comprising: i) Telecom business at INR 780/share based on DCF valuation; implied valuation of 14.3x Sept’21 EV/EBITDA; ii) Option value of duopoly market at INR 67/share; and iii) Digital opportunities at INR 105/share based on potential monetisation of Video OTT apps, audio OTT and Consumer IoT business. e) Retail business at an EV of INR 584/share based on 25x forward EBITDA. Further, we value Jio Mart at an EV of INR 115/share, factoring the opportunity of digitisation of Kirana store. RIL is entering a strong FCF generation phase with major capex completed and expectation of strong 17-18% EPS CAGR over the next 3-5 years led by Digital and Retail businesses. Hence, we initiate with a BUY rating and TP of INR 2,500/share (Sep’21 basis). We have also computed a 3-year Target Price (Sept’23 basis), which comes to INR 3,350/share, implying a potential ~17% CAGR return. Given the sharp +100% rally in the share price in the last 4 months, there could be near-term weakness given that EPS growth is likely to be muted in the next 1-2 quarters. However, we suggest using this opportunity to BUY as our 3-year TP implies a potential return CAGR of ~17%. We also take comfort from the company’s effort to address balance sheet concerns by expediting its deleveraging exercise and getting to zero net debt ahead of its end FY21 target. At CMP, stock is trading at FY22E P/E of 23.3x (3 yr avg: 18.6x), FY22E P/B of 2.3x (3 yr avg: 1.7x) and FY22E EV/EBITDA of 11.3x (3 yr avg: 10.8x).
Exhibit 12. RIL Sum-of-the-parts valuation - our Sept’ 2021 Target Price for RIL is INR 2,500/share Valuation EBITDA Valuation Valuation Valuation Valuation Business segment methodology (INR Bn) multiple (INR bn) (USD bn) (INR/share) Comments Energy business 5,322 71 838 Valued at 7.5x EV/EBITDA; in-line with multiple Petchem EV/ EBITDA 359 7.5 2,692 36 424 implied by Saudi Aramco deal Valued at 7.5x EV/EBITDA; in-line with multiple Refining EV/ EBITDA 293 7.5 2,198 30 346 implied by Saudi Aramco deal Valued at 9x EV/EBITDA; higher multiple used as E&P EV/ EBITDA 48 9.0 431 6 68 EBITDA to jump 3x Digital business (for RIL's 67.05% share) 6,044 81 952 Based on DCF valuation; implied valuation of a) Telecom business DCF 4,952 66 780 14.3x Sept'21 EV/EBITDA 50% probability of duopoly market; Jio garnering b) Optional upside in Telecom business 423 6 67 40% of VIL subscriber without any ARPU dilution Based on potential monetization of Video OTT c) Digital opportunities 669 9 105 apps, JioSaavn and Consumer IoT business Retail business EV/ EBITDA 4,437 60 699 Valued at 25x EV/EBITDA, based on peers a) Retail business 3,706 50 584 valuation range Valuing kirana digitisation opportunity assuming Jio Mart gets ~10% market share in General b) JioMart New commerce business 732 10 115 Trade ecommerce market by FY30 Total Enterprise Value 15,803 212 2,489 Factoring: a) Rs1,521bn from 32.95% stake sale in JPL; b) Rs76bn from BP; and c) rights issue Less: Net Debt -70 -1 -11 proceeds of INR531bn Total Equity Value 15,873 213 2,500 CMP 2,097 % upside 19% Source: JM Financial Note: We have used 6,349mn shares for our target price computation (including 423mn Rights shares but excluding 413mn Treasury shares)
JM Financial Institutional Securities Limited Page 8 Reliance Industries 30 July 2020 Exhibit 13. RIL Sum-of-the-parts valuation - our Sept’ 2023 Target Price for RIL is INR 3,350/share Valuation EBITDA Valuation Valuation Valuation Valuation Business segment methodology (INR Bn) multiple (INR bn) (USD bn) (INR/share) Comments Energy business 5,988 80 942 Valued at 7.5x EV/EBITDA; in-line with multiple Petchem EV/ EBITDA 411 7.5 3,081 41 485 implied by Saudi Aramco deal Valued at 7.5x EV/EBITDA; in-line with multiple Refining EV/ EBITDA 326 7.5 2,443 33 385 implied by Saudi Aramco deal E&P EV/ EBITDA 84 5.5 464 6 72 Valued at 5.5x EV/EBITDA Digital business (for RIL's 67.05% share) 7,169 96 1,129 Based on DCF valuation; implied valuation of 12x a) Telecom business DCF 5,835 78 919 Sept'23 EV/EBITDA 50% probability of duopoly market; Jio garnering b) Optional upside in Telecom business 515 7 81 40% of VIL subscriber without any ARPU dilution Based on potential monetization of Video OTT c) Digital opportunities 819 11 129 apps, JioSaavn and Consumer IoT business Retail business EV/ EBITDA 7,191 97 1,133 Valued at 25x EV/EBITDA, based on peers a) Retail business 6,289 84 991 valuation range Valuing kirana digitisation opportunity assuming Jio Mart gets ~10% market share in General b) JioMart New commerce business 901 12 142 Trade ecommerce market by FY30 Total Enterprise Value 20,347 273 3,204 Less: Net Debt -931 -12 -147 Net debt at end end Sept'2023 Total Equity Value 21,278 286 3,350 CMP 2,097 % upside 60% Source: JM Financial Note: We have used 6,349mn shares for our target price computation (including 423mn Rights shares but excluding 413mn Treasury shares)
Risks along with EPS and valuation sensitivity a) Refining margin sensitivity: Every USD 1/bbl increase/decrease in GRM has a positive/negative impact of 2% of our valuation, 5% of our FY22E EPS, and 3% of our FY22E EBITDA. An unexpected decline in refining margin could have a negative impact on RIL’s earnings and valuation. b) Petchem margin sensitivity: Every USD 20/ton increase/decrease in EBITDA margins has a positive/negative impact of 2% of our valuation, 4% of our FY22E EPS, and 2% of our FY22E EBITDA. An unexpected slide in petchem EBITDA margins could hurt RIL’s earnings and valuation. c) Retail margin sensitivity: Every 50bps increase/decrease in retail EBITDA margins has a positive/negative impact of 1% of our valuation, FY22E EPS, and FY22E EBITDA. Any downside to retail profitability could have a negative impact on RIL’s earnings and valuation. d) ARPU and subscriber sensitivity: Every INR 10 increase/decrease in ARPU has a positive/negative impact of 2% of our valuation, 3% our FY22E EPS, and 2% of our FY22E EBITDA. Every 20mn increase/decrease in subscribers has a positive/negative impact of 1% of our valuation, 1% our FY22E EPS, and 1% of our FY22E EBITDA. Lower than expected ARPU and subscriber growth could have a negative impact on RIL’s earnings and valuation.
Exhibit 14. RIL Earnings and valuation sensitivity Change Impact on FY22 EBITDA Impact on FY22 EPS Impact on TP FY22e Base case assumption INR bn % change INR % change INR % change GRM (USD/bbl) 9.0 +/- USD 1/bbl 39 3% 4.2 5% 50 2% Petchem EBITDA margins (USD/ton) 221 +/- USD 20/tn 31 2% 3.3 4% 42 2% Retail EBITDA margins (%) 5.9% +/- 0.5% 11 1% 1.2 1% 21 1% Jio w ireless ARPU 171 +/- INR 10 26 2% 2.9 3% 39 2% Jio w ireless subscriber (mn) 457 +/-20mn 10 1% 1.1 1% 28 1% Base case 1,235 90 2,500 Source: JM Financial
JM Financial Institutional Securities Limited Page 9 Reliance Industries 30 July 2020 ARPU hike inevitable; Jio on track to ~50% RMS target in wireless Just over three years since its launch, Jio has become the undisputed leader both in terms of revenues and subscriber market share. Given that industry consolidation is largely over, we expect industry ARPUs to rise going forward, driven by a mix of increase in data usage and tariff hikes. Although there exists limited visibility on TRAI’s floor tariff, we believe a tariff hike is inevitable given the industry needs an ARPU of INR230-250 by FY25E for a pre-tax RoCE of 12-15% to justify future investment requirements. Further, VIL needs APRU to more than double to +INR 270 by FY23 to avoid a duopoly market. Hence we expect industry revenue to likely double by FY25E to ~INR 2,600bn. We expect Jio ARPU to post a 10% CAGR during FY20-28 and expect its strong subscriber acquisition pace to continue. Hence, we expect Jio to attain ~ 50% RMS by FY25E (from ~36% at end FY20). We value RIL’s share of the telecom business at an EV of INR 780/ share; additionally also valued the option value of a duopoly market at INR 67/share for RIL. Jio on track to achieve ~50% RMS target in wireless business Jio’s continued robust subscriber additions over the past 3 years means it is now the undisputed leader both in terms of subscriber market share and revenue market share. Jio witnessed a net subscriber addition of 81mn in FY20, taking the total number of subscribers to 388mn at the end of FY20 and enabling it to reach 36% in terms of both subscriber and revenue market shares. We expect Jio’s ARPUs to sequentially increase in the coming quarters driven by: a) recent tariff hikes and b) plan upgrades due to higher data demand. However, despite the recent tariff hikes, Jio’s tariffs continue to be at a 10-20% discount to Bharti and VIL in key price points. Hence, we expect net subscriber additions to continue to be healthy for Jio and expect it to increase its subscriber market share to ~45% by FY25E (from ~36% at end-FY20) and revenue market share (RMS) to increase to ~50% by FY25E (from ~36% at end-FY20) – (Exhibits 24 and 28). Jio’s market share gains could be higher in the scenario of further consolidation of the market to a duopoly market – this is not part of our base case scenario.
Exhibit 15. Jio’s subscriber addition remained robust; ARPU yet to reflect tariff hike Net Subscriber adds (mn) ARPU ( INR )
50 160
40 145 ARPU ARPU (INR)
30 130
20 115 Net subscriber additions (mn) additions subscriber Net
10 100
2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20
Source: Company, JM Financial. Consolidation to drive doubling of industry revenue over next 5 years
Jio’s aggressive tariff pricing over the past few years has resulted in a sharp decline in industry Jio’s aggressive tariff has resulted in AGR revenue to ~INR 1,300bn in FY19-20 from ~INR 1,800bn in FY17 (Exhibit 21); this has decline in industry AGR revenue to driven major consolidation in the industry and had reduced it to 4 players now, including the ~INR 1,300bn in FY19-20 from ~INR public sector BSNL/MTNL (from a peak of 15 players in 2012). Jio was able to reach a 1,800bn in FY17 subscriber market share of ~36% at end-FY20 and become the market leader in less than 4 years of its launch; with all players (except Bharti) seeing major subscriber market share loss.
JM Financial Institutional Securities Limited Page 10 Reliance Industries 30 July 2020
Exhibit 16. AGR RMS for the telecom industry for FY12 ExhibitExhibit 17. 17. AGR RMS for the telecom industry for 9MFY20
Bharti Airtel Vodafone Idea BSNL RCOM Others Source: Company, JMJio Financial.Bharti Airtel VIL BSNL/MTNL and Others
15% 9%
31% 33% 9% 27% 12%
13% 21% 31%
Source: Company, JM Financial. *Others include Aircel, TTSL, Telenor, MTS and MTNL. Source: TRAI, JM Financial.* Others include RCOM. TRAI is yet to publish AGR data for 4QFY20.
India’s ARPU to GDP per capita was at respectable 1.3-1.5% during FY14 to FY16, i.e. before Jio disrupted the market through rock bottom tariffs. However, ARPU started declining ARPU to nominal GDP per capita is sharply since FY17 due to rising competition after the entry of Jio. The consistent decline in at historical lows of 0.6% vs 1.3%- ARPU from FY17 has resulted in a record low ARPU-to-GDP per capita ratio of ~0.6% in FY19 1.5% levels seen during FY14-16 and FY20. This is also evident from FY20 ARPU of ~INR 103 vs. inflation adjusted ARPU of INR 175-200 during FY11-16 (and even higher during the earlier period) giving sufficient headroom for a tariff hike. Globally also, ARPU for India is one of the lowest at sub USD 2/month.
Exhibit 18. India has one of the lowest ARPUs globally ARPU (USD/month) 48
40
32
24
16 ARPU (USD/month) ARPU
8
0
US
UK
India
Brazil
China
South
Korea
Nigeria
Srilanka
Malaysia
Indonesia Singapore
Bangladesh Source: Company, JM Financial.
JM Financial Institutional Securities Limited Page 11 Reliance Industries 30 July 2020 Exhibit 19. India’s ARPU to GDP per capita has declined to record low Exhibit 20. Inflation adjusted ARPUs are at historical lows of 0.6% in FY19-20 vs 1.3-1.5% during FY14-16 ARPU (INR) Inflation adjusted ARPU (INR) Historical ARPU/ GDP per capita for India 600 2.0% 500
400 1.5% 300
1.0% 200
100
0.5% bn) (INR AGR on based ARPU
0
ARPU/GDP per capita (%) capita per ARPU/GDP
FY10 FY15 FY09 FY11 FY12 FY13 FY14 FY16 FY17 FY18 FY19 FY20
0.0% FY08
FY14
FY15
FY16
FY17
FY18 FY19 FY20 Source: TRAI, JM Financial. Source: TRAI, JM Financial. ARPUs need to rise to INR 230-260 (from INR 103 in FY20) for the ARPU-to-GDP per capita Consolidation to drive industry ratios to go back to 1.3%-1.5% levels seen earlier. After nearly three years of very low tariffs, revenue to double at ~INR 2,600bn tariff was hiked by 30-40% across players in Nov-Dec’19, signalling a price revival. Going by FY25e; significant headroom for forward, we expect increase in tariffs due to industry consolidation, which coupled with ARPU expansion higher usage is expected to drive industry revenue to nearly double at ~INR 2,600bn by FY25e vs. ~INR 1,300bn in FY19 and FY20. Further, industry capex intensity is likely to moderate going forward, and together with improving EBITDA across the industry, would improve the ROCEs of players in the sector.
Exhibit 21. Consolidation to drive doubling of industry revenues over Exhibit 22. ….and capex intensity to soften improving the ROCE the next 5 years… profile Industry AGR (INR bn) ARPU (based on AGR,INR) [RHS] Total Industry Capex (INR bn) Capex / sales (%) [RHS]
3000 300 2000 100% ARPU ARPU ( based onAGR,INR) 1750 88% 2500 250 1500 75% Capex / sales (%) 2000 200 1250 63% 1500 150 1000 50% 750 38% 1000 100 500 25%
Industry AGR (INR bn) (INR AGR Industry 500 50 250 13%
0 0 bn) (INR capex Industry Total 0 0%
FY11 FY08 FY09 FY10 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY23E FY21E FY22E FY24E FY25E
FY21E
FY22E
FY23E
FY24E FY25E
Source: Company, JM Financial. Source: Company, JM Financial. Jio’s subscriber market share to rise to ~45% and RMS to ~50% by FY25e Despite the recent tariff hikes, Jio’ tariffs continue to be at a 10-20% discount to Bharti and Jio’s subscriber addition likely to VIL in key price points. continue as its tariff is still at a 10- 20% discount to Bharti/VIL Exhibit 23. Despite recent tariff increases, Jio’s tariffs continue to be at a discount Jio Bharti VIL
28 day 1 GB/Day * 174 219 219 28 day 1.5 GB/Day 199 219 219 28 day 2 GB/Day 249 298 299 28 day 3 GB/Day 349 398 399 84 day 1.5 GB/Day 555 598 599 84 day 2 GB/Day 599 698 649 365 day 24 GB 1299 1498 1499 365 day 1.5 GB/Day 2020 2398 2399 Source: Company, JM Financial. * Jio’s 1GB/day plan is only for 24 days, effective tariff for 28 days calculated at INR 174.
JM Financial Institutional Securities Limited Page 12 Reliance Industries 30 July 2020 VIL has lost c.130mn customers in the first 18 months of the merger. These have been driven by difficulties in integrating networks across circles, leading to network disruptions, and a Development of low cost relatively lower ARPU customer base, which has shifted to Jio due to lower price points. A smartphone with Google could part of the customer loss could also be attributed to the minimum recharge plans introduced sustain Jio’s growth in subscriber in November 2018. Recently, VIL rejigged its organisational structure and adopted a cluster- and revenues in the medium to long wise approach, wherein the entire business has been reorganised into 10 clusters rather than term the circle-wise approach adopted earlier. We believe this signals intent to focus only on strong circles and could lead to more customer churns. Accordingly, we believe the subscriber market share for VIL would decrease from the current 27% to 21% by the end of FY25E. However, we believe that the subscriber losses for Bharti Airtel have largely played out, as evidenced by the stable overall subscriber number, and healthy addition of 4G customers in 4QFY20. Despite the premium pricing to Jio, Airtel’s benefits program (Airtel Thanks) has been a major differentiator, ensuring stickiness of high ARPU customers and upgrade of the existing customer base. We have built in gradual subscriber additions for Bharti Airtel, taking the subscriber market share from the current 26% to 29% by the end of FY25E. RIL, in its FY20 AGM, had announced that Google would buy a 7.73% stake in Jio Platforms Limited (JPL), the intermediate holding company for the Telecom business. The company also highlighted that this was a strategic partnership, wherein Google and Jio would work together to develop low cost 4G/5G Android-based smartphones, targeting existing 350mn 2G users and accelerating their upgrade to mobile broadband. While Jio already has a 4G- enabled feature phone (Jiophone), it has limited apps that can be installed in its OS Jio’s subscriber market share to rise (Operating System). We expect the new device, based on Android, would be much more to ~45% by FY25E (from ~36% at attractive for the consumers, given the huge app ecosystem in Android OS. Moreover, the end-FY20) and RMS to increase to development of a low cost 5G smartphone (the current prices range from USD 750 – 1000 in ~50% by FY25E (from ~36% at India), would enable Jio to accelerate 5G subscriber additions relative to its competition, and end-FY20) sustain growth in both the user base and revenues in the medium to long term.
Exhibit 24. Jio subscriber market share to rise to ~45% by FY25E (~36% at end-FY20)
Jio Bharti Airtel VIL Others
100%
80%
60%
40%
20% Subscriber market share (%) share market Subscriber
0% FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E
Source: Company, JM Financial.
JM Financial Institutional Securities Limited Page 13 Reliance Industries 30 July 2020 ARPU to see a gradual rise; increased data consumption post Covid-19 a boost Bharti’s higher ARPUs are driven by the high-quality MBB (Mobile Broadband) subscriber base. This could be attributed to the higher usage and stickiness driven by programmes such as Airtel Thanks benefits. However, for VIL, usage and stickiness seems to be low, as shown by the lower ARPU for MBB subscribers. The tariff hikes in Dec’19 are yet to reflect for Jio customers and the higher tariffs are expected to flow through in FY21.
Exhibit 25. Subscriber, ARPU and revenue break-up Avg. subs (mn) % of subs Revenue (INR bn) % of revenue ARPU (INR) Jio Post-paid 4 1% 2 2% 199 Smartphones 285 75% 123 83% 144 Jiophone 90 24% 23 15% 84 Total users 379 100% 148 100% 131 Bharti Post-paid 15 5% 18 14% 399 MBB/ Smartphones 145 51% 96 74% 221 2G 123 43% 16 13% 44 Total users 283 100% 130 100% 154 VIL Post-paid 23 8% 30 26% 399 MBB/ Smartphones 118 40% 64 55% 167 2G 156 53% 23 19% 45 Total users 298 100% 118 100% 121 Industry (ex- BSNL/MTNL) Post-paid 42 4% 51 13% 383 MBB/ Smartphones 548 57% 284 72% 170 2G (including Jiophone) 369 38% 62 16% 54 Total users 960 100% 395 100% 134 Source: Company, JM Financial.
Jio’s FY20 revenues at INR 543bn, grew 34% YoY, with EBITDA at INR 216bn, growing 43% Industry data consumption to see YoY. Exit ARPU at INR 131, however was only up 1.7% QoQ. The muted growth could have sustained rise post Covid-19; Jio been driven by: a) aggressive pushing of long-term plans just before the implementation of ARPU growth to be driven by the tariff hike; b) promotional offers for Jiophone in 3QFY20, increasing the number of low increased data usage and tariff hike ARPU customers in the subscriber base and c) extension of recharge benefits due to the lockdown. However, we expect ARPUs to sequentially increase in the coming quarters driven by: a) recent tariff hikes; b) plan upgrades by users due to higher data demand. Hence, we have built in an ARPU growth of c.15% for FY21 and long-term (FY20-28) ARPU CAGR of 10%. Jio is poised to benefit from virtual working initiatives due to its extensive coverage (99%), in our view.
Exhibit 26. Industry data usage per subscriber to increase Exhibit 27. Jio ARPU growth to be driven by increased data usage and
Average Monthly Data Usage (GB/month) tariff hike Jio Net subscriber adds (mn) Jio ARPU (INR) [RHS] 14
12 150 250 125 225 10
100 200 ARPU ARPU (INR) 8 75 175
6 50 150
4 25 125 Net subscriber additions (mn)additions Netsubscriber 0 100
2
Data usage per data subscriber (GB/month) subscriber data per usage Data
FY20 FY18 FY19
FY24E FY22E FY23E FY25E 0 FY21E FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25
Source: TRAI, company, JM Financial. Source: Company, JM Financial.
JM Financial Institutional Securities Limited Page 14 Reliance Industries 30 July 2020 Exhibit 28. Jio RMS to rise to ~50% by FY25E (from ~36% at end-FY20) driven by strong subscriber additions and ARPU increase
Jio Bharti Airtel VIL Others
100%
80%
60%
40%
Revenue market share (%) share market Revenue 20%
0% FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E
Source: Company, JM Financial. Limited visibility on implementation of TRAI’s floor tariff concept; but tariff hike inevitable given the future investment needs
On 17Dec’19, the regulator TRAI floated a consultation paper (click here) to discuss on While floor tariff implementation whether it should fix a floor tariff given the dire state of the industry due to intense has been deferred, TRAI might not competition, huge AGR liability and capex requirement in future owing to impending oppose a fresh hike in tariff by investments for spectrum and 5G rollout. In response, Bharti (click here) and VIL (click here) telcos, especially for broadband have batted for floor tariffs citing insufficient returns while Jio (click here) has backed the customers demand for floor tariffs citing future investments needed in the sector However, as per news reports, the enactment of the floor tariffs has been deferred in light of the ongoing pandemic. While we believe that the regulator may not implement any floor tariffs in near term, it may not oppose any fresh tariff hikes, if the telcos choose to do so, especially for higher ARPU broadband customers. Also, in our view, it is likely that the telcos could go in for a hike in tariff, given the impending investments for spectrum and 5G rollout. Our calculation suggests (Exhibit 29) that the industry needs to reach an ARPU of around INR 200 for covering the cost of capital (12%) and an ARPU of INR 215 for a healthy pre-tax RoCE (of 15%) based on actual investment until FY20 (~INR 5,495bn). However, if we also consider the future investment requirements (taking total investments to ~ INR 8,000bn cumulative till end FY25e), medium term ARPUs might need to reach INR 230-250 levels by FY25E for a reasonable pre-tax RoCE of 12-15% (Exhibit 30). Players such as Bharti have guided for a near-term ARPU target of INR 200 to earn its cost of capital and a medium-term ARPU target of INR 300 for a reasonable pre-tax RoCE of 15%, keeping in mind the future investments needs.
Exhibit 29. Estimated ARPU of INR 200-215 for a pre-tax RoCE of 12% and 15% based on actual investment for private telcos For 12% ROCE For 15% ROCE Comments Required return 12% 15%
Total invested capital (INR bn) 5,495 5,495 Book value of net invested capital at the end of FY20 Required EBIT (INR bn) 659 824
Actual non-statutory opex (INR bn)* 1,338 1,338 4QFY20 annualised opex ex-License Fees and Spectrum Usage Charges [SUC] License Fee + SUC (%) 13% 13% License Fee taken at 8% and SUC at 5% Required revenue (INR bn) 2,295 2,485 Number of subscribers (mn) 962 962
ARPU (INR ) 199 215 Source: Company, JM Financial.* Pre-IND AS numbers used
JM Financial Institutional Securities Limited Page 15 Reliance Industries 30 July 2020 Exhibit 30. Estimated ARPU of INR230-250 for a pre-tax RoCE of 12% and 15% based on future investment for private telcos For 12% ROCE For 15% ROCE Comments Required return 12% 15%
Total invested capital (INR bn) 8,012 8,012 Book value of net invested capital at the end of FY20 + estimated capex over FY21-25E Required EBIT (INR bn) 961 1,201
Actual non-statutory opex (INR bn)* 1,338 1,338 4QFY20 annualised opex ex-License Fees and Spectrum Usage Charges [SUC] License Fee + SUC (%) 13% 13% License Fee taken at 8% and SUC at 5% Required revenue (INR bn) 2,642 2,918 Number of subscribers (mn) 962 962
ARPU (INR ) 229 253 Source: Company, JM Financial.* Pre-IND AS numbers used
Jio, Bharti and VIL want the floor tariff for data to be set at INR 20/GB, INR 30/GB and INR Industry ARPUs need to rise to INR 35/GB respectively (from current INR 9-12/GB). Also, Bharti and VIL have recommended a 230-250 levels by FY25E for a minimum subscription charge (MSC) to compensate for the maintenance of network even reasonable pre-tax RoCE of 12-15% when there is no usage of voice/data. Bharti has recommended a flat MSC of INR 75; VIL on considering the future investment the other hand has recommended a MSC of INR 40 for voice-only subscribers, INR 50 for requirements data-only subscribers and INR 75 for bundled pack users. Bharti and VIL wants to price voice at INR 60 for unlimited packs (average MOU of 1000 per month). For metered voice, while Bharti would like to keep both onnet and offnet calls under forbearance, VIL wants to keep offnet calls at INR 0.06/min and reiterated that onnet calls are under forbearance. Jio reiterated that it would prefer that voice services be kept under forbearance, while acknowledging that it was charging for off-net calls due to continuation of IUC. Further, Jio wants any floor on voice calls, if implemented, to be technology-neutral.
While we do not expect a blanket acceptance of these recommendations by TRAI, given that Industry ARPU might rise to INR it could hit bottom of the pyramid customers. Based on the above recommendations by 167-230 levels in case of Jio/Bharti/VIL we assume that only offnet calls could be priced at 6 paisa/minute with an MSC implementation of a floor tariff of INR 75/28days for MBB subscribers; accordingly we have considered 3 probable scenarios which suggest potential floor tariff could be around: a) INR 167 as per Jio’s suggestions (Scenario 1); b) INR 211 as per Bharti’s suggestions (Scenario 2) and c) INR 231 as per VIL‘s suggestions (Scenario 3). We observe that data tariffs would have the largest effect on overall ARPU. It is highly likely that the telecom operators would choose to implement these tariff hikes over a period of time, rather than a one-time increase, to reduce the burden on consumers and ensure that usage metrics do not drop drastically.
Exhibit 31. Industry ARPU might rise to INR 167-230 levels in case of implementation of a floor tariff Scenario 1 Scenario 2 Scenario 3 Comments Average FY20 subscribers (mn) 943 943 943 of which broadband subscribers (mn) 590 590 590 Jiophone subscribers (mn) 100 100 100 Subscribers for whom MSC is applicable (mn) [A] 490 490 490 We have assumed TRAI would allow charging of MSC on higher ARPU broadband users only FY20 Data usage (bn GB) [B] 63 63 63 Actual data usage for the telcos for FY20 Drop in data usage due to floor tariff (%) [C] 5% 10% 13% Assumed drop in data usage due to increase in prices Floor tariff for data (INR/GB) [D] 20 30 35 As suggested by companies FY20 Voice usage (bn minutes) 7,188 7,188 7,188 Actual voice usage for the telcos for FY20 Offnet calls (bn minutes) [E] 3,594 3,594 3,594 Assumed that voice tariff is applicable only for offnet minutes Drop in voice usage due to floor tariff (%) [F] 5% 5% 5% Assumed drop in voice usage due to removal of unlimited voice Floor tariff for voice (paisa/minute) [G] 6 6 6 Floor tariff for voice taken at same level as IUC charges MSC (INR) [H] 75 75 75 As suggested by companies Data Revenues (INR bn) { [I]=[B]*(1-[C])*[D] } 1,200 1,706 1,935 Voice Revenues (INR bn) { [J]= [E]*(1-[F])*[G] } 205 205 205 MSC Revenues (INR bn) { [K] =[A]*[H] *12} 479 479 479 MSC revenues are calculated on a 28-day cycle for 365 days Total Revenue {[I]+[J]+[K]} 1,884 2,389 2,618 ARPU (INR/month) 167 211 231 Source: Company, JM Financial.
JM Financial Institutional Securities Limited Page 16 Reliance Industries 30 July 2020 Significant ARPU increase required to avoid a duopoly market VIL requires a significant ARPU increase in order to meet its payment obligations and survive without any further equity injection. Below, we have calculated the ARPU required for VIL to meet its payment obligations in FY23E, in the absence of any additional equity injection. VIL needs APRU to rise from the current INR 121 to INR +270 by FY23.
Exhibit 32. Required ARPU of INR +270 by FY23 for VIL to survive in the absence of any additional equity injection Cash outflow obligations FY23E Comments Non-spectrum interest cost (INR bn) 17 Average gross debt of c.INR180bn at 9.5% interest rate; principal to be refinanced Spectrum EMI (including interest) (INR bn) 158 Higher spectrum repayment (vs. INR 120bn currently) after moratorium AGR EMI (INR bn) 66 Assumed net liability of INR 504bn, 15 years repayment period at 10% p.a. interest Capex (INR bn) 82 Assumed capex in FY23E Required Cash inflow (EBITDA) 323 EBITDA margin %(pre-IND AS) 40% We expect VIL to aggressively reduce costs, improving margins to 40% Required revenues (INR bn) 817 Average subscriber base (mn) 245 Assumed average subscriber base in FY23E Required ARPU (INR) 278 Source: Company, JM Financial. A significant ARPU increase for VIL would, however signify ARPU uplift for other players also. Jio would be the biggest beneficiary given its large subscriber base. However, if the required VIL require ARPU to rise from the tariff hike doesn’t come through then VIL might not be able to meet its payment obligations. current INR 121 to +INR 270 by We have calculated the incremental value for Jio in a scenario of duopoly market to be INR FY23 to survive in the absence of 67/share. Key assumptions are: any additional equity injection a) Additional 114mn subscribers for Jio assuming 60% of VIL’s broadband subscribers would shift to Jio and only 25% of VIL’s 2G subscribers would shift to Jio (as they would have to invest in a Jiophone). Although increased subsidisation of Jiophone would enable Jio to gain further market share, it would be ARPU dilutive; b) Incremental capex of INR c.180bn. Although our interactions with management indicate that incremental capex to support incoming VIL subscribers could be marginal, we have conservatively taken incremental capex to the tune of 8% of revenues every year and taken its present value; and c) An EV/EBITDA multiple of c.10x, lower than that for Jio, given the uncertainty in churn for these new customers Our base case continues to be a 4 player market (3 private players + BSNL/MTNL), despite the adverse AGR verdict as the payments could be spread over 15-20 years. In the latest hearing held on 20Jul’ 20 Supreme Court has reserved verdict on the payment timeline, while making it clear that there would not be any reductions in the payments due. While Bharti and VIL have asked for a 15 year payment period, Tata Teleservices has asked for 7-10 years, Optional value for RIL of possibly since it does not have any future capex requirements since they have ceased their INR67/share in case of duopoly wireless operations. Any shorter than expected timeline for repayment of AGR dues would market put VIL’s survivability under question, given that apart from AGR instalments, VIL would also require to undertake periodic network capex in the future to maintain market share. The verdict would be announced on 10Aug’20.
Exhibit 33. Optional value for RIL of INR67/share in case of duopoly market Additional subscribers for Jio (mn) 114 FY22E Subscriber ARPU (INR)** 171 Incremental revenue (INR bn) 234 Incremental EBITDA margin 60% Incremental EBITDA (INR bn) 140 EV / EBITDA (x) 10 Incremental EV (INR bn) 1,447 Incremental capex (INR bn) 181 Incremental Equity value (INR bn) 1,267 Probability of duopoly market 50% Optional equity value for RIL (INR/share)* 67 Source: Company, JM Financial.*after accounting for 32.95% minority interest in JPL. ** We assume Jio would maintain ARPUs from incoming VIL users and would not resort to ARPU dilutions for aggressive market share gains.
JM Financial Institutional Securities Limited Page 17 Reliance Industries 30 July 2020 Potential digital monetisation opportunities Having comprehensively won the Telecom war, we expect Jio to train its eyes on the vast untapped Digital opportunities. This foray into Digital services has been accelerated by strategic investments by various marquee tech and private equity players in JPL. Covid-19 has accelerated both data consumption due to virtual working and adoption of Digital apps. Jio is ideally placed to capture a major share of this new and growing Digital pie given: a) the large +390mn telecom subscriber base of Jio; b) network effects provided by participation of marquee partners such as Facebook; and c) creation of a digital ecosystem, consisting of both Jio and third-party apps, enabling cross-selling of solutions. We have looked at the value arising from applications having greater visibility – namely, monetisation of video OTT apps, audio OTT and ramp up of consumer IoT/smart sensors business. Cumulatively, these contribute INR 105/share to our RIL target price. Jio has evolved from a pure-play telecom provider to a tech enabler, after the reorganisation of business into Jio Platform. RIL had undertaken the reorganisation of its telecom business, Jio apps and acquired tech businesses into a wholly-owned platform (Jio Platform Limited, JPL) in Oct’19. Currently, JPL (standalone entity) houses the enterprise and consumer suite of apps as well as the infrastructure business of Jio’s payment app (design, development and operation of the app). Further, some tech and app investments made by RIL earlier have been transferred to JPL as subsidiaries. Apart from direct subsidiaries, JPL has a few of RIL’s tech investments by way of preference shares. Jio Infocomm Limited, the licensed company for telecom business (wireless, FTTH and enterprise) is a wholly-owned subsidiary of JPL. In line with expectations, the above re-organisation has enabled faster monetisation of the digital business of RIL. JPL has already seen investments from Facebook and Google and a multitude of private equity players. Given Jio’s large subscriber base, we believe the participation of tech companies in the platform would create further network effects, enabling a rapid scale-up of the digital business.
Exhibit 34. Jio Platform structure
Source: Company, JM Financial. Note: The cable operators Hathway and DEN are not part of the JPL platform. However, we expect the acquisition to be fully leveraged for rolling out of FTTH. Similarly KaiOS is not part of the platform, but its OS is used in JioPhones
JM Financial Institutional Securities Limited Page 18 Reliance Industries 30 July 2020 Exhibit 35. JPL key tech investments over the past few years App/ tech Investments Description Invested amount /Committed capital (INR mn) Invested on Haptik Artificial Intelligence based conversational platform 7,500* Apr-2019 Radysis India Private Limited Open telecom solutions to service providers 1,144 Dec-2018 Embibe Artificial Intelligence powered learning platform 13,500* Jun-2018 Tesseract AR/VR startup 284 May-2019 Reverie Technologies Regional language capabilities for devices 2,670* Mar-2019 Netradyne Fleet management software 2,764 Sep-2018 NEWJ Curation and production of video content 30 Nov-2018 Sankhya Sutra Labs Software Simulation Services 2,160* Mar-2019 KareXpert Digital Health Service Provided 250 May-2018 Asteria Aerospace Drone based solutions 1,481* Dec-2019 EasyGov G2C Platform 680* Feb-2019 Jio Estonia OU Software development and consultancy 740 Nov-2018 Jio Saavn Music App 68,260 Mar-2018 Total 101,463
Source: Company, JM Financial. * Includes committed capital. Committed capital calculated using 1 USD = INR 75.
Exhibit 36. Key entities in JPL and outside JPL Key Entities in JPL Key Entities outside JPL Apps Tech Connectivity business Investments Apps / others My Jio Haptik Wireless JioTV Radisys Enterprise KaiOS JioMart Jio Cinema Embibe FTTH Hathway, Den Jio Money Jio Saavn Tesseract Grab a grub Jio POS Lite Jio News Reverie Technologies C-Square Jio Payments Bank Jio Cloud Netradyne Fynd Jio Health Hub NEWJ Skytran JioTV+ Sankhya Sutra Labs VAKT Holdings Jio Call KareXpert All media investments Jio Chat Asteria Aerospace InvITs Jio Security EasyGov Jio Switch Jio Estonia OU Jio Browser Payment platform infrastructure Jio Games Source: Company, JM Financial.
Exhibit 37. Minority investments in JPL to-date Investor Amount (INR bn) Stake (%) Pre-money EV (INR tn) Facebook 436 9.99% 4.62 Google 337 7.73% 4.62 Vista Equity Partners 114 2.32% 5.16 Saudi PIF 114 2.32% 5.16 KKR 114 2.32% 5.16 Silver Lake 102 2.08% 5.16 Mubadala Investment Company 91 1.85% 5.16 General Atlantic 66 1.34% 5.16 Abu Dhabi Investment Authority 57 1.16% 5.16 TPG 45 0.93% 5.16 L Catterton 19 0.39% 5.16 Intel Capital 19 0.39% 5.16 Qualcomm Ventures 7 0.15% 5.16 Total 1,521 32.95% Source: Company, JM Financial.
JM Financial Institutional Securities Limited Page 19 Reliance Industries 30 July 2020 Exhibit 38. JPL capabilities to cater to solutions across industries
Source: Company. Total digital market opportunity India is still at a nascent stage of the digital ecosystem’s development. Apart from e- commerce, OTT platforms, digital lending solutions and consumer IoT, to name a few, are expected to grow exponentially. As per a MeiTY study, by FY24-25E, nominal value of India’s digital economy would grow 4-5x to USD795-1,015bn by FY25 (vs. USD200bn in FY18). The As per MeiTY study, by FY24-25E, current digital economy of USD200bn is largely made up of e-commerce, digital payments, India’s digital economy would grow digital communication services and IT-BPM services. While the government expects these to 4-5x to USD795-1,015bn by FY25 grow to USD 500-650bn by FY25E, with tailwinds from digital media and entertainment (vs. USD200bn in FY18) services and a robust electronics manufacturing ecosystem, it envisions new and emerging digital use cases to contribute USD 385-505bn to the digital economy by FY25E.
Exhibit 39. India’s digital economy likely to grow 4-5x to USD 795-1,015bn by FY25 (USD bn)
Source: MeiTY.
JM Financial Institutional Securities Limited Page 20 Reliance Industries 30 July 2020 The new and emerging digital opportunities would be driven by tech-enabled healthcare (USD 4-5bn), digitally enabled energy distribution (USD 10-15bn), government e- marketplaces (USD 10-25bn), digital education platforms (USD 20-50bn), digital farmer financing and agricultural market places (USD 50-65bn), online skill development (USD 65- 70bn), new digital financial services like flow based lending for enterprises (USD 90-120bn) and digital supply chains including IoT (USD 135-155bn). With over a billion mobile subscriptions (and growing), India is one of the largest markets in the world. Smartphone penetration has also been on the rise, led by the availability of affordable phones with best-in-class features. The current smartphone base, as per company estimates, stands at 450mn. The total number of internet users has also been on the rise, and as per TRAI’s latest report, stands at 719mn. The large base of smartphone and internet users provides a platform for rapid growth in digital services and we expect RIL to capture a significant portion of the market share. a) Prepaid Payment Instruments (PPIs) has been growing in India at a rapid base due to the digitisation of subscribers and regulatory thrust on digital spending. Using Big Data & Analytics, ultimately these instruments could be utilised to lend digitally to the consumers, based on their spending patterns and the requirements. According to a BCG report, the total value of retail lending, for which consumers applied through online medium ,was USD 75bn in FY18 and is expected to reach USD 350bn by FY23. This could grow further, given the rapid advances in Big Data & Analytics. b) Low cost of data, decreasing cost of sensors and consumer electronics and increasing speed of computing have been catalysing the adoption of IoT, particularly among industries. In the consumer segment, although a range of connected and smart devices are available in India; the penetration is still at a nascent stage among consumers. We expect greater adoption as cost of devices and sensors decrease further. Introduction of 5G, with its speed and very low latency, is expected to provide another big boost to IoT. As per Industry estimates, consumer IoT or Smart Devices market is expected to be a USD 8bn opportunity by 2024. c) With increase in average data consumption, consumption through OTT has increased over the last couple of years. Telco bundles of content, which are subsidised, have allowed users to sample a wide variety of content. Simultaneously, as per a FICCI-EY report, 260mn subscribers have accessed OTT video content through Telco bundles. Moreover, the total number of SVOD (Subscription Video-on-Demand) is expected to reach 32mn by end of 2020, rising from just 7mn at the end of 2018. According to the consultancy firm, Media Partners Asia, OTT market (excluding Telco bundles) is expected to touch USD 4bn by 2025, with subscription accounting for USD 1.5bn and advertisement another USD 2.5bn. Also consumer surveys by consultancy firm Ovum have indicated that around 47% of users said the presence of bundled OTT content was a differentiating factor for them. We believe monetisation of Telco bundles could significantly increase the market size for OTT platforms. Jio’s potential digital monetisation opportunities Jio’s digital apps and capabilities cater to a wide range of solutions. However, we consider a We expect Jio to position its video few such as OTT platforms, IoT solutions and payment solutions that we believe could be OTT offerings as a one-stop shop monetised easily. for content and subsequently monetize it a) Video-on-Demand platforms – JioTV, JioTV+, and Jio Cinema: Jio platform currently has two major Video-on-Demand (VOD) platforms, namely JioTV and Jio Cinema. JioTV is a content aggregator app for Live TV channels while Jio Cinema aggregates movies. Also Jio Fiber users have access to JioTV+, an app which aggregates content across OTT platforms. At present, Jio does not charge for these apps and are being used to give additional benefits to Jio customers so as to retain them. We believe that Jio has already aggressively positioned itself in the carriage space, with its captive user base of 388mn and investment in leading Cable TV companies (Den, Hathway and GTPL Hathway). Even in the content space, RIL has invested in content producers such as Balaji Telefilms, EROS and Roy Kapoor Films and has also signed non-exclusive content deals with marquee Indian and foreign players such as Disney, Zee network and Sun network, to name a few, besides its majority investment in Network18. Given the abundance of OTT players and the still nascent stage of the industry, we do not foresee immediate meaningful monetisation of content. However, recently Jio made available the Disney+ Hotstar VIP plan for select higher ARPU and longer validity plans. We believe this
JM Financial Institutional Securities Limited Page 21 Reliance Industries 30 July 2020 would be followed by further initiatives to monetise content. Over the medium term, Jio could monetise its OTT platforms by positioning it as a one-stop solution for a vast spectrum of content, ranging from web-series to movies, which would be sourced from its marquee investee companies and content partners. Given the vast spectrum of content that could be made available to the consumers through such an aggregation, we believe there could be strong traction and monetisation of the Video-on-Demand platforms. We have estimated an additional upside to the tune of INR 80/share due to monetisation of content, with the underlying assumptions: i) Out of its captive subscriber base of c.499mn in FY25E, we believe around 30% could opt to choose content in JioTV/Jio Cinema given that users would be able to access content from multiple platforms for the price of one platform; ii) An ARPU of INR 100/month. Currently, some of the prominent Indian OTT platforms charge their users INR 99/month for premium content (INR 84 ARPU excluding GST). Given the multitude of content in JioTV/Jio Cinema, we believe INR 100/month would be a sustainable ARPU in the medium term and could gradually increase; and iii) EV/revenue multiple of 6x. This is at a discount to the Netflix (8x), since we believe Indian consumers would be more price-sensitive We have not considered a scenario of advertisement led monetisation for Jio Cinema (JioTV streams live TV and already consist of broadcaster advertisements). Advertisement ARPUs (including video and banner ads) are generally low and given RIL’s investments, we believe monetisation through subscriptions is the most likely scenario. Moreover advertisements tend to reduce user experience. However, we do acknowledge that monetisation of content through a freemium model is a possibility and would be a further upside to our value.
Exhibit 40. Additional value unlocked through monetisation of content Jio subscribers in FY25E (mn) 499 % of subs paying for OTT 30% No. of OTT subscribers (mn) 150 ARPU (INR) 100 Revenue (INR bn) 180 One year forward EV/revenue (x) 6 Enterprise value* (INR bn) 1006 Discounted to Sep’21 at company WACC 786 Equity value upside for RIL (INR/share) 83 Source: Company, JM Financial. * Since the apps are already up and running with content, we believe any incremental debt / capex would be negligible. **After accounting for 32.95% minority interest in JPL b) Other apps in JPL’s portfolio: The other applications in the platform include JioSaavn, Jio Significant traction seen in JioSaavn, News, Jio Health Hub and Jio Cloud. Apart from JioSaavn, other apps are not yet monetised expect sustained monetization from and advertisement revenues, if any would be small, in our view. JioSaavn is the music JioSaavn streaming app whose main competitors include Gaana, Spotify and YouTube Music. It runs a freemium model, similar to Spotify, where subscribers can either choose an ad-free subscription plan or use the service for free with ads. However, unlike Spotify, which derives 90% of its revenues from paid services, the paid user base of JioSaavn is still low, at 20%, as per media reports. As per media reports, the service currently has 100 mn Monthly Active Users (MAUs). We have estimated an additional upside to the tune of INR 8/share due to JioSaavn. The underlying assumptions are: i) Subscription ARPU of INR c.50/ month and advertisement ARPU of INR c.11/month; ii) 20mn paying subscribers every month out of the total 100mn monthly users. Though the subscriber base could scale up, given the multitude of other options in the market, we have conservatively assumed it at the current levels; iii) EV/Revenue multiple of 3x. This is at a discount to that for Spotify (4x), given the price sensitive nature of Indian consumers
JM Financial Institutional Securities Limited Page 22 Reliance Industries 30 July 2020 Exhibit 41. Additional upside from monetisation of Audio OTT platform Saavn users (mn) 100 Non-subscribing users (80% of total users) (mn) 80 Subscribing users (20% of total users)(mn) 20 ARPU for paid subscribers (INR) 50 Subscription revenue (INR bn) 12 Advertisement ARPU (INR) 11 Advertisement revenue (INR bn) 11 Total Revenue (INR bn) 23 One year forward EV/Revenue (x) 3 Enterprise value* (INR bn) 77 Equity value upside for RIL (INR/share)** 8 Source: Company, JM Financial. * Since the apps are already up and running with content, we believe any incremental debt / capex would be negligible. **After accounting for 32.95% minority interest in JPL c) Consumer IoT / Smart Devices: RIL had done several tuck-in acquisitions to increase its capabilities in AI/IoT like Radysis (open source telecom solutions enabling next generation technologies) and Haptik (conversational AI platform). Currently, these are being used for B2B applications; for example, the Haptik chatbot was used in GoI’s corona helpdesk. However, many of these acquisitions could be leveraged for consumer applications, giving Jio an edge in consumer IoT. While the ARPU per device is likely to be low, with average ARPUs of INR 10-15, the number of such devices is potentially high.
Exhibit 42. Acquisition of tech companies and the potential uses for consumer IoT/ Smart Devices Company Likely consumer use-cases Radysis Radysis would help in rapid innovation and solution development across Enterprises and Consumer segments Haptik Provides ability to develop AI enabled multilingual devices, strongly positioning Jio against Amazon Alexa and Google Assistant Tesseract Enables immersive media and also better online shopping experience, where consumers can try on products from their homes Reverie Develops multi-lingual capabilities for apps and devices Embibe Helps provide personalised learning experience using AI Source: Company, JM Financial. We estimate the additional value of the consumer IoT business to be INR 13/ share based on the following assumptions:
i) 600mn consumer IoT devices base by FY25E. Jio had estimated a potential market of 1bn Jio likely to leverage capabilities of devices for its IoT business over the next three years. We believe, along with enterprise IoT, its tech investees to ramp up there will be significant traction in consumer IoT business. consumer IoT/Smart devices ii) ARPU of INR 15/month. At present other major IoT players like China Mobile have ARPU in business the range of INR 10-15/month; iii) Moderate EBITDA margin of 20% and incremental capex of 2.5% of revenues; and iv) EV/EBITDA multiple of 10x, lower than that for Telecom business, given that the churn could be higher for this new business.
Exhibit 43. Optional upside for consumer IoT business No. of consumer IoT devices on Jio by FY25E (mn) 600 ARPU (INR) 15 Revenue (INR bn) 108 EBITDA margin (%) 20% EV/EBITDA (x) 10 Incremental EV (INR bn) 205 Discounted to Sep’21 at company WACC 162 Incremental capex (INR bn) 27 Incremental Equity Value (INR bn) 135 Equity value upside for RIL (INR/share)* 14 Source: Company, JM Financial. *After accounting for 32.95% minority interest in JPL d) Digital lending opportunity: RIL recently launched its UPI payments feature in its MyJio app. This is in addition to JioMoney, which is a mobile wallet app. While the wallet business could not gain significant traction due to: i) already entrenched players such as PayTM; ii) need for both payer and payee to have the same wallet; and iii) additional step of transferring to and from the wallet to the bank account; also transfer from wallets to bank accounts incurred charges. However, with the launch of RIL’s UPI, which is inter-operable with other UPI apps and directly linked with the bank accounts, we believe that RIL could gain significant traction
JM Financial Institutional Securities Limited Page 23 Reliance Industries 30 July 2020 in the mobile payments space, given its large user base. Moreover, RIL also has a payments bank license (Jio Payments Bank), which can be leveraged to enhance financial inclusion, thereby further enhancing traction for its payment business. We believe that, over the medium-to-long term, this could evolve into a digital lending platform. As per Jio, total UPI payment is currently at 10% of GDP. We believe that given Reliance Retail’s e-commerce venture JioMart and the large amount of consumer behavioural data from its telecom business, RIL is advantageously positioned to scale up in this business. The recent launch of JioPOSLite, in which users can recharge for others and earn commissions, also opens up the possibility of scaling up P2P payment solutions. However, the traction in these apps is still low for us to build in any meaningful upside from this opportunity, at this point of time. Platform based business: A case of 1+1 > 2 From being a pure-play telecom operator four years ago, Jio has transformed itself into a truly digital platform with a captive user base of c.+390mn, of which about c.290mn are higher- ARPU smartphone subscribers. While the number of users is certainly impressive, that alone cannot be the criterion to label a company as a platform-based one. For example, China Mobile has c.950mn users, but is not considered a platform business. Even in India, Bharti Airtel and VIL have a sizeable mobile broadband subscriber base of 160mn and 141mn, respectively. However they are also not considered platform plays, despite the fact that these telcos provide their own OTT applications to the subscribers. So what makes a platform company different from a large Telco or one that provides an OTT platform?—the answer lies in the creation of an ecosystem to connect diverse businesses.
Jio Platform currently has developed/is developing a suite of digital apps, which customers We expect development of a ‘Super have access to and provide them with varied value propositions. These are currently being App’ in the long run, driven by the used as user retention tools for the captive telecom subscriber base. However, in the creation of a Jio app ecosystem medium-to-long term these could be monetised as standalone apps or app bundles. The presence of a large number of apps also reduces search and transactional costs for users, enabling Jio to cross-sell its offerings. For example, a probable scenario would be one in which Jio Game users are provided with the option of paying through Jio Money/Jio UPI for in-game purchases or Embibe providing learning outcomes for students and providing them with the option of accessing learning materials through Jio Cloud. While at present the visibility is low on these, we clearly see a situation where Jio evolves a ‘Super App’ like that of WeChat in China. While the different digital apps in the Jio ecosystem may seem targeted at different consumer interests, the synergy and cross – selling opportunities that they provide can be truly immense, given the large subscriber base. Two key events have provided an impetus to Jio in this journey to create a ‘Super App’, in our view. a) Strategic partnership with Facebook: Jio can leverage Facebook’s domain expertise and technical knowledge to build an app combining social media facilities, e-commerce, digital payments etc. Given Whatsapp’s +400mn user base in India, this could potentially allow Jio to integrate its offerings with Whatsapp and attract subscriber base of other telcos as well. The use cases would be many, for example the partnership between JioMart and Whatsapp, coupled with low cost smartphones, could enable Jio to reach the smaller kiranas with ease, eventually converting them to users of Jio Money and providing financial services for these kiranas in the long run. The supply chain can be extended to farmers and SMEs also, whereby these kiranas could place orders through JioMart. As per RIL, through this partnership, it would focus on India’s 60 million micro, small and medium businesses; 120 million farmers; 30 million small merchants and millions of small and medium enterprises in the informal sector. b) Jio opening up its Set-top box ecosystem, whereby third-party developers can launch and monetise their offerings through Jio. We expect this to be a significant step in the journey to become a ‘Super App’. While Jio has a range of enterprise and consumer digital apps currently, it may not be in a position to organically cater to all consumer demands in the future. Opening up of the Jio ecosystem to third-party developers would allow creation of a large number of popular apps in the ecosystem, further attracting other app developers, thus creating a strong moat for the ecosystem and enabling the creation of a ‘Super App’. For developers, it could be an ideal opportunity to reach out to +390mn subscribers and monetise their apps.
JM Financial Institutional Securities Limited Page 24 Reliance Industries 30 July 2020 Exhibit 44. Snapshots from Jio Developers website for third-party developers (1/2)
Source: Company website for developers.
Exhibit 45. Snapshots from Jio Developers website for third-party developers (2/2)
Source: Company website for developers.
JM Financial Institutional Securities Limited Page 25 Reliance Industries 30 July 2020 Valuations and key assumptions for the Digital business Focus now on growth in FTTH and Enterprise businesses The ramp-up of the FTTH business has been slower than expected. After the beta testing Factoring 24mn homes and phase for customers, Jio has started charging customers over the past few months. We enterprise subscriber at the end of believe that with the increase in data consumption expected due to virtual working, Jio FY25E, vs management’s target of would start aggressively pursuing this opportunity. We are building in 3mn subscribers at the 50mn in next 3 years end of FY21E (vs. 1mn subscribers at the end of FY20), reaching 24mn customers at the end of FY25E. This is conservative, given the management’s target of 50mn homes and enterprise in next 3 years. Given that Jio’s tariffs are in line with those of other players, unlike wireless where Jio still maintains a discount, we believe that EBITDA margins should reach 50% in the medium-to-long term. This is conservative in our view given that EBITDA margin for Bharti’s Homes Services is c.50% with only 2.4mn customers. On the 5G/enterprise front, we are building in revenues of INR 35bn in FY23E, growing to INR 84bn by FY25E. Given the widespread network coverage, 5G ready infrastructure and comfortable cash position, we believe Jio is poised to gain sizeable market share in the 5G/enterprise segment. Strong FCF generation likely due to robust EBITDA growth and moderation in capex We see the consolidated EBITDA margins improving to near 50% levels in the medium-to- long term (vs. 38.8% in FY20) aided by operating leverage. Other key tailwinds for margin would be: a) reduction in license fees from the current 8% levels; b) operational efficiencies Expect EBITDA margin improving to leading to lower employee expenses and SG&A costs; and c) a faster ramp-up of the high- ~50% in medium-to-long term (vs. margin FTTH business. 38.8% in FY20) aided by operating With 99% coverage, the peak capex cycle for Jio is over. Any further network capex would leverage. Building a cumulative be only for capacity addition. Network capex decreased from INR 685bn in FY19 to INR capex of USD6.1bn for 5G over 215bn in FY20, and we expect the capex intensity as a % of sales to moderate further. FY23-25E; capex / sales estimated at However, we are building in a one-time spectrum renewal charge of USD 2.8bn in FY22E (for 15% in the long term vs. 40% in erstwhile RCOM’s spectrum in the 800 MHz band). Given the impending auction for 5G, we FY20 are building a cumulative capex of USD 6.1bn for 5G over FY23-25E. Moreover, we see capex / sales at 15% in the long term vs. 40% seen in FY20. Any larger than expected data consumption leading to more pressure on the network, would be a key upside risk to our capex numbers.
Exhibit 46. Increase in ARPU an operating leverage to improve Exhibit 47. Jio’s peak capex cycle is over, long term capex intensity margins seen at 15% of sales
Jio EBITDA margin (%) Jio incremental EBITDA margin (%) Capex (INR bn) Capex / sales (%) [RHS]
80% 240%
600
60%
160% Caepx/ sales (%) 400
40% Margins (%) Margins Capex (INR bn) (INR Capex 80% 200 20%
0% 0 0% FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E
Source: Company, JM Financial. Source: Company, JM Financial.
JM Financial Institutional Securities Limited Page 26 Reliance Industries 30 July 2020 Exhibit 48. Key assumptions and financials for Jio Telecom business Particulars FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E Wireless segment Subscribers (mn, EoP) 187 307 388 445 457 472 485 499 509 514 519 AMDU (GB/month) 10.9 11.5 12.2 12.9 13.6 13.9 14.3 14.6 15.0 15.4
12.2 11.3 12.2 13.2 14.0 14.9 15.8 16.8 17.9 18.6 Average realisation per GB (INR) ARPU (INR) 149 133 130 149 171 190 207 226 246 268 286 Revenues (INR bn) 202 393 543 746 923 1,058 1,190 1,334 1,489 1,646 1,771 5G/Enterprise
Revenues (INR bn) 0 0 35 56 83 117 159 211
FTTH segment
Subscribers (mn, EoP) 1.0 3.0 8.0 12.5 18.0 24.0 29.2 32.7 36.4
ARPU (INR) 750 765 780 796 812 828 845 862
Revenues (INR bn) 18 50 96 146 205 264 314 357
Key financials
Consolidated Revenue* (INR bn) 202 412 580 764 974 1,189 1,392 1,622 1,870 2,118 2,339 Consolidated Revenue growth (%) 105% 41% 32% 27% 22% 17% 17% 15% 13% 10%
Consolidated EBITDA* (INR bn) 67 153 225 332 463 567 667 781 904 1,029 1,141 Consolidated EBITDA growth (%) 128% 47% 47% 39% 23% 18% 17% 16% 14% 11%
Consolidated EBITDA margin (%) 33.4 37.2 38.8 43.4 47.5 47.7 48.0 48.1 48.3 48.6 48.8 Incremental EBITDA margin (%) 40.8 42.8 58.0 62.4 48.7 49.3 49.2 49.6 50.4 50.9
Capex (INR bn) (481) (685) (215) (191) (294) (275) (215) (243) (233) (235) (248) FCF (INR bn) * (439) (589) (75) 49 66 168 306 365 469 562 635 Source: Company, JM Financial. * FY18, FY19 and FY20 Revenues and EBITDA also include other digital services
Digital business valuation We value RIL’s 67.05% stake in JPL at an Equity value of INR ~950/share or INR 6trn comprising of: a) Telecom business at an enterprise value of INR 780/share or INR 4,952bn based on DCF valuation (Exhibit 50); implied valuation of 14.3x Sep’21 EV/EBITDA; b) Optional upside in Telecom business at an equity value of INR 67/share or INR 423bn (Exhibit 33) based on 50% probability of duopoly market and Jio garnering 40% of VIL total subscriber base without any ARPU dilution; and c) Digital opportunities at an equity value of INR 105/share or INR 669bn (Exhibit 51) based on potential monetisation of Video OTT apps, JioSaavn and Consumer IoT business.
Exhibit 49. The digital business is valued at INR ~950/share Valuation Valuation (INR Valuation Valuation Business segment Comments methodology bn) (USD bn) (INR/share)
Digital business (for RIL's 67.05% share) 6,044 81 952
Based on DCF valuation; implied valuation of 14.3x a) Telecom business DCF 4,952 66 780 Sept'21 EV/EBITDA
50% probability of duopoly market; Jio garnering b) Optional upside in Telecom business 423 6 67 40% of VIL subscriber without any ARPU dilution
Based on potential monetization of Video OTT apps, c) Digital opportunities 669 9 105 JioSaavn and Consumer IoT business
Source: Company, JM Financial.
JM Financial Institutional Securities Limited Page 27 Reliance Industries 30 July 2020 Exhibit 50. DCF value of RIL’s share of Telecom EV at INR 780/share FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E DCF (INR bn) EBIT X (1-tax rate) 181 272 338 402 481 566 654 733 Depreciation & Amortization 90 99 116 130 138 147 154 161 Changes in net working capital 3 6 6 5 6 6 7 6 Capex (191) (294) (275) (215) (243) (233) (235) (248) Free cash flow to the firm [FCFF] 83 84 185 323 382 486 580 652 FCFF growth (%) 1% 121% 74% 18% 27% 19% 12%
Sep-21E WACC 10.4% PV of cash flows (FY22E-28E) (INR bn) 1,756 PV of terminal value (INR bn) 5,630 Terminal value as % of Enterprise Value 76% Total Enterprise Value (INR bn) 7,386 RIL number of shares (mn) 6,349 Enterprise Value for RIL (INR/share) 780 Source: Company, JM Financial.
Exhibit 51. INR 172/share equity value for RIL from duopoly Exhibit 52. USD 21bn of equity value from duopoly optionality and optionality and digital applications digital applications 200 Optional value - Telecom Duopoly Video OTT 172 180 14 Audio OTT Consumer IoT/smart devices 8 160 83
140 1 2 120
100
INR/share 8 80 67 60 10 40
20
0 Optional value - Video OTT Audio OTT Consumer Total Telecom Duopoly IoT/smart devices
Source: Company, JM Financial. Source: Company, JM Financial.
Exhibit 53. Global telecom and digital comparable for Jio P/E FY20-22 EPS EV/EBITDA CY21/FY22 RoE CY19/FY20 CY20/FY21 CY21/FY22 CAGR CY19/FY20 CY20/FY21 CY21/FY22
Rjio (JMFe) 130.9 49.9 28.6 109.7% 10.8% 34.1 22.3 16.0 Digital comparable
Tencent 34.1 39.4 31.8 24.8% 22.2% 21.2 27.1 22.6 Alibaba 60.9 35.2 29.2 32.7% 15.1% 32.4 29.0 22.5 Amazon 80.3 91.0 57.2 49.6% 23.7% 23.6 34.0 24.6 Alphabet 27.7 28.1 22.2 16.8% 15.7% 17.1 16.0 12.8 Facebook 25.1 27.6 21.1 29.8% 20.8% 17.5 15.8 12.4 Netflix 78.3 73.8 51.7 49.0% 30.2% 52.4 47.1 35.9 Apple 18.4 29.9 25.0 11.7% 134.9% 11.4 20.6 18.0 Telecom comparable
Bharti Airtel NM NM 141.4 106.8% 3.1% 10.1 12.6 10.0 Vodafone Idea NM NM NM -48.5% 393.2% 29.2 9.2 6.3 Vodafone Plc NM 20.4 22.4 NM 2.8% 7.3 6.2 6.4 AT&T 16.8 9.3 9.2 30.4% 11.6% 7.7 6.9 6.8 Verizon 11.5 12.1 11.7 2.9% 29.1% 7.5 7.4 7.2 China Mobile 11.2 9.2 8.9 2.1% 9.7% 2.9 2.2 2.2 XL Axiata 47.0 21.2 19.1 41.0% 5.7% 5.6 4.8 4.5 MTN Group 17.9 10.3 8.9 19.0% 15.5% 4.2 3.4 3.3 Source: Company, JM Financial. * Equity base includes minority investments to-date.
JM Financial Institutional Securities Limited Page 28 Reliance Industries 30 July 2020 Retail — driving omni-channel capabilities across segments Reliance Retail has, in a short span of time, attained a strong leadership position in the Retail segment, which reflects the ambition of the group of attaining leadership in every segment it operates in. Reliance Retail was launched in 2006 with the opening of the first Reliance Fresh store and the next two years witnessed launch of Reliance Digital and Reliance Trends. Interestingly, it now leads in each of the three segments viz. Grocery, Fashion & Lifestyle and Consumer Electronics and the fact that the feat was achieved in a decade is a testimony to group’s ability for value creation. Even in FY20, these 3 segments contributed c.86% to the Retail segment EBITDA and are expected to remain the major drivers of earnings in future. The company exited the year FY20 with a total store count of 12,307 and a retail space in operation of 28.7mn sq. ft. To put this in perspective, it is 3.7x the size of DMart in terms of retail space while core-retail revenue and EBITDA are 3.7x and 4.1x that clocked by DMart. The ambition for organised retail business is even larger now, as highlighted in FY20 AGM – RIL expects to drive omni-channel capabilities across segments as well as extend JioMart to Consumer Electronics and Fashion & Lifestyle – JioMart has started off in the grocery space at present to begin with - similar to how Reliance Retail initially began. Given previous history of successful execution, this could as well become a sizeable value-creation opportunity in the future. For the near-term, we expect larger value-creation potential from the Grocery and Consumer Electronics businesses over FY20-23 while Fashion & Lifestyle segment is likely to take relatively more time to recover from the pandemic. But given that Fashion and Lifestyle is intrinsically a much higher margin business, we forecast Core Retail EBITDA margin in FY23E to be slightly below the level of FY20. This is expected to be entirely mix-led, as we expect individual segments to all clock higher margins in FY23 vs FY20. At an overall basis, we value the Reliance Retail business at 25x forward EBITDA to arrive at a valuation of INR3.7tn (Sep’21 basis). On Jio Mart, we are presently factoring in only the opportunity of digitisation of Kirana store where, we believe, the business has a real value proposition. We are not yet factoring in any value from the other categories where the market place capabilities can be extended to (like consumer electronics and apparels as brick and mortar presence gives Jio Mart some edge in these segments). As explained in detail later, we expect Jio Mart to garner at least 10% market share in the digitised General Trade market (expecting it to be 50% of the total GT market by FY30) by FY30 and given the profitability potential in this space, we are pegging the value of this business at INR1,600bn by Mar’29 which implies INR732bn in present value terms.
Exhibit 54. Chronological milestones representing the progression of Reliance Retail over the past c.1.5 decade Year Event 2006 Ventured into organised retail through Reliance Retail with its first Reliance Fresh store in Hyderabad 2007 Launched Reliance Digital, a consumer electronics retail chain 2008 Opened first fashion & lifestyle store under Reliance Trends and Reliance Footprint brand 2010 Crossed 1,000 stores mark. Announced partnerships with Zegna, QuikSilver & Steve Madden 2011 Launched wholesale cash-n-carry store chain - Reliance Market 2012 Reliance Trends became India’s largest fashion Retailer. 2013 AnnouncedReliance Market part nershipsbecame withIndia’s Iconix, largest Kenneth wholesales Cole, cash Thomas & carry Pink store and chain. Brooks Brothers 2014 RelianceLaunched Retail Reliance achieved Digital EBITDA Express break Mini,-even a chain of small stores dealing in mobility and communication devices 2015 Reliance Retail 2.0 unveiled with launch of multi-channel initiatives. 2016 AnnouncedLaunched www.ajio.com partnership with a curated BCBGMAXAZRIA, fashion e-commerce Juicy Couture platform and andCherokee www.Footprint360.com a multi-channel 2017 eReliance-commerce Retail platform crossed for USD Reliance 5bn revenue Footprint mark 2018 LaunchedCrossed revenue www.reliancetrends.com milestone of USD 10bn a multi -channel e-commerce platform for Reliance Trends 2019 Made first international foray with 100% acquisition of marquee British Toy retailer Hamleys. Announced partnership with Flormar, Bally and Scotch & Soda 2020 JioMart launched across all major cities for delivering essential grocery items. Launched Project Eve, a mid-premium fashion and lifestyle destination store for women Source: Company, JM Financial JioMart goes live on Whatsapp after the deal between Facebook and Reliance Jio
Focus on scale was accompanied by a strong delivery on throughputs: Reliance Retail was established with the focus of attaining a sizeable scale which is quite evident from the fact that its core retail revenue has nearly quintupled over FY16-20 despite having a revenue size
JM Financial Institutional Securities Limited Page 29 Reliance Industries 30 July 2020 of INR190bn in FY16 – this represents revenue CAGR of 49%. While this can be also attributed to its rapid expansion of store count but this has only doubled over the past 4 years. If we were to look at revenue per store, the same has more than trebled for both grocery and consumer electronics and has grown by 34% for Fashion & Lifestyle segment. This is quite commendable as rapid pace of expansion generally leads to a decline in throughputs per store. The confluence of these factors helped the company deliver 8.9% EBITDA margin in FY20. For the Retail business (including connectivity but excluding Petro Retail), ROIC has scaled-up to 27.1% from mere 6.5% in FY16.
Exhibit 55. Store count has nearly doubled over FY16-20… Exhibit 56. …while revenue has become 5x over the same period… Store Count (ex-petro) - nos Core Retail Revenue - INR bn Expecting to double 14,000 2,000 over next 3 years 11,784 1,800 1,732 12,000 10,415 1,600 10,000 1,400 1,323 7,573 1,200 8,000 1,020 1,000 928 6,000 800 735 3,616 4,000 3,245 600 437 400 273 2,000 190 200 0 0 FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Source: Company, JM Financial Source: Company, JM Financial
Exhibit 57. …driven by sharp scaling-up of throughputs per store… Exhibit 58. …which is expected to improve further over next 3 years except for Fashion and Lifestyle (being hit by pandemic) Revenue/store - INR mn Revenue/store - INR mn 600 3.4x FY16 FY20 800 FY20 FY23E 491 500 681 700
400 600 491 500 300 3.7x 400 Medium-term 200 300 fallout from 146 155 213 1.3x pandemic 200 155 100 65 49 41 100 65 60
0 0 Grocery Consumer electronics Fashion and Lifestyle Grocery Consumer electronics Fashion and Lifestyle
Source: Company, JM Financial Source: Company, JM Financial
Working capital rationalisation has also helped pare down debt and improve returns profile: While scaling-up of revenue size coupled with improving operating margin is in itself commendable, the company has also worked on driving efficient operations which would help keep investments in business lower at least in relation to revenue. Noteworthy point here is that Fixed Asset turnover has seen a marginal improvement from 7.2x in FY16 to 7.7x in FY19 while a significant part of the improvement in the capital employed was driven by a sharp reduction in working capital – revenue for the retail business in FY20 was 7x levels seen in FY16 but net working capital was less than 2x over the same period. Entire improvement was driven by inventory which fell from 104 days of sales in FY16 to 26 days in FY20.
The efficient management of working capital has also helped Reliance Retail report positive operating cash flows in each of the 5 years over FY16-20 (both inclusive). On an average, operating cash flows have been c.2x the net operating profit after tax over these 5 years – this feat was possible partly on account of efficient working capital management during the same period and was also aided by tax payments being nearly half that of tax provisions in the PNL (possibly on carried forward losses in tax books). This has helped constrict net debt to merely 16.5% of Invested capital – it was 10% in FY16 but 41% in FY19.
JM Financial Institutional Securities Limited Page 30 Reliance Industries 30 July 2020 Exhibit 59. ROIC has improved significantly from 6.5% in FY16 to 27.1% in FY20 aided by higher OPM and better asset turns
NOPAT margin - % ROIC - % Invested capital turns - RHS 30% 8 27.1%
6.4 6.2 24% 5.9 6 5.0 21.2% 18%
4 15.9% 3.2 12%
8.8% 2 6% 5% 6.5% 3% 2% 2% 2% 0% 0 FY16 FY17 FY18 FY19 FY20
Source: Company, JM Financial
Exhibit 60. Lower tax payments and efficient working capital management helped in strong cash flow generation with operating cash flow being 225% of Operating Profit after Tax CFO - % of NOPAT
500% 473%
287% 275%
250% 5 Yr Avg:
Impacted due to working capital investments 104% 96% 95%
39% 49%
0% FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Source: Company, JM Financial
Exhibit 61. Working capital as % of sales has come to below mid- Exhibit 62. …which has aided reduction in net debt in the past one single digit levels… year
Working capital - INR bn WC - % of sales Net Debt - INR bn 100 18% 120 89 17% 100 80
12% 80 60 10% 58 38 40 7% 8% 28 39 6% 31 40 20 6 4% 19 0
0% 0 -20 -11 FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20
Source: Company, JM Financial Source: Company, JM Financial
Expecting core retail revenue trajectory to moderate to 23% CAGR over FY20-23 on slower growth in apparels: We continue to believe that retail business would largely normalize once the pandemic is reasonably controlled over the course of next 12 months. Interestingly though, Reliance Retail’s diversified revenue stream holds it in good stead to counter the problems arising as a result of this pandemic.
JM Financial Institutional Securities Limited Page 31 Reliance Industries 30 July 2020 - Of the core-retail business revenues, 37% comes from the grocery segment which would largely remain unaffected during the pandemic. We expect throughputs per store to grow at 11% per annum which coupled with store expansion should help drive a 30% revenue CAGR over FY20-23 (vs 41.5% over FY16-20) - Consumer electronics on the other hand being partly discretionary in nature is expected to face some headwinds in the short-term. Some parts of the business like mobile phones and laptops continue to remain essential and to that extent would be lesser impacted. Furthermore, lockdowns have also forced people to look for more options for convenience leading to higher sales of some household durable products like refrigerators, washing machines, microwaves etc. Overall, we expect this segment to normalise soon and we are building in 11% CAGR in throughputs and 22% CAGR in revenue over FY20-23 (vs. 64.4% over FY16-20). - We expect Fashion & Lifestyle to be the worst hit amongst these three categories. In our view, revival in apparels would be more gradual which is in-line with our belief that normalisation of social gatherings to pre-Covid levels will take some time even after the crisis is largely over. We are forecasting revenue per store for Apparels in FY23 to be 7% lower than that seen in FY20 and we are building in 5% revenue CAGR in this segment completely led by store expansion. Overall we are factoring in 23% revenue CAGR over FY20-23 in the Core Retail business. We expect EBITDA CAGR to be lower at 21.4% which would completely be on account of mix change – high margin (23.9% in FY20) apparels business would be mere 9.1% of core retail revenues relative to 14.6% FY20.
Overall business valuation estimated at INR3.7tn; JioMart’s GT venture would contribute another 20% to the overall value: We are valuing Reliance Retail at 25x on 12M fwd EBITDA to arrive at a valuation of INR3.7tn. This also implies EV/sales of 1.5x. The valuation compares quite favourably to peers like Trent and Page which are quoting at 31-32x on EV/EBITDA (FY22) and 5-6.5x on EV/Sales (FY22). This would also be a sharp discount to DMart’s valuation of 44.6x on EV/EBITDA (FY22) and 3.5x on EV/Sales (FY22). We have used a lower multiple as the business also includes low margin categories like connectivity and petro- retailing and we are also factoring in a possibility of peers quoting at prices which are above their respective fair values. For JioMart, its current proposition of digitising the General Trade (Kirana stores) could really develop in to a huge opportunity and we believe the underlying strengths in the business can help develop a strong moat in this segment. However, if were to assume that JioMart is able to garner at least 10% market share of digitized General Trade segment (would be c.50% of GT market pegged at USD1,355bn in FY30 on our estimates) over the next 10 years and earn a commission of 3% on sales, the company could clock a revenue of INR152bn on a GMV of INR5,080bn. Furthermore, a 30% EBITDA margin would imply it could clock an operating profit of about INR46bn in FY30. Using a 35x EV/EBITDA multiple we derive an Enterprise Value of INR1,600bn in FY29 and would be worth INR732bn in present value terms as at Sep’22.This implies JioMart has a potential to add another 20% to our valuation of Reliance Retail.
JM Financial Institutional Securities Limited Page 32 Reliance Industries 30 July 2020 Exhibit 63. Based on back-of-envelope assumptions, the JioMart New-commerce kirana store grocery initiative, if successfully scaled-up, could itself be worth another c.USD9-10bn – and add c.20% to current retail business valuation FY30
General Trade (GT) market - USD bn 1,355 % of market assumed to be digitised 50% GT market-size for E-commerce - USD bn 677 Estimated JioMart New-Commerce Market Share by FY30- % 10% JioMart New-Commerce GMV from grocery -USD bn 68 JioMart New-Commerce GMV from grocery – INR bn 5,080 Commission - % 3.0% Estimated JioMart New-Commerce Revenue - INR bn 152 EBITDA margin 30% JioMart New-Commerce EBITDA - INR bn 46 Target EV/EBITDA multiple 35 JioMart New-Commerce Enterprise Value - INR bn (Mar’29 basis) 1,600 Discount Rate 11.0% JioMart New-Commerce EV (discounted to Present Value) INR bn - Mar'21 basis 732 Source: Technopak Research & Analysis, JM Financial Note: Our assumptions for JioMart are based on global peers in the same field like Alibaba and JD.com. Alibaba earns a 4% distributor commission on GMV and has a 42% margin. We have assumed lower commissions and margin as we are presently factoring in only the grocery business. On valuations, JD.Com is presently quoting at 23x on FY21 EV/EBITDA while Alibaba is around 27x. We are valuing JioMart at a premium as the growth would still remain quite high even post achieving this scale. Exhibit 64. Comparable listed peer valuations for Jio Mart PE EV/EBITDA EV/Sales ROCE (pre-tax)
FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY22E
ADITYA BIRLA FASHION AND RETAIL 294.9 -35.0 72.4 27.3 110.3 17.5 1.4 1.7 1.2 10.3%
TITAN COMPANY 60.8 76.4 45.1 41.0 49.8 31.0 4.5 4.8 3.6 26.9%
TRENT 157.1 760.6 67.4 39.5 58.8 30.1 6.2 7.1 4.8 14.7%
PAGE INDUSTRIES 62.2 77.6 48.6 40.2 46.2 31.4 7.4 7.8 6.3 52.1%
AVENUE SUPERMARTS 100.5 98.3 67.4 64.0 67.3 44.9 5.2 4.9 3.6 17.2% Source: Company, JM Financial.
JM Financial Institutional Securities Limited Page 33 Reliance Industries 30 July 2020 Downstream margins outlook subdued; RIL relatively better placed We expect refining and petchem margin outlook to be subdued in the near term given the huge ~8% global oil demand contraction likely in CY20, ongoing capacity additions and the resultant excess inventory build-up. However, RIL is relatively better placed to mitigate this challenge due to its integrated and complex facility, locational advantage and its strength for feedstock sourcing and product placement. Hence, we expect RIL to continue to operate its plants at optimum utilisation despite near-term demand concerns. We expect RIL’s GRM at USD 7.5/9.0/10.0/bbl in FY21/22/23 (vs. USD 8.9/bbl in FY20) and petchem EBITDA margin at USD 192/221/243/tn in FY21/22/23 (vs. USD 218/tn in FY20). We value Refining and Petchem business at an EV of INR 346/share and INR424/share, respectively, based on 7.5x EV/EBITDA. Refining margin recovery to be gradual along with recovery in oil demand
Global oil demand expected to return to pre-Covid levels only in CY22 IEA and EIA expects CY20 global oil The IEA - in its July’20 oil market report (click here) - expects CY20 oil demand at demand to decline by ~8mmbpd; 92.1mmbpd, i.e. unprecedented contraction of 7.9mmbpd due to the pandemic (contraction expects demand recovery to pre- of 10.75mmbpd in 1HCY20, moderating to contraction of 5.1mmbpd in 2HCY20). Further, Covid levels only in CY22 CY21 oil demand is expected to grow only by 5.3mmbpd YoY to 97.4mmbpd, still 2.6mmbpd below CY19 level (of 100mmbpd) due to expectations of significantly lower demand for Jet fuel and Kerosene until at least CY22. The IEA estimates jet fuel demand to decline by 3mmbpd YoY in CY20 (from 8mmbpd in CY19) and only rise by 1mmbpd in CY21, still ~2mmbpd below pre-crisis level. Data from the International Air Transport Association show that passenger traffic in CY20 will be 55% vs. CY19. EIA’s expectation is also along similar lines (click here for its July’20 short-term energy outlook)
Exhibit 65. IEA and EIA expects global oil demand to return to pre-Covid levels only in CY22 CY14 CY15 CY16 CY17 CY18 CY19 CY20e CY21e IEA Global demand (mmbpd) 93.4 95.3 96.5 98.2 99.3 100.0 92.1 97.4 Demand growth (mmbpd, YoY) 1.9 1.1 1.7 1.1 0.7 -7.9 5.3 EIA Global demand (mmbpd) 93.5 95.3 96.9 98.8 100.4 101.0 92.9 99.9 Demand growth (mmbpd, YoY) 1.8 1.6 1.9 1.6 0.6 -8.1 7.0 Source: IEA, EIA
Exhibit 66. Expectation of product-wise monthly global oil demand contraction trend in CY20 (mmbpd)
Source: IEA
JM Financial Institutional Securities Limited Page 34 Reliance Industries 30 July 2020 Exhibit 67. Expectation of region wise break-up in global oil demand contraction in CY20 and recovery in CY21 (mmbpd)
Source: EIA IEA expects net refining capacity Global refining capacity additions continue due to lagged impact addition of 1.5mmbpd in CY20-21; Despite the massive demand contraction of ~7.9mmbpd in CY20, refining capacity is GRM to stay subdued due to low expected to witness net additions in CY20 and CY21 due to the lagged impact of capacity capacity utilisation and oil product expansion decisions take 3-5 years ago. IEA expects net refining capacity addition of inventory build-up 1.5mmbpd in CY20-21; China to add 530kbpd of capacity, India to add ~140kbpd capacity and Middle East to add 710kbpd capacity.
Exhibit 68. Region-wise capacity additions across the world over the years kbpd CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20e CY21e Americas 115 119 487 310 6 9 246 20 10 Europe & CIS 89 19 111 -150 20 235 172 0 0 Middle east 173 383 393 164 121 239 313 120 590 India 40 0 -12 313 79 272 0 19 120 China and Rest of Asia Pacific 865 865 865 865 865 865 789 341 280 Africa 14 9 0 0 -14 -5 6 0 0 Total 1,296 1,149 436 479 492 1,428 1,526 500 1,000 Source: BP statistical review, IEA, JM Financial GRM to stay subdued due to low capacity utilisation and oil product inventory build-up Hence, global refining utilisation decline could record lows of ~75% in CY20 vs. the past decade’s average of ~82%.
Exhibit 69. Global refining utilisation to decline to record low of ~75% in CY20 vs. past decade average of ~82% 3.0 86%
1.5 82%
0.0 78%
-1.5 74%
-3.0 70%
CY1980
CY1981
CY1982
CY1983
CY1984
CY1985
CY1986
CY1987
CY1988
CY1989
CY1990
CY1991
CY1992
CY1993
CY1994
CY1995
CY1996
CY1997
CY1998
CY1999
CY2000
CY2001
CY2002
CY2003
CY2004
CY2005
CY2006
CY2007
CY2008
CY2009
CY2010
CY2011
CY2012
CY2013
CY2014
CY2015
CY2016
CY2017
CY2018
CY2019
CY2020e CY2021e
Global refining capacity addition Global refinery utilisation rate (%) (RHS)
Source: BP statistical review, IEA, JM Financial
JM Financial Institutional Securities Limited Page 35 Reliance Industries 30 July 2020 Further, this capacity glut has resulted in built up in oil products inventory. IEA expects large implied product stock build-up of ~550mmbbl during Jan-May’20; published OECD product inventory data for Apr’20 confirms the directional trend.
Exhibit 70. OECD oil products stocks jump due to demand contraction mmbbl 1QCY18 2QCY18 3QCY18 4QCY18 1QCY19 2QCY19 3QCY19 4QCY19 1QCY20 Apr2020 OECD Americas 625 621 667 647 648 649 658 647 651 682 OECD Asia Oceania 200 203 220 212 214 216 232 212 213 210 OECD Europe 869 842 853 863 864 866 875 863 908 932 Total OECD oil product stocks 1,693 1,666 1,740 1,721 1,727 1,732 1,764 1,721 1,772 1,824 Source: IEA, JM Financial Hence, Singapore Dubai GRM has collapsed to record low levels in the last few months (reported negative USD1.0/bbl in 1QFY21), well below the cash cost of USD2-3/bbl for refiners across various regions. The excess oil products inventory also needs to be eliminated before we see GRM return to historical levels. Hence, we expect Singapore Dubai GRM to average at USD 2.5/4.5/5.5/bbl in FY21/22/23 (vs. USD 3.2/bbl in FY20 and average of USD 6.2/bbl during FY11-FY20 and USD 5.5/bbl during FY01-FY20).
Exhibit 71. Product wise margin trend USD/bbl F Y11 F Y12 F Y13 F Y14 F Y15 F Y16 F Y17 F Y18 F Y19 F Y20 1QF Y21 Reuters Singapore complex margin 5.2 7.9 7.7 5.9 6.3 7.5 5.8 7.2 4.9 3.2 -1.0 Product-cracks Gasoline-Dubai crack 8.3 11.5 15.4 12.7 14.5 19.2 13.9 14.6 8.0 6.7 0.9 Gasoil-Dubai crack 13.8 17.8 19.5 17.4 15.7 12.0 11.3 13.3 15.1 14.1 4.7 Jet kero-Dubai crack 14.8 18.3 18.9 16.7 15.9 12.5 11.5 13.3 14.6 12.6 -1.2 FO-Dubai crack -7.1 -2.6 -5.0 -10.5 -8.4 -6.7 -5.4 -4.0 -2.8 -8.1 -2.7 Naphtha -Dubai crack 0.4 -4.6 -5.0 -4.3 -1.5 2.9 0.1 0.3 -4.1 -5.5 -4.6 Light heavy crude spread Arab Light-Arab Heavy crude spread 3.2 3.6 3.6 4.2 4.3 3.0 2.8 2.2 2.3 2.2 0.5 Brent-Dubai crude spread 2.7 4.2 3.5 3.0 2.2 1.7 2.3 1.8 1.1 0.4 0.7 Source: Company, Reuters, Bloomberg, JM Financial
Exhibit 72. S’pore Dubai GRM has collapsed to record low levels and below cash cost due to huge global demand contraction 8 8
4 6
0 4
USD/bbl mmbpd
-4 2
-8 0
CY02 CY01 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
CY20e CY21e
Refinery capacity addition (LHS) World oil demand growth (LHS) S'pore Dubai GRM (RHS) S'pore Dubai GRM 20 year average (RHS)
Source: IEA, Reuters, JM Financial Is low crude price a positive for refiners? Crude price is a function of global a) oil product demand growth and b) global crude supply growth. However, GRM is a function of global a) oil product demand growth and b) refining capacity additions. Hence, while the demand side of equation is common for determination of both crude price and GRM, the supply side of the equation is different for both. For crude price, supply side is not purely determined by economics, as OPEC+ tries to artificially regulate crude supply with an objective to put a floor to crude price given their dependency on oil export revenues. However, for GRM, supply side is the net refining capacity addition (net of permanent shutdowns) which is based on economic factors. However, refining capacity addition has a 3-5 year lead time, which means capacity addition always comes with a lag and hence leads to the cyclicality in the refining margin.
JM Financial Institutional Securities Limited Page 36 Reliance Industries 30 July 2020 We looked at the past 3 instances of crude price crashes to understand this: a) Crude price crash in CY08-09 was led by oil demand shock; hence, GRM also declined Current crude price collapse is due sharply along with crude prices: During the global financial crisis in CY08-09, the crash in to unprecedented oil demand crude price from high of USD 146/bbl to USD 38/bbl was purely due to oil demand shock - contraction; hence GRM to stay global oil demand contracted by 0.6mmbpd in CY08 and by another 1.0mmbpd in CY09 weak till demand normalises (after strong annual growth of 1.1-3.1mmbpd reported during CY03-07). Further, as refining capacity addition fell short of robust oil demand growth during 2004-07, the market saw a golden refining cycle in 2004-07 (with Spore Dubai GRM at USD 6-8/bbl); hence lot of refining capacity addition planned during that period was commissioned during the CY08-09 downturn, further aggravating the weakness in GRMs. Hence, GRM declined sharply from USD 6-8/bbl in 2004-07 to USD 5.8/3.7/4.6/bbl in CY08/09/10. b) Crude price crash during CY14-16 was due to crude supply shock; hence GRM was at record high levels as oil demand growth continued to be robust: Crude price started to gradually decline from +USD 100/bbl level prevailed since Feb 2011-13 and bottomed at USD 26/bbl in Feb 2016 purely due to crude supply shock as the market realised the potential risk from a continuous rise in US shale oil production - US crude production grew sharply from 5.5mmbpd in CY10 to 9.4mmbpd in CY15. However, global oil demand was growing at a record pace during the period– reported growth of 1.2/1.9/1.1/1.7/mmbpd in CY14/CY15/CY16/CY17. On the other hand, refining capacity addition was muted at 1.4/0.5/0.5/0.6mmbpd in CY14/CY15/CY16/CY17. Hence, despite the crude price crash, refining industry was in a golden cycle during the period with Spore Dubai GRM of USD 5.8/7.7/6.1/7.1/bbl in CY14/CY15/CY16/CY17. c) Current crude price crash is due to huge unprecedented oil demand shock: The current Low crude price to benefit refiners sharp fall in crude price is primarily due to an unprecedented large oil demand contraction. via reduction in fuel & loss cost and Hence, GRM will continue to be weak for few quarters till we return to normalcy in global oil working capital needs and increase demand. crude price discounts from crude However, the weakness in GRM is likely to be partly offset by following benefits on account suppliers of low crude price (as witnessed during 2014-16): a) lower fuel and loss cost for refiners (given fuel & loss is ~6-10% across refiners); b) high crude price discounts from Middle East crude suppliers to large Asian buyers in their desperation to maintain market share amidst crude supply glut and c) lower working capital requirements.
Exhibit 73. GRM decline in CY08-09 & CY20 due to demand led fall Exhibit 74. GRM decline in CY08-09 & CY20 due to demand led fall in crude, unlike supply led fall in crude in CY14-16 in crude, unlike supply led fall in crude in CY14-16
140 10.0 140 10.0
7.5 105 105 7.5
5.0
70 70 5.0 USD/bbl
2.5 USD/bbl
USD/bbl USD/bbl 35 0.0 35 2.5
0 -2.5
0 0.0
FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY18 FY20
1QFY09 1QFY10 1QFY11 1QFY12 1QFY13 1QFY14 1QFY15 1QFY16 1QFY17 1QFY18 1QFY19 1QFY20 1QFY21
Brent (LHS) Spore Dubai GRM (RHS) Brent Spore Dubai GRM (RHS)
Source: Reuters, Bloomberg Source: Reuters, Bloomberg
JM Financial Institutional Securities Limited Page 37 Reliance Industries 30 July 2020 RIL relatively better placed to tide the crisis RIL relatively better placed to tide the crisis due to its integrated and Light-heavy crude spread has moderated over past 1-2 years due to shortage of a heavy complex facility, locational crude supply (produced mostly by Middle East countries) and rise in supply of light crude advantage and superior crude (produced by the US). This has had some moderating impacting in GRM premium for sourcing/ product placement complex refiners such as RIL. However, RIL has largely been able to offset this via its superior strategies crude sourcing strategies.
Exhibit 75. Brent – Dubai crude spread continue to be lower (USD/bbl) Exhibit 76. Arab light – Arab heavy continue to be lower (USD/bbl)
Source: Bloomberg, JM Financial. Source: Bloomberg, JM Financial.
Exhibit 77. OPEC and non-OPEC countries monthly crude production trend (mmbpd) Countries CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 OPEC Saudi Arabia 8.1 9.0 9.5 9.4 9.5 10.1 10.4 10.0 10.3 9.8 9.7 9.7 9.7 11.9 8.5 7.6 Iran 3.7 3.6 3.0 2.7 2.8 2.9 3.6 3.8 3.8 2.4 2.1 2.1 2.0 2.0 2.0 2.0 Venezuela 2.5 2.5 2.5 2.5 2.5 2.5 2.2 2.0 1.5 0.9 0.8 0.8 0.7 0.6 0.6 0.3 Nigeria 2.1 2.2 2.1 2.0 1.9 1.9 1.5 1.5 1.6 1.7 1.7 1.7 1.8 1.8 1.5 1.4 Libya 1.6 0.5 1.4 0.9 0.5 0.4 0.4 0.8 1.0 1.1 0.8 0.1 0.1 0.1 0.1 0.1 Iraq 2.4 2.7 3.0 3.1 3.3 4.0 4.4 4.5 4.5 4.7 4.5 4.6 4.6 4.5 4.2 3.7 UAE 2.3 2.5 2.7 2.8 2.8 2.9 3.1 2.9 2.9 3.1 3.1 3.2 3.5 3.9 2.5 2.4 Kuw ait 2.0 2.2 2.5 2.6 2.6 2.7 2.9 2.7 2.7 2.7 2.7 2.7 2.9 3.1 2.2 2.1 Angola 1.7 1.7 1.8 1.7 1.7 1.8 1.7 1.6 1.5 1.4 1.4 1.4 1.4 1.3 1.3 1.2 Other OPEC 3.1 3.0 3.0 2.9 2.8 3.3 2.7 2.5 2.3 2.2 2.1 2.1 1.9 1.7 1.3 1.4 Total OPEC crude 29.5 29.9 31.3 30.5 30.3 32.4 32.8 32.4 32.0 30.0 28.9 28.3 28.6 30.8 24.1 22.2 Non-OPEC Russia 10.5 10.6 10.7 10.9 10.9 11.1 11.3 11.4 11.4 11.6 11.6 11.3 11.3 11.4 8.6 8.5 US 5.5 5.7 6.5 7.5 8.8 9.4 8.9 9.3 10.4 12.3 13.0 13.0 13.0 12.3 11.5 10.9
Source: IEA, EIA JM Financial RIL’s GRM premium should see some gains due to commercialisation of its ~USD 6bn petcoke gasification project by end FY20. Assuming stabilisation of petcoke gasification project by end FY21, we have factored in additional GRM contribution of ~USD 0.5/bbl in FY21 and USD1.0/bbl in FY22. However this is lower than original expectations and guidance as project economics have deteriorated since its conceptualisation (in 2012-13) due to the following reasons: a) Petcoke gasifier capacity is at 10mmtpa as opposed to 6mmtpa initially planned; b) Spot LNG prices have collapsed to USD2-3/mmbtu from high of USD 14-15/mmbtu prevailing pre-2014; and c) Petcoke prices have only seen only a moderate decline (following the global coal prices) vs. 2014 levels.
JM Financial Institutional Securities Limited Page 38 Reliance Industries 30 July 2020
Exhibit 78. Asia spot LNG prices have come down to record lows of Exhibit 79. Coal prices though have corrected from recent peak, is ~USD2-3/mmbtu flattish from 2014 levels 12 140
9 115
6 90
USD/tonne USD/mmbtu
3 65
0 40
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Nov-15
Nov-16
Nov-17
Nov-18
Nov-19
Jan-16
Jan-17
Jan-18
Jan-19 Jan-20
Source: JM Financial, Bloomberg Source: JM Financial, Bloomberg
Exhibit 80. RIL GRM premium over Spore Dubai GRM to be capped due to moderation in light heavy crude spread (USD/bbl) 8.0
6.0
4.0
2.0
0.0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
RIL GRM premium over Singapore Dubai GRM Arab Light- Arab Heavy Spread Brent-Dubai Spread
Source: JM Financial, Company Further, RIL, due to its locational advantage and superior product placement strategies, was able to operate its refineries (and its petchem units) at more than 90% utilisation during the lockdown from Mar’20 to May’20, during which domestic demand saw contraction of 20- 45%. This compared with utilisation declining to 50-80% for other refiners.
JM Financial Institutional Securities Limited Page 39 Reliance Industries 30 July 2020 Exhibit 81. RIL’s refinery continues to operate at +90% utilisation during lockdown 120%
100%
80%
60%
40%
Apr'20
Jan'20
Feb'20
Mar'20
Nov'19
Dec'19 May'20 IOCL BPCL HPCL RIL Essar
Source: PPAC, JM Financial As discussed earlier, we expect Singapore Dubai GRM to average at USD 2.5/4.5/5.5/bbl in Expect RIL’s GRM at USD FY21/22/23 (vs. USD 3.2/bbl in FY20 and average of USD 6.2/bbl during FY11-FY20 and USD 7.5/9.0/10.1/bbl in FY21/22/23; 5.5/bbl during FY01-FY20). We are building in RIL’s steady state GRM premium at USD value Refining business at an EV of 4.5/bbl over our Singapore Dubai GRM assumption; hence we expect RIL’s GRM at USD INR 346/share based on 7.5x 7.5/9.0/10.0/bbl in FY21/22/23 (vs. USD 8.9/bbl in FY20). We value Refining business at an EV EV/EBITDA of INR 346/share based on 7.5x EV/EBITDA.
Exhibit 82. RIL’s GRM composition (USD/bbl)
Source: JM Financial, Company
Exhibit 83. RIL’s refining segment — key assumptions and estimates FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E EBITDA (INR Bn) 268 286 290 261 245 198 271 316 322 329 Volumes (mmtpa) Crude throughput 69.6 70.1 69.8 68.3 70.6 65.7 70.6 70.7 70.7 70.8 Margins (USD/bbl) S'pore Dubai GRM 7.5 5.8 7.2 4.9 3.2 2.5 4.5 5.5 5.5 5.5 RIL's total GRM premium 3.3 5.2 4.4 4.3 5.7 5.0 4.5 4.5 4.5 4.5 a) RIL normal GRM premium 3.3 5.2 4.4 4.3 5.7 5.0 4.0 3.8 3.5 3.5 b) Petcoke gasification addition to GRM 0.0 0.0 0.5 0.8 1.0 1.0 RIL's GRM 10.8 11.0 11.6 9.2 8.9 7.5 9.0 10.0 10.0 10.0 Refining cash opex 2.8 2.7 2.8 1.8 2.3 2.0 2.0 2.0 2.0 2.0 Refining EBITDA 8.0 8.3 8.8 7.4 6.6 5.5 7.0 8.0 8.0 8.0 Source: JM Financial, Company
JM Financial Institutional Securities Limited Page 40 Reliance Industries 30 July 2020
Petchem margins subdued due to oversupply amid demand contraction RIL has 3.6mmtpa capacity to produce ethylene, which is used as a primary feedstock for the Petchem margins to remain weak in production of PE, MEG, and PVC. Global ethylene capacity additions (of 6mmtpa/7mmtpa in near-term due to oversupply amid CY18/CY19) continue to outpace demand growth (of 4mmtpa/6mmtpa in CY18/CY19). sharp demand contraction Further, ethylene capacity of around 8mmtpa is expected to come online in 2HCY20. This is likely to continue to exert downward pressure on ethylene prices despite assuming demand posts a 4% CAGR (or ~6mmt annually) over CY2019-21 like witnessed in CY2016-19.
Exhibit 84. Asia’s ethylene and propylene capacity additions schedule (mmtpa) Company Ethylene Propylene Expected start date China Sinopec SABIC Tianjin 1.0 0.5 Jul'20 BASF YPC 0.7 0.3 Jul'20 Sinopec SK Wuhan 0.8 0.4 Oct'20 CNOOC & Shell 1.0 0.6 Q4-20 South Korea SK Energy 0.7 0.4 Nov'20 Lotte Chemical 1.2 0.5 Dec'20 YNCC 0.6 0.3 4QCY20 Taiwan Formosa 1.2 0.6 Aug-Sep-20 Indonesia Chandra Asri 0.9 0.4 Jul-Aug 20 Total 8.0 3.9 Source: Platts, JM Financial Recovery in PE-Naphtha spreads temporary: Crude prices fell steeply (~30%) in the first half of CY20 given the unprecedented ~11% contraction in global oil demand in 1HCY20. As a result, Naphtha prices shrank (~35-40%) to USD400/mt during 1HCY20. This enabled several idled Naphtha based PE producers to compete against the low cost ethane based US producers. Global PE demand in CY20 saw slight improvement due to sudden spike in demand from the medical and food packaging sector on account of coronavirus pandemic. However, going forward, we expect the PE demand to normalise and PE prices to head downwards due to already apparent oversupply scenario coupled with significant capacity additions in US (~0.8mmtpa) and China (~2mmtpa).
Exhibit 85. Naphtha prices (USD/MT) fell ~35-40% during 1HCY20 700
550
400
250
100
Jul-19 Jul-20
Apr-19 Apr-20 Oct-19
Jan-19 Jan-20 Jun-20 Jun-19
Mar-19 Mar-20
Feb-19 Feb-20
Sep-19 Nov-19 Dec-19 Aug-19 May-20 May-19 Source: Bloomberg, JM Financial PP demand struggling due to slowdown in automotive sector: Polypropylene (PP) is widely used to manufacture various automobile components and its demand has been hit sharply by weak economic cycles and Covid-19 led disruptions. We expect PP demand to recover gradually; however, impending one LPG cracker and 4 PDH plants (expected by 2HCY20) are likely to create demand-supply imbalance.
JM Financial Institutional Securities Limited Page 41 Reliance Industries 30 July 2020 Exhibit 86. PP capacity additions in CY2020 Company Type Capacity (ktpa) Expected start date Fujian Meide PDH 660 4QCY20 Zhejiang Huahong PDH 450 4QCY20 Oriental Energy PDH 660 2HCY20 Hyosung Chemical PDH 300 Aug'20 Yantai Wanhua Chemical LPG cacker 130 4QCY20 Total 2,200 Source: Platts, JM Financial PX markets to exacerbate further due to oversupply: During FY20, PX-Naphtha margins were hampered by start-up of new large PX units in China. The supply glut in the global PX market was caused by capacity addition of 12mmt against consumption of merely 3mmt. Going forward, we expect margins to continue to remain under pressure due to a) additional capacity of around 2.6mmtpa coming online in CY20-21; b) uncertainty in demand caused by the Covid-19; and c) gradual easing of excess inventories.
Exhibit 87. PX capacity additions in CY2020-21 Company Product Capacity (ktpa) Shangond Dongjying PX 1,000 Sinochem Quanzhou PX 800 Aramco Jazan PX 850 Total 2,650 Source: Platts, JM Financial High inventory, huge capacity additions to hurt PTA margins: The polyester market has seen a large amount of demand destruction due to the pandemic and this has taken the PTA inventories in China to a mammoth ~3.5mmt in May’20 (vs. normal average of ~1-1.5mmt). Despite huge inventories, the PTA market has been flooded with supply as Chinese producers continued to operate at 85-95% capacity since Apr’20. Moreover, in 2HCY20, around 7.2mmtpa of new PTA capacity additions would come online (taking PTA capacity to 59.8mmtpa in China and 79.8mmtpa in Asia). Hence, we believe PTA margins are likely to remain subdued due to huge oversupply amid demand concerns.
Exhibit 88. PTA capacity additions in CY2020-21 Company Product Capacity (ktpa) Expected start date Hengli Petrochemcial PTA 2,500 Jul'20 Xinfengming Group PTA 2,200 Sep'20 Fujian Baihong Group PTA 2,200 Oct'20 Others 300 Total 7,200 Source: Platts, JM Financial
RIL’s petchem margins are likely to see only a gradual recovery: Petchem margins are likely to Assumed RIL’s petchem EBITDA remain weak in the near term due to steep demand contraction and the huge capacity margin to be lower at USD 192- additions in China and US across polymers and fibre intermediates. We have assumed RIL’s 243/tn in FY21-22E (vs USD 218/tn petchem EBITDA margin to be lower at USD 192/tn in FY21E, USD 221/tn in FY22E and in FY20); value Petchem segment at USD243/tn in FY23E (vs USD 218/tn in FY20). We value RIL’s Petchem segment at an EV of an EV of INR 424/share based on INR 424/share based on 7.5x EV/EBITDA, in-line with the implied Saudi Aramco deal. 7.5x EV/EBITDA Exhibit 89. RIL's petchem segment - key assumptions and estimate FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E EBITDA (INR Bn) 137 165 259 379 309 266 337 381 401 421 Margin EBITDA/ton (USD/ton) 155 176 234 273 218 192 221 243 248 253 Sales volumes (mmtpa) Polymers 4.6 4.5 4.9 5.8 6.0 5.6 6.1 6.2 6.3 6.3 Polyesters 2.2 2.3 2.6 2.9 2.9 2.7 3.0 3.0 3.0 3.1 Fiber intermediaries 6.4 6.9 9.3 10.9 10.8 10.0 11.0 11.2 11.3 11.4 Total 13.5 13.9 17.1 19.8 20.0 18.6 20.5 20.7 20.9 21.1 Source: Company, JM Financial.
JM Financial Institutional Securities Limited Page 42 Reliance Industries 30 July 2020 Exhibit 90. Global refining peer valuation table EV/EBITDA (x) EBITDA Margins (%) P/E (x) P/B (x) ROE (%) Company FY21CY20 FY22CY21 FY21CY20 FY22CY21 FY21CY20 FY22CY21 FY21CY20 FY22CY21 FY21CY20 FY22CY21 US peers Holly Corporation 11.4 6.3 5.4 8.0 NM 18.7 0.8 0.8 -1.9 5.1 Valero Energy 16.0 6.9 3.2 6.1 NM 15.9 1.3 1.3 -5.3 5.0 Marathon Petroleum 13.1 7.6 10.0 NM NM 21.2 1.1 1.2 -5.1 4.0 US peers average 13.5 6.9 6.2 7.0 NM 18.6 1.1 1.1 -4.1 4.7 European peers Galp Energia 7.3 5.4 13.4 15.0 39.9 14.8 2.0 2.0 4.3 13.1 Motor Oil Hellas 6.5 5.1 5.6 6.2 10.0 6.4 1.3 1.2 10.7 17.0 New Zealand Refining 9.1 5.9 21.0 28.4 NM NM 0.3 0.3 -7.0 -4.6 PKN Orlen 4.0 3.2 10.2 10.1 9.3 6.5 0.6 0.6 6.6 8.8 Saras 4.3 2.8 3.2 4.1 NM 7.5 0.5 0.5 -0.9 6.7 MOL Hungarian oil & gas plc 4.8 3.6 13.1 14.5 21.3 6.0 0.8 0.8 2.2 7.5 OMV Ag 5.5 3.9 21.2 24.7 16.4 7.8 0.8 0.7 4.5 9.1 European peers average 5.9 4.3 12.5 14.7 19.4 8.1 0.9 0.9 2.9 8.2 Asian peers GS Holdings 6.2 6.6 9.2 11.9 4.5 4.9 0.4 0.3 8.2 7.3 SK Energy Co Ltd 9.2 8.6 -0.4 6.1 18.3 18.9 0.8 0.7 -8.8 3.8 MRPL 15.0 6.0 3.6 5.8 NM 5.4 0.9 0.8 1.0 12.9 CPCL 16.0 7.3 2.3 3.9 NM 4.0 0.5 0.5 1.7 20.2 BPCL 12.4 9.4 6.4 6.5 15.0 10.5 2.2 2.0 14.8 19.2 HPCL 7.7 5.9 4.7 4.9 7.9 5.6 1.0 0.9 14.8 13.1 IOCL 7.2 5.9 7.9 7.7 7.7 5.7 0.8 0.7 9.7 11.1 RIL 17.8 13.5 17.3 18.5 30.2 21.1 2.5 2.2 8.9 11.1 Asian peers average 11.4 8.0 5.6 7.9 13.9 10.6 1.1 1.0 4.6 11.4 Global peers average 9.6 6.4 8.3 10.4 16.4 11.1 1.0 1.0 2.6 9.2 Global peers median 8.4 6.0 6.4 7.1 15.0 7.6 0.8 0.8 2.2 8.8 Source: JM Financial, Bloomberg
Exhibit 91. Global petchem peer valuation table EV/EBITDA (x) EBITDA Margins (%) P/E (x) P/B (x) ROE (%) Company FY21/CY20 FY22/CY21 FY21/CY20 FY22/CY21 FY21/CY20 FY22/CY21 FY21/CY20 FY22/CY21 FY21/CY20 FY22/CY21 Global (ex Asia) peers DoW 9.8 7.8 12.9 15.1 53.8 19.7 2.7 2.9 4.8 12.6 Du Pont 11.8 11.3 23.6 24.9 18.6 16.4 1.0 1.0 4.3 5.3 Wacker Chemie 9.5 6.9 11.5 14.9 72.3 26.4 2.1 2.0 3.3 8.8 Johnson Matthey 9.5 8.1 15.7 17.3 15.8 11.9 1.5 1.4 9.6 12.0 LANXESS 6.8 5.9 13.5 14.7 14.9 11.5 1.3 1.2 8.3 9.4 BASF 9.8 8.2 12.2 13.7 21.4 14.4 1.1 1.1 3.8 6.9 Indorama ventures 9.7 8.4 10.7 11.4 15.0 10.3 1.0 1.0 7.1 9.4 SABIC 12.6 9.9 21.4 24.1 86.6 30.5 1.7 1.6 1.9 5.5 Honam Petrochemical 5.2 3.6 10.2 13.3 16.3 7.8 0.4 0.4 2.6 5.5 Eastman Chemical Co 9.3 8.5 21.0 21.6 12.9 11.0 1.7 1.6 12.7 14.2 AKZO Nobel 13.5 11.8 15.7 16.9 24.4 19.5 2.6 2.5 8.9 12.0 Global (ex Asia) peers average 9.8 8.2 15.3 17.1 32.0 16.3 1.6 1.5 6.1 9.2 Asian peers Mitsubishi Gas Chem 7.8 6.4 10.1 11.6 20.0 12.9 0.7 0.7 3.4 5.4 Sinopec Shanghai Petrochemical 11.9 7.5 3.0 4.4 13.0 7.7 0.6 0.6 5.9 7.4 LG Chem 12.3 9.5 12.1 13.0 47.0 27.3 2.2 2.1 4.7 7.7 Formosa Chemicals & Fibre Corp 15.9 14.4 10.8 10.4 23.6 18.0 1.2 1.2 4.3 5.8 Nan Ya Plastics 18.8 17.2 10.5 10.6 24.1 18.3 1.3 1.3 5.0 7.9 Formosa Plastics 18.2 15.3 15.0 15.8 21.9 15.0 1.4 1.4 6.5 9.2 Hanw ha 8.9 7.9 11.2 11.5 15.5 10.3 0.7 0.7 4.6 6.4 Asahi Kasei Corp 6.9 5.8 11.9 13.4 13.0 10.1 0.8 0.8 5.9 7.8 Toray Industries 8.9 7.6 9.7 10.6 21.1 12.7 0.7 0.7 3.8 5.1 Kuraray Co 6.0 5.3 17.6 19.1 19.0 12.9 0.7 0.7 3.4 5.3 Teijin Ltd 6.2 5.5 12.0 12.6 13.8 10.3 0.8 0.7 5.3 7.2 Mitsui Chemicals 8.3 6.4 9.5 11.5 21.5 10.5 0.8 0.7 3.8 7.7 RIL 17.8 13.5 17.3 18.5 30.2 21.1 2.5 2.2 8.9 11.1 Asian peers average 11.4 9.4 11.6 12.5 21.8 14.4 1.1 1.0 5.0 7.2 Global peers average 10.6 8.7 13.1 14.5 26.5 15.3 1.3 1.3 5.4 17.6 Global peers median 9.5 7.9 12.0 13.5 20.6 12.9 1.1 1.1 4.8 7.7 Source: JM Financial, Bloomberg
JM Financial Institutional Securities Limited Page 43 Reliance Industries 30 July 2020 Debt concerns behind us; entering strong FCF generation phase We take comfort from RIL’s deleveraging efforts via stake sale in JPL and rights issue to become zero-net-debt ahead of its Mar’21 target. Though RIL- Aramco deal for a proposed 20% stake in RIL’s O2C has been delayed due to challenging energy market outlook, we still see a possibility of this deal going through in future given its strategic importance for Saudi Arabia to secure its future crude markets. RIL is entering strong FCF generation phase with major capex phase behind us and expectation of strong 17-18% EPS CAGR over the next 3-5 years led by growth potential in the Digital and Retail businesses. We expect RIL’s FCF yield to improve from 2% in FY20 to 7% in FY25 as RIL will generate FCF of INR 235bn in FY21, which will grow to INR 993bn by FY25. Stake sale in JPL helped achieve zero net debt target ahead of timeline We take comfort from RIL’s effort to address balance sheet concerns as it expedited its RIL achieved zero net debt ahead of deleveraging exercise via stake sale in JPL and rights issue to become zero net debt ahead of its Mar’21 target via stake sale in its Mar’21 target. RIL’s reported net debt at end FY20 was INR 1,610bn. However, in FY21 so JPL and rights issue far, RIL has managed to raise INR 2,128bn via: a) INR 1,520bn via stake sale of 32.95% in JPL; b) INR 531bn via rights issue (including 75% of proceeds to be received in FY22); c) INR 76bn from BP for 49% stake sale in petro-retail JV. Hence, RIL has effectively become zero net debt ahead of its Mar’21 target. However, there also exists other liability of ~INR 950bn at end FY20 (which includes capex for creditors, spectrum dues and other current and non- current liability). Hence, net debt including other liabilities has declined to INR 432bn (from INR 2,560bn at end FY20). Further, despite some delay due to challenging energy market conditions, RIL continues to pursue with Saudi Aramco (Aramco) for its proposed 20% stake in its O2C (oil to chemical) business at an enterprise value of USD 15bn. RIL is simultaneously working with NCLT to carve out O2C business into a separate subsidiary to facilitate this partnership and expects this process to complete by early 2021. This deal, once finalised, should result in potential inflows of ~USD 15bn (or INR 1,125bn) and further strengthen its balance sheet.
Exhibit 92. Details of RIL’s historical consolidated debt, capex and cash flow break-up INR bn FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Gross debt Non-current long term borrow ing 710 1,010 1,205 1,416 1,521 1,442 2,075 1,976 Current portion of long term borrow ing 179 49 123 155 129 372 156 449 Working capital borrow ing 184 328 276 235 315 374 644 938 Reported Gross debt (a)1,072 1,387 1,604 1,807 1,966 2,188 2,875 3,363 Less: Cash and cash equivalent (b) 844 906 878 900 772 781 1,330 1,753 Reported Net debt (c=a-b) 228 481 725 907 1,194 1,407 1,545 1,610 Other liabilities that should be considered as debt Other non-current financial liabilities* 0 8 15 22 90 85 100 113 Deferred payment liabilities (Spectrum) 0 0 74 133 201 202 188 188 Other current financial liabilities (Creditor for capex) 58 121 307 741 916 880 580 500 Other current liabilities** 0 0 34 100 209 432 529 476 Less: Other current assets *** 18 33 -85 -163 -199 -328 -368 -328 Other liabilities (d) 75 162 345 833 1,218 1,272 1,030 950 Total gross debt (incl other liabilities) (e=a+d)1,148 1,549 1,949 2,639 3,184 3,459 3,905 4,313 Total Net debt (incl other liabilities) (f=c-d) 304 643 1,070 1,740 2,412 2,679 2,574 2,560 Equity 1,821 1,987 2,087 2,316 2,637 2,935 3,871 4,533 EBITDA 351 379 415 507 525 712 877 922 PAT 209 225 236 299 299 361 398 399 CFO 369 433 344 381 496 715 423 981 FCF 62 -168 -290 -88 -286 -25 -513 216 Capex 323 691 1,002 1,130 1,147 793 1,235 805 Net Debt to Equity (x) 0.2 0.3 0.5 0.8 0.9 0.9 0.7 0.6 Net Debt to EBITDA (x) 0.9 1.7 2.6 3.4 4.6 3.8 2.9 2.8 Source: JM Financial, Company. Note: FY20 debt calculations is after accounting for both Fibre and Tower InvIT, * Interest accrued but not due on deferred payment liabilities and creditors for capex, **Advances from customer and statutory dues, *** Balance with tax authorities and prepaid expense, deposits etc
JM Financial Institutional Securities Limited Page 44 Reliance Industries 30 July 2020 Exhibit 93. RIL’s net debt flow chart based on recent and proposed stake sale (INR bn) 2,560 436 2,700 337 2,100 950 747 1,500 76 531 1,610 950 900 432 300 -300 -900 -693
-1,500 -1125
Rights issueRights
FY20
deal
RIL-BP fuel RIL-BPfuel JV
deals
investors ininvestors JPL
Stake sale to Stakesale other
at FY20 end
Stake sale into JPL sale Stake into JPL sale Stake
deal is executed isdeal
Reporteddebtnet
Other liabilities Other considereddebtas
Total net debt Totalend debt net at
PotentialSaudiAramco Total net debt Aramcodebt netTotal if
Total net debt Totalabovedebt net after Source: Company, JM Financial
RIL-Aramco deal delayed, but still likely given its strategic importance for Saudi RIL- Aramco deal delayed due to Arabia challenging energy market outlook; RIL- Aramco deal for a proposed 20% stake in RIL’s O2C has been delayed due to sharp fall we still see a possibility of this deal in crude oil prices post covid-19 outbreak. This has led to Saudi Aramco’s FCF declining to going through given its strategic USD 15bn in 1QCY20 (vs USD 17bn in 1QCY19) and is expected to come under further importance for Saudi Arabia to pressure due to weak crude price outlook. However, to ensure its commitment of annual secure its future crude markets dividend of USD 75bn (as announced ahead of its IPO) amid weakness in global oil demand outlook, Aramco would like for some stability in the oil market before finalizing the deal. Earlier, Aramco had also extended payment period for its 70% stake purchase in SABIC for USD 69bn and also cut its capex for CY20 to USD 25-30bn (from earlier guidance of USD 35- 40bn) to provide a cushion against weak oil prices. However, we still see a possibility of this deal going through in future given its strategic importance for Saudi Arabia to secure its future crude markets. As part of the agreement, RIL is likely to increase its crude offtake from Aramco to 500kbpd on long term basis (from existing ~280kbpd). This is consistent with Aramco’s strategy to invest in downstream assets in growing Asian countries to secure their future crude markets. Aramco’s downstream business is the largest customer for its upstream business’ crude production, consuming 38% of its crude production in 2018 as per its IPO document.
Exhibit 94. Saudi Aramco historical financials USD bn CY16 CY17 CY18 CY19 1QCY20 PAT 13 76 111 88 17 Balance sheet Cash and cash eq. 13 22 49 47 63 PP&E 169 200 233 262 266 Total assets 251 294 359 398 393 Total borrwoings 14 21 27 47 49 Total liabilites 55 74 85 119 75 Total equity 196 220 274 279 288 Cash flow Operating cash flow 29 89 121 111 22 Investing cash flow -31 -32 -35 -47 5 Financing cash flow 1 -48 -59 -65 -12 Capex -28 -33 -35 -33 -7 Free cash flow 2 56 86 78 15 Ratios ROACE 6.6% 33.8% 41.1% 28.4% 26.3% Net Debt/Equity 0.6% -0.4% -8.6% -0.2% -4.9% Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 45 Reliance Industries 30 July 2020 RIL’s major capex phase behind us; entering strong FCF generation phase RIL’s major capex phase ended in RIL ended a major capex phase - incurring INR 6,680bn during FY14-FY20 - primarily to build FY20; entering strong FCF its Digital business and also for capacity expansion in its O2C business. With major capex generation phase completed, we expect it to moderate to a more normalised level of ~ INR 400-500bn p.a. going forward. Further, we expect RIL’s EPS to post a strong 17-18% CAGR over next 3-5 years led by growth potential in the Digital and Retail business. Hence, we estimate RIL’s FCF yield to improve from 2% in FY20 to 7% in FY25 as RIL will generate free cash flow of INR 235bn in FY21, which will grow to INR 993bn by FY25.
Exhibit 95. RIL’s major capex phase is behind us (INR bn) 1,250 1,200 1,135 1,149 RIL's major capex phase is behind us 1,003 1,000
757 731 750 706
516 493 500 418 429 452 327 269 246 250 101
0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
FY22E
FY23E FY24E FY25E Source: Company, JM Financial
Exhibit 96. RIL’s segment-wise capex break-up – major capex phase is behind us (INR bn) 1,250 1,200 1,149
1,000
757 750 731
516 493 452 500 429 418
250
0
FY17
FY18
FY19
FY20
FY21E
FY22E
FY23E
FY24E FY25E Refining Petchem E&P Retail Digital Others
Source: Company, JM Financial
Exhibit 97. RIL’s Net Debt - Equity on a steep declining trend Exhibit 98. RIL’s FCF and FCF yield to rise sharply 1.0 1,650 11% 0.91 0.91 0.8 0.75 0.67 1,100 7% 0.6 0.56 0.51 0.4 0.36 550 3% 0.32 (%) 0.23 bnINR 0.2 0.17 0.17 0.09 0 -1% 0.0 -0.01 -0.09 -0.16 -0.2 -0.23 -550 -5%
-0.4
FY12 FY14 FY15 FY17 FY18 FY19 FY20 FY13 FY16
FY22E FY23E FY24E FY25E FY21E
FY10 FY12 FY13 FY14 FY17 FY18 FY19 FY11 FY15 FY16 FY20
FY21E FY22E FY23E FY24E FY25E FCF (INR bn) FCF yield (%) (RHS)
Source: Company, JM Financial Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 46 Reliance Industries 30 July 2020 Key assumptions and estimates Exhibit 99. RIL – key assumption and estimate FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E Brent crude price (USD/bbl) 47.5 49.0 57.6 70.2 60.9 40.0 50.0 50.0 50.0 50.0 Exchange rate (INR/USD) 65.5 65.5 64.5 69.9 70.9 74.5 74.5 76.0 77.5 79.1 Refining EBITDA (INR Bn) 268 286 290 261 245 198 271 316 322 329 Crude throughput 69.6 70.1 69.8 68.3 70.6 65.7 70.6 70.7 70.7 70.8 Margins (USD/bbl) S'pore Dubai GRM 7.5 5.8 7.2 4.9 3.2 2.5 4.5 5.5 5.5 5.5 RIL's total GRM premium 3.3 5.2 4.4 4.3 5.7 5.0 4.5 4.5 4.5 4.5 a) RIL normal GRM premium 3.3 5.2 4.4 4.3 5.7 5.0 4.0 3.8 3.5 3.5 b) Petcoke gasification addition to GRM 0.0 0.0 0.5 0.8 1.0 1.0 RIL's total GRM 10.8 11.0 11.6 9.2 8.9 7.5 9.0 10.0 10.0 10.0 Refining cash opex 2.8 2.7 2.8 1.8 2.3 2.0 2.0 2.0 2.0 2.0 Refining EBITDA 8.0 8.3 8.8 7.4 6.6 5.5 7.0 8.0 8.0 8.0 Petrochemicals EBITDA (INR Bn) 137 165 259 379 309 266 337 381 401 421 EBITDA/ton (USD/ton) 155 176 234 273 218 192 221 243 248 253 Sales volumes (mmtpa) Polymers 4.6 4.5 4.9 5.8 6.0 5.6 6.1 6.2 6.3 6.3 Polyesters 2.2 2.3 2.6 2.9 2.9 2.7 3.0 3.0 3.0 3.1 Fiber intermediaries 6.4 6.9 9.3 10.9 10.8 10.0 11.0 11.2 11.3 11.4 Total 13.5 13.9 17.1 19.8 20.0 18.6 20.5 20.7 20.9 21.1 E&P EBITDA (INR Bn) 69 13 17 16 4 7 34 62 81 87 Gas production (mmscmd) 32 25 21 14 11 7 21 26 30 30 Gas realisation (USD/mmbtu) 4.7 3.8 4.3 5.1 5.3 5.5 5.4 6.4 6.4 6.4 Digital EBITDA (INR Bn) 67 153 225 332 463 567 667 781 EBITDA marrgin (%) 33.4% 37.2% 38.8% 43.4% 47.5% 47.7% 48.0% 48.1% Wireless segment Subscribers (mn - EoP) 187 307 388 445 457 472 485 499 ARPU (INR) 149 133 130 149 171 190 207 226 5G/Enterprise Revenues (INR bn) 0 0 35 56 83 FTTH segment Subscribers (mn - EoP) 3 8 13 18 24 ARPU (INR) 750 765 780 796 812 Retail EBITDA (INR Bn) 9 12 25 62 97 90 127 170 220 283 EBITDA margin (%) 4.1% 3.5% 3.7% 4.7% 5.9% 5.0% 5.9% 6.3% 6.7% 7.2% Net Store additions (#) 960 483 4,004 2,863 1,376 195 990 890 890 930 Gross revenue per average store (INR) 55 56 73 112 131 137 155 180 207 237 - YoY grow th (%) -3% 1% 31% 54% 17% 4% 13% 16% 15% 14% EBITDA break-up (INR Bn) Refining 268 286 290 261 245 198 271 316 322 329 Petchem 137 165 259 379 309 266 337 381 401 421 E&P 69 13 17 16 4 7 34 62 81 87 Digital 67 153 225 332 463 567 667 781 Retail 9 12 25 62 97 90 127 170 220 283 Financial Services & Others 25 51 54 6 42 3 4 5 5 6 Total 507 526 712 877 922 895 1,235 1,500 1,697 1,907 Energy business 474 463 565 656 557 470 641 759 804 837 Non-energy business (incl others) 33 62 146 221 364 425 593 742 892 1,070 EBITDA proportion Refining 53% 54% 41% 30% 27% 22% 22% 21% 19% 17% Petchem 27% 31% 36% 43% 34% 30% 27% 25% 24% 22% E&P 14% 2% 2% 2% 0% 1% 3% 4% 5% 5% Digital 0% 0% 9% 17% 24% 37% 37% 38% 39% 41% Retail 2% 2% 4% 7% 10% 10% 10% 11% 13% 15% Financial Services & Others 5% 10% 8% 1% 5% 0% 0% 0% 0% 0% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Energy business 93% 88% 79% 75% 60% 53% 52% 51% 47% 44%
Non-energy business (incl others) 7% 12% 21% 25% 40% 47% 48% 49% 53% 56% Source: Company, JM Financial.
JM Financial Institutional Securities Limited Page 47 Reliance Industries 30 July 2020 Exhibit 100. RIL’s historical EBITDA bridge –majorly led by Petchem expansion and ramp-up in Digital and Retail business
32 882 900 86 841 72 120 37 68 642 650 35 94 4 14 462 4
400 INR Bn
150 -16 -13 -3 -29 0 -14 -69
-100
E&P
E&P
E&P
Retail
Retail
Retail
Digital
Digital
Digital
Others
Others
Others
Refining
Petchem
Refining
Petchem
Refining
Petchem
FY17 EBITDA FY17
FY18 EBITDA FY18 FY19 EBITDA FY19 FY20 EBITDA FY20 Source: Company, JM Financial.
Exhibit 101. RIL's EBITDA bridge – Digital and Retail business to be key driver of EBITDA growth 105 1 1,500 1,450 45 27 43 131 1 1,234 45 1,150 28 37 73 71 882 107 0 895 3 850
550 INR Bn INR 250 -47 -43 -7
-50
E&P
E&P
E&P
Retail
Retail
Retail
Digital
Digital
Digital
Others
Others
Others
Refining
Petchem
Refining
Petchem
Refining
Petchem
FY20EBITDA
FY21EBITDA FY22EBITDA FY23EBITDA Source: Company, JM Financial
Exhibit 102. RIL’s EBITDA contribution from various business segments 100% 60%
80% 48%
60% 36%
40% 24%
20% 12%
0% 0%
FY11 FY13 FY15 FY17 FY19 FY10 FY12 FY14 FY16 FY18 FY20
FY21E FY23E FY22E FY24E FY25E
Refining Petchem E&P Retail Digital Others % EBITDA contribution from Consumer business (RHS)
Source: Company, JM Financial.
JM Financial Institutional Securities Limited Page 48 Reliance Industries 30 July 2020 Initiate coverage with a BUY rating with TP of INR 2 ,500 Our Target Price for RIL of INR 2,500/share (Sept’ 2021 basis) is computed on a sum-of-the- parts (SOTP) valuation method: a) Petchem segment at an EV of INR 424/share based on 7.5x forward EV/EBITDA, in-line with the implied Saudi Aramco deal multiple; b) Refining segment at an EV of INR 346/share based on 7.5x forward EV/EBITDA, in-line with the implied Saudi Aramco deal multiple; c) E&P segment at an EV of INR 68/share based on 9.0x forward EV/EBITDA; higher multiple as EBITDA is likely to jump due to a rise in gas production from new fields; d) Digital segment (RIL’s 67.05% stake in JPL) at an EV of INR 952/share comprising: i) Telecom business at INR 780/share based on DCF valuation; implied valuation of 14.3x Sept’21 EV/EBITDA; ii) Option value of duopoly market at INR 67/share; and iii) Digital opportunities at INR 105/share based on potential monetisation of Video OTT apps, audio OTT and Consumer IoT business. e) Retail business at an EV of INR 584/share based on 25x forward EBITDA. Further, we value Jio Mart at an EV of INR 115/share, factoring the opportunity of digitisation of Kirana store. RIL is entering a strong FCF generation phase with major capex completed and expectation of strong 17-18% EPS CAGR over the next 3-5 years led by Digital and Retail businesses. Hence, we initiate with a BUY rating and TP of INR 2,500/share (Sep’21 basis). We have also computed a 3-year Target Price (Sept’23 basis), which comes to INR 3,350/share, implying a potential ~17% CAGR return. Given the sharp +100% rally in the share price in the last 4 months, there could be near-term weakness given that EPS growth is likely to be muted in the next 1-2 quarters. However, we suggest using this opportunity to BUY as our 3-year TP implies a potential return CAGR of ~17%. We also take comfort from the company’s effort to address balance sheet concerns by expediting its deleveraging exercise and getting to zero net debt ahead of its end FY21 target. At CMP, stock is trading at FY22E P/E of 23.3x (3 yr avg: 18.6x), FY22E P/B of 2.3x (3 yr avg: 1.7x) and FY22E EV/EBITDA of 11.3x (3 yr avg: 10.8x).
Exhibit 103. RIL Sum-of-the-parts valuation - our Sept’ 2021 Target Price for RIL is INR 2,500/share Valuation EBITDA Valuation Valuation Valuation Valuation Business segment methodology (INR Bn) multiple (INR bn) (USD bn) (INR/share) Comments Energy business 5,322 71 838 Valued at 7.5x EV/EBITDA; in-line with multiple Petchem EV/ EBITDA 359 7.5 2,692 36 424 implied by Saudi Aramco deal Valued at 7.5x EV/EBITDA; in-line with multiple Refining EV/ EBITDA 293 7.5 2,198 30 346 implied by Saudi Aramco deal Valued at 9x EV/EBITDA; higher multiple used as E&P EV/ EBITDA 48 9.0 431 6 68 EBITDA to jump 3x Digital business (for RIL's 67.05% share) 6,044 81 952 Based on DCF valuation; implied valuation of a) Telecom business DCF 4,952 66 780 14.3x Sept'21 EV/EBITDA 50% probability of duopoly market; Jio garnering b) Optional upside in Telecom business 423 6 67 40% of VIL subscriber without any ARPU dilution Based on potential monetization of Video OTT c) Digital opportunities 669 9 105 apps, JioSaavn and Consumer IoT business Retail business EV/ EBITDA 4,437 60 699 Valued at 25x EV/EBITDA, based on peers a) Retail business 3,706 50 584 valuation range Valuing kirana digitisation opportunity assuming Jio Mart gets ~10% market share in General b) JioMart New commerce business 732 10 115 Trade ecommerce market by FY30 Total Enterprise Value 15,803 212 2,489 Factoring: a) Rs1,521bn from 32.95% stake sale in JPL; b) Rs76bn from BP; and c) rights issue Less: Net Debt -70 -1 -11 proceeds of INR531bn Total Equity Value 15,873 213 2,500 CMP 2,097 % upside 19% Source: JM Financial Note: We have used 6,349mn shares for our target price computation (including 423mn Rights shares but excluding 413mn Treasury shares)
JM Financial Institutional Securities Limited Page 49 Reliance Industries 30 July 2020 Exhibit 104. RIL Sum-of-the-parts valuation - our Sept’ 2023 Target Price for RIL is INR 3,350/share Valuation EBITDA Valuation Valuation Valuation Valuation Business segment methodology (INR Bn) multiple (INR bn) (USD bn) (INR/share) Comments Energy business 5,988 80 942 Valued at 7.5x EV/EBITDA; in-line with multiple Petchem EV/ EBITDA 411 7.5 3,081 41 485 implied by Saudi Aramco deal Valued at 7.5x EV/EBITDA; in-line with multiple Refining EV/ EBITDA 326 7.5 2,443 33 385 implied by Saudi Aramco deal E&P EV/ EBITDA 84 5.5 464 6 72 Valued at 5.5x EV/EBITDA Digital business (for RIL's 67.05% share) 7,169 96 1,129 Based on DCF valuation; implied valuation of 12x a) Telecom business DCF 5,835 78 919 Sept'23 EV/EBITDA 50% probability of duopoly market; Jio garnering b) Optional upside in Telecom business 515 7 81 40% of VIL subscriber without any ARPU dilution Based on potential monetization of Video OTT c) Digital opportunities 819 11 129 apps, JioSaavn and Consumer IoT business Retail business EV/ EBITDA 7,191 97 1,133 Valued at 25x EV/EBITDA, based on peers a) Retail business 6,289 84 991 valuation range Valuing kirana digitisation opportunity assuming Jio Mart gets ~10% market share in General b) JioMart New commerce business 901 12 142 Trade ecommerce market by FY30 Total Enterprise Value 20,347 273 3,204 Less: Net Debt -931 -12 -147 Net debt at end end Sept'2023 Total Equity Value 21,278 286 3,350 CMP 2,097 % upside 60% Source: JM Financial Note: We have used 6,349mn shares for our target price computation (including 423mn Rights shares but excluding 413mn Treasury shares) Risks along with EPS and valuation sensitivity a) Refining margin sensitivity: Every USD 1/bbl increase/decrease in GRM has a positive/negative impact of 2% of our valuation, 5% of our FY22E EPS, and 3% of our FY22E EBITDA. An unexpected decline in refining margin could have a negative impact on RIL’s earnings and valuation. b) Petchem margin sensitivity: Every USD 20/ton increase/decrease in EBITDA margins has a positive/negative impact of 2% of our valuation, 4% of our FY22E EPS, and 2% of our FY22E EBITDA. An unexpected slide in petchem EBITDA margins could hurt RIL’s earnings and valuation. c) Retail margin sensitivity: Every 50bps increase/decrease in retail EBITDA margins has a positive/negative impact of 1% of our valuation, FY22E EPS, and FY22E EBITDA. Any downside to retail profitability could have a negative impact on RIL’s earnings and valuation. d) ARPU and subscriber sensitivity: Every INR 10 increase/decrease in ARPU has a positive/negative impact of 2% of our valuation, 3% our FY22E EPS, and 2% of our FY22E EBITDA. Every 20mn increase/decrease in subscribers has a positive/negative impact of 1% of our valuation, 1% our FY22E EPS, and 1% of our FY22E EBITDA. Lower than expected ARPU and subscriber growth could have a negative impact on RIL’s earnings and valuation.
Exhibit 105. RIL Earnings and valuation sensitivity Change Impact on FY22 EBITDA Impact on FY22 EPS Impact on TP FY22e Base case assumption INR bn % change INR % change INR % change GRM (USD/bbl) 9.0 +/- USD 1/bbl 39 3% 4.2 5% 50 2% Petchem EBITDA margins (USD/ton) 221 +/- USD 20/tn 31 2% 3.3 4% 42 2% Retail EBITDA margins (%) 5.9% +/- 0.5% 11 1% 1.2 1% 21 1% Jio w ireless ARPU 171 +/- INR 10 26 2% 2.9 3% 39 2% Jio w ireless subscriber (mn) 457 +/-20mn 10 1% 1.1 1% 28 1% Base case 1,235 90 2,500 Source: JM Financial
JM Financial Institutional Securities Limited Page 50 Reliance Industries 30 July 2020 Bull vs Bear case valuation Our bull case valuation for RIL at INR 2,685/share factors in the following upside scenarios: a) Higher refining margins: FY22E GRM rise to USD 10.0/bbl (i.e. up USD 1.0/bbl from our base case assumption); this could increase our valuations by INR 50/share. b) Higher petchem margins: RIL’s FY22E Petchem EBITDA margins rising by USD 15/ton vs our base case assumption; this could increase our valuations by INR 31/share. c) Higher Jio ARPU: RIL’s FY25E ARPU doubling to ~INR 260 from INR 130 at the end of FY20 (vs. our base case of INR 226). This could add ~INR 171/share to our base value. However, in such a scenario chances of a VIL exit would be negligible and RIL would lose the option value of a duopoly, resulting in a net increase of INR 104/share. Our bear case valuation for RIL is INR 1,849/share factors in the following concerns: a) Lower refining margins: RIL’s FY22E GRM decline to USD 7.0/bbl (i.e. down USD 2.0/bbl from our base case assumption); this could hit our valuations by INR 103/share. b) Lower petchem margins: RIL’s FY22E Petchem EBITDA margins declining by USD 30/ton vs our base case assumption; this could hit our valuation by INR 64/share. c) NIL value to JioMart New commerce business: Challenges in ramping-up New commerce business amid heightened competition, this could hit our valuations by INR 115/share. d) Lower Jio ARPU: RIL’s ARPU is stagnant over FY21-23e similar to FY20 levels of INR 130 (vs. our base case of INR 190 in FY23), could hit our valuation by INR 264/share, but assuming VIL survives based on fresh equity infusion. e) Nil value for Digital opportunities: Challenges in monetisation of various Digital opportunities, could hit our valuations by INR 105/share.
Exhibit 106. Bull-Bear case September 2021 valuation range for RIL (INR) 2,800 104 2,685 2,500 50 31 105 2,400 264 115 64 103 2,000 1,849
1,600
1,200
Bull case Bull
GRM
Base Base case
Bear Bear Case
GRM
by 25E by
business
over over FY20-23E
USD2/bbl USD2/bbl lower
Stagnant ARPU Stagnant
opportunities
USD1/bbl USD1/bbl higher
USD30/tn lower USD30/tn
USD15/tn higher USD15/tn
petchem EBITDA petchem
petchem EBITDA petchem
New commerceNew
Doubling ARPUDoubling of NIL value for DigitalNILvaluefor NIL value to JioMartNILvalueto Source: JM Financial
JM Financial Institutional Securities Limited Page 51 Reliance Industries 30 July 2020 Relative Valuation RIL’s valuation has historically been driven by its potential for high earnings growth. RIL’s EPS during FY92-FY08 posted an ~18%-20% CAGR, but slowed considerably over FY09-FY16 to ~7% CAGR, despite commissioning of the RPL refinery, and gas production from KG D6. However, RIL’s EPS growth has picked up since FY17 and has posted a 13% CAGR during FY17-FY20 due to earning contribution from commissioning of +USD 50bn projects. We expect EPS growth trajectory to continue with a 17-18% CAGR in the next 3-5 years led by strong earnings growth in both Digital and Retail business. Hence, strong EPS growth trajectory is likely to continue to support RIL’s valuation.
Exhibit 107. 1 year forward P/E chart – RIL valuation re-rating led by EPS growth from Digital and Retail business 2,200 FY17-20 EPS CAGR of 13%; FY20-23e EPS CAGR at 18% 25x
1,650 FY09-16 EPS CAGR of 7%
16x 1,100
8x 550
0 Jul-04 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14 Jul-16 Jul-18 Jul-20
Source: Bloomberg, JM Financial
Exhibit 108. 1-year forward P/B chart 2,200 Re-rating led by EPS grow th due to 2.0x commissioning of +USD50bn projects aided by strong performance in Digital and Retail business
1,650 1.5x
1,100 1.0x
550
0 Jul-04 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14 Jul-16 Jul-18 Jul-20
Source: Bloomberg, JM Financial
JM Financial Institutional Securities Limited Page 52 Reliance Industries 30 July 2020
Exhibit 109. 1-year forward EV/EBITDA chart 2,200 Re-rating led by EPS grow th due to commissioning of +USD50bn projects aided by strong performance in Digital and Retail business 14x 1,650
10x 1,100
8x
550
0 Jul-04 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14 Jul-16 Jul-18 Jul-20
Source: Bloomberg, JM Financial
Exhibit 110. RIL’s underperformance v/s the Sensex has narrowed over past 2 years 32 Over past 3 years, RIL had made up for past under-performance due to grow th momentum in Digital and Retail busines
24
16
8
0 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14 Jul-16 Jul-18 Jul-20
RIL 1 yr forward PE Sensex 1 yr forward PE
Source: Bloomberg, JM Financial
JM Financial Institutional Securities Limited Page 53 Reliance Industries 30 July 2020 Company profile Reliance Industries Limited (RIL) is a Fortune 500 company and the largest Indian company in terms of market cap. RIL was founded in 1966 by Mr. Dhirubhai Ambani as a small textile manufacturer unit under the name Reliance Textiles Engineers Pvt. Limited. In 1985, the company changed its name to Reliance Industries Limited. Over the years, the company has diversified into other businesses like Petchem, Refining, Telecom, Retail and Media & Entertainment.
The energy business of RIL includes Refining and Marketing, Petrochemicals, and Oil & Gas Exploration and Production. In 2006, the company entered into organized retail under the brand name ‘Reliance Fresh’. Reliance Retail is the largest retailer in India and has established its business across five key consumption baskets of Consumer Electronics, Fashion & Lifestyle Grocery, Petro Retail and Connectivity. Reliance Jio, the telecom business, was launched in 2016 as a 4G only network. In just over 3 years, Jio has become the largest telecom service provider in term of subscribers and revenues. The company also has an associated suite of ‘Jio app’ catering to various consumer needs. Media & Entertainment assets include Network 18’s portfolio of 56 channels, across news and entertainment genres and 16 international channels. Apart from this, Network 18 includes filmed entertainment and digital news and entertainment platforms. Other assets include publishing business, distribution platform and cable TV providers. RIL has also started focussing on financial services driven by its digital payment solutions and payment bank.
Board of Directors
- Mr. Mukesh Ambani – Chairman and Management Director - Mrs. Nita M. Ambani – Non-Executive, Non Independent Director - Mr. Hital R. Meswani – Executive Director - Mr. Nikhil R. Meswani – Executive Director - Mr. P.M.S Prasad – Executive Director - Mr. P.K. Kapil – Executive Director - Mr. R.A.Mashelkar – Independent Director - Mr. Adil Zainulbhai – Independent Director - Mr.Dipak C. Jain – Independent Director - Mr. Yogendra P. Trivedi – Independent Director - Mr. Raminder S. Gujral – Independent Director - Mr. Shumeet Banerji – Independent Director - Mrs. Arundhati Bhattacharya – Independent Director - Mr. K.V. Chowdary – Non-Executive Director - Mr. Pawan Kumar Kapil – Executive Director
JM Financial Institutional Securities Limited Page 54 Reliance Industries 30 July 2020 Financial Tables (Consolidated)
Income Statement (INR mn) Balance Sheet (INR mn) Y/E March FY19A FY20A FY21E FY22E FY23E Y/E March FY19A FY20A FY21E FY22E FY23E Net Sales 56,92,090 59,67,430 51,27,431 66,04,605 74,87,221 Shareholders’ Fund 38,71,120 45,33,310 52,98,537 62,52,992 69,61,873 Sales Growth 45.3% 4.8% -14.1% 28.8% 13.4% Share Capital 59,260 63,390 64,447 67,616 67,616 Other Operating Income 0 0 0 0 0 Reserves & Surplus 38,11,860 44,69,920 52,34,090 61,85,376 68,94,256 Total Revenue 56,92,090 59,67,430 51,27,431 66,04,605 74,87,221 Preference Share Capital 0 0 0 0 0 Cost of Goods Sold/Op. Exp 39,44,870 40,52,400 34,81,968 44,85,097 50,84,469 Minority Interest 82,800 80,160 2,70,935 3,56,867 4,64,406 Personnel Cost 1,24,880 1,40,750 1,47,788 1,55,177 1,62,936 Total Loans 27,19,420 29,14,170 22,61,012 16,52,401 14,75,202 Other Expenses 7,80,670 8,92,110 6,02,176 7,29,608 7,39,660 Def. Tax Liab. / Assets (-) 4,51,470 5,12,230 5,31,623 5,61,272 5,98,959 EBITDA 8,41,670 8,82,170 8,95,500 12,34,724 15,00,156 Total - Equity & Liab. 71,24,810 80,39,870 83,62,107 88,23,532 95,00,439 EBITDA Margin 14.8% 14.8% 17.5% 18.7% 20.0% Net Fixed Assets 57,78,370 64,17,640 65,65,230 68,63,442 71,13,442 EBITDA Growth 31.2% 4.8% 1.5% 37.9% 21.5% Gross Fixed Assets 58,47,100 74,29,350 78,44,224 84,57,722 90,53,271 Depn. & Amort. 2,09,340 2,22,030 2,61,691 3,09,805 3,40,177 Intangible Assets 1,19,970 1,02,590 1,02,590 1,02,590 1,02,590 EBIT 6,32,330 6,60,140 6,33,809 9,24,919 11,59,978 Less: Depn. & Amort. 19,83,330 22,05,360 24,67,051 27,76,856 31,17,033 Other Income 83,860 1,39,560 1,40,416 1,32,495 1,35,660 Capital WIP 17,94,630 10,91,060 10,85,467 10,79,986 10,74,614 Finance Cost 1,64,950 2,20,270 1,72,081 1,11,794 86,255 Investments 23,56,350 27,67,670 23,06,690 23,33,301 24,01,160 PBT before Excep. & Forex 5,51,240 5,79,430 6,02,143 9,45,620 12,09,383 Current Assets 18,41,580 24,44,840 29,01,037 31,92,174 35,69,259 Excep. & Forex Inc./Loss(-) 0 -44,440 0 0 0 Inventories 6,75,610 7,39,030 7,26,425 8,70,610 9,41,014 PBT 5,51,240 5,34,990 6,02,143 9,45,620 12,09,383 Sundry Debtors 3,00,890 1,96,560 2,33,707 2,74,744 3,02,965 Taxes 1,53,900 1,37,260 1,61,060 2,51,879 3,19,212 Cash & Bank Balances 1,10,810 3,09,200 7,58,961 8,57,152 11,24,469 Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 59,970 2,24,010 2,06,694 2,12,490 2,20,102 Assoc. Profit/Min. Int.(-) -1,030 -1,070 49,319 85,931 1,07,539 Other Current Assets 6,94,300 9,76,040 9,75,250 9,77,178 9,80,710 Reported Net Profit 3,98,370 3,98,800 3,91,765 6,07,810 7,82,632 Current Liab. & Prov. 28,51,490 35,90,280 34,10,850 35,65,386 35,83,423 Adjusted Net Profit 3,98,370 4,43,240 3,91,765 6,07,810 7,82,632 Current Liabilities 10,83,090 9,67,990 8,83,169 11,27,579 12,30,995 Net Margin 7.0% 7.4% 7.6% 9.2% 10.5% Provisions & Others 17,68,400 26,22,290 25,27,682 24,37,807 23,52,428 Diluted Share Cap. (mn) 5,926.0 6,339.0 6,444.7 6,761.6 6,761.6 Net Current Assets -10,09,910 -11,45,440 -5,09,814 -3,73,211 -14,164 Diluted EPS (INR) 67.2 69.9 60.8 89.9 115.7 Total – Assets 71,24,810 80,39,870 83,62,107 88,23,532 95,00,439 Diluted EPS Growth 10.4% 4.0% -13.1% 47.9% 28.8% Source: Company, JM Financial Total Dividend + Tax 46,410 49,650 38,668 54,093 74,378 Dividend Per Share (INR) 6.5 6.5 6.0 8.0 11.0 Source: Company, JM Financial
Cash Flow Statement (INR mn) Dupont Analysis Y/E March FY19A FY20A FY21E FY22E FY23E Y/E March FY19A FY20A FY21E FY22E FY23E Profit before Tax 5,51,240 5,34,990 6,02,144 9,45,620 12,09,383 Net Margin 7.0% 7.4% 7.6% 9.2% 10.5% Depn. & Amort. 2,09,340 2,22,030 2,61,691 3,09,805 3,40,177 Asset Turnover (x) 0.9 0.8 0.6 0.8 0.8 Net Interest Exp. / Inc. (-) 1,10,380 1,14,530 31,666 -20,701 -49,405 Leverage Factor (x) 1.9 1.8 1.7 1.5 1.4 Inc (-) / Dec in WCap. -2,87,820 2,19,040 -1,09,364 59,189 4,792 Others -37,770 -25,990 0 0 0 RoE 11.7% 10.5% 8.0% 10.5% 11.8%
Taxes Paid -1,21,910 -83,860 -1,41,667 -2,22,229 -2,81,525 Operating Cash Flow 4,23,460 9,80,740 6,44,469 10,71,683 12,23,423 Key Ratios Capex -9,36,260 -7,65,170 -4,09,281 -6,08,017 -5,90,178 Y/E March FY19A FY20A FY21E FY22E FY23E Free Cash Flow -5,12,800 2,15,570 2,35,188 4,63,666 6,33,245 BV/Share (INR) 653.2 715.1 822.2 924.8 1,029.6 Inc (-) / Dec in Investments -38,210 -17,110 4,79,086 -34,336 -79,003 ROIC 11.2% 11.3% 10.1% 13.8% 16.3% Others 29,400 25,340 1,40,416 1,32,495 1,35,660 ROE 11.7% 10.5% 8.0% 10.5% 11.8% Investing Cash Flow -9,45,070 -7,56,940 2,10,221 -5,09,858 -5,33,521 Net Debt/Equity (x) 0.5 0.4 0.0 -0.1 -0.2 Inc / Dec (-) in Capital 2,320 1,300 5,53,586 4,00,738 626 P/E (x) 31.2 30.0 34.5 23.3 18.1 Dividend + Tax thereon 0 0 0 0 0 P/B (x) 3.2 2.9 2.6 2.3 2.0 Inc / Dec (-) in Loans 8,64,560 3,55,810 -7,47,766 -6,98,486 -2,62,578 EV/EBITDA (x) 19.2 18.3 16.3 11.3 9.0 Others -3,07,820 -3,82,520 -2,10,749 -1,65,887 -1,60,633 EV/Sales (x) 2.8 2.7 2.8 2.1 1.8 Financing Cash Flow 5,59,060 -25,410 -4,04,929 -4,63,635 -4,22,585 Debtor days 19 12 17 15 15 Inc / Dec (-) in Cash 37,450 1,98,390 4,49,761 98,191 2,67,317 Inventory days 43 45 52 48 46 Opening Cash Balance 73,360 1,10,810 3,09,200 7,58,961 8,57,152 Creditor days 82 69 76 77 75 Closing Cash Balance 1,10,810 3,09,200 7,58,961 8,57,152 11,24,469 Source: Company, JM Financial Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 55 Reliance Industries 30 July 2020
APPENDIX I
JM Financial Institutional Securities Limited Corporate Identity Number: U67100MH2017PLC296081 Member of BSE Ltd., National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd. SEBI Registration Nos.: Stock Broker - INZ000163434, Research Analyst – INH000000610 Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India. Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: [email protected] | www.jmfl.com Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: [email protected]
Definition of ratings Rating Meaning Buy Total expected returns of more than 15%. Total expected return includes dividend yields. Hold Price expected to move in the range of 10% downside to 15% upside from the current market price. Sell Price expected to move downwards by more than 10%
Research Analyst(s) Certification
The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that:
All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and
No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
Important Disclosures
This research report has been prepared by JM Financial Institutional Securities Limited (JM Financial Institutional Securities) to provide information about the company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the purpose of information of the select recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written consent of JM Financial Institutional Securities. This report has been prepared independent of the companies covered herein.
JM Financial Institutional Securities is registered with the Securities and Exchange Board of India (SEBI) as a Research Analyst and a Stock Broker having trading memberships of the BSE Ltd. (BSE), National Stock Exchange of India Ltd. (NSE) and Metropolitan Stock Exchange of India Ltd. (MSEI). No material disciplinary action has been taken by SEBI against JM Financial Institutional Securities in the past two financial years which may impact the investment decision making of the investor.
JM Financial Institutional Securities renders stock broking services primarily to institutional investors and provides the research services to its institutional clients/investors. JM Financial Institutional Securities and its associates are part of a multi-service, integrated investment banking, investment management, brokerage and financing group. JM Financial Institutional Securities and/or its associates might have provided or may provide services in respect of managing offerings of securities, corporate finance, investment banking, mergers & acquisitions, broking, financing or any other advisory services to the company(ies) covered herein. JM Financial Institutional Securities and/or its associates might have received during the past twelve months or may receive compensation from the company(ies) mentioned in this report for rendering any of the above services.
JM Financial Institutional Securities and/or its associates, their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) covered under this report or (c) act as an advisor or lender/borrower to, or may have any financial interest in, such company(ies) or (d) considering the nature of business/activities that JM Financial Institutional Securities is engaged in, it may have potential conflict of interest at the time of publication of this report on the subject company(ies).
Neither JM Financial Institutional Securities nor its associates or the Research Analyst(s) named in this report or his/her relatives individually own one per cent or more securities of the company(ies) covered under this report, at the relevant date as specified in the SEBI (Research Analysts) Regulations, 2014.
The Research Analyst(s) principally responsible for the preparation of this research report and members of their household are prohibited from buying or selling debt or equity securities, including but not limited to any option, right, warrant, future, long or short position issued by company(ies) covered under this report. The Research Analyst(s) principally responsible for the preparation of this research report or their relatives (as defined under SEBI (Research Analysts) Regulations, 2014); (a) do not have any financial interest in the company(ies) covered under this report or (b) did not receive any compensation from the company(ies) covered under this report, or from any third party, in connection with this report or (c) do not have any other material conflict of interest at the time of publication of this report. Research Analyst(s) are not serving as an officer, director or employee of the company(ies) covered under this report.
While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities may not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This report is provided for information only and is not an investment advice and must not alone be taken as the basis for an investment decision.
JM Financial Institutional Securities Limited Page 56 Reliance Industries 30 July 2020 The investment discussed or views expressed or recommendations/opinions given herein may not be suitable for all investors. The user assumes the entire risk of any use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities reserves the right to make modifications and alterations to this statement as they may deem fit from time to time.
This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any transaction.
This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject JM Financial Institutional Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves of and to observe such restrictions.
Persons who receive this report from JM Financial Singapore Pte Ltd may contact Mr. Ruchir Jhunjhunwala ([email protected]) on +65 6422 1888 in respect of any matters arising from, or in connection with, this report.
Additional disclosure only for U.S. persons: JM Financial Institutional Securities has entered into an agreement with JM Financial Securities, Inc. ("JM Financial Securities"), a U.S. registered broker-dealer and member of the Financial Industry Regulatory Authority ("FINRA") in order to conduct certain business in the United States in reliance on the exemption from U.S. broker-dealer registration provided by Rule 15a-6, promulgated under the U.S. Securities Exchange Act of 1934 (the "Exchange Act"), as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission ("SEC") (together "Rule 15a-6").
This research report is distributed in the United States by JM Financial Securities in compliance with Rule 15a-6, and as a "third party research report" for purposes of FINRA Rule 2241. In compliance with Rule 15a-6(a)(3) this research report is distributed only to "major U.S. institutional investors" as defined in Rule 15a-6 and is not intended for use by any person or entity that is not a major U.S. institutional investor. If you have received a copy of this research report and are not a major U.S. institutional investor, you are instructed not to read, rely on, or reproduce the contents hereof, and to destroy this research or return it to JM Financial Institutional Securities or to JM Financial Securities.
This research report is a product of JM Financial Institutional Securities, which is the employer of the research analyst(s) solely responsible for its content. The research analyst(s) preparing this research report is/are resident outside the United States and are not associated persons or employees of any U.S. registered broker-dealer. Therefore, the analyst(s) are not subject to supervision by a U.S. broker-dealer, or otherwise required to satisfy the regulatory licensing requirements of FINRA and may not be subject to the Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
JM Financial Institutional Securities only accepts orders from major U.S. institutional investors. Pursuant to its agreement with JM Financial Institutional Securities, JM Financial Securities effects the transactions for major U.S. institutional investors. Major U.S. institutional investors may place orders with JM Financial Institutional Securities directly, or through JM Financial Securities, in the securities discussed in this research report.
Additional disclosure only for U.K. persons: Neither JM Financial Institutional Securities nor any of its affiliates is authorised in the United Kingdom (U.K.) by the Financial Conduct Authority. As a result, this report is for distribution only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the "Financial Promotion Order"), (ii) are persons falling within Article 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the matters to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as "relevant persons"). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons.
Additional disclosure only for Canadian persons: This report is not, and under no circumstances is to be construed as, an advertisement or a public offering of the securities described herein in Canada or any province or territory thereof. Under no circumstances is this report to be construed as an offer to sell securities or as a solicitation of an offer to buy securities in any jurisdiction of Canada. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the registration requirement in the relevant province or territory of Canada in which such offer or sale is made. This report is not, and under no circumstances is it to be construed as, a prospectus or an offering memorandum. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed upon these materials, the information contained herein or the merits of the securities described herein and any representation to the contrary is an offence. If you are located in Canada, this report has been made available to you based on your representation that you are an “accredited investor” as such term is defined in National Instrument 45-106 Prospectus Exemptions and a “permitted client” as such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Under no circumstances is the information contained herein to be construed as investment advice in any province or territory of Canada nor should it be construed as being tailored to the needs of the recipient. Canadian recipients are advised that JM Financial Securities, Inc., JM Financial Institutional Securities Limited, their affiliates and authorized agents are not responsible for, nor do they accept, any liability whatsoever for any direct or consequential loss arising from any use of this research report or the information contained herein.
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