COMPANY UPDATE

RELIANCE INDUSTRIES Déjà vu: Downgrade in order

India Equity Research| Oil, Gas and Services COMPANYNAME

We turned very bullish on Reliance Industries (RIL) with our BRAVEHEART EDELWEISS 4D RATINGS ‘BUY’ in 2016; four years on and a 4x rally since, we believe the stock’s Absolute Rating HOLD primary triggers—deleveraging, asset monetisation and digital Rating Relative to Sector Outperform momentum—have played out. We also believe the pendulum has swung Risk Rating Relative to Sector Medium entirely: from extreme pessimism to exuberance, infallible expectations Sector Relative to Market Equalweight on execution and a peak analyst ‘Buy’ ratio (80%). That the valuation is pricing in overly high growth expectations when its WACC is rising and economic spread being negative suggest risks lie on the downside. This is MARKET DATA (R: RELI.BO, B: RIL IN) not RIL’s first brush with euphoria: 1994 (India liberalisation), 2000 (Y2K) CMP : INR 2,146 and 2008 (KG-D6/Refining). The current exuberance gives us a sense of Target Price : INR 2,105 déjà vu; downgrade to ‘HOLD’ with a target price of INR2,105. 52-week range (INR) : 2,163 / 867 Share in issue (mn) : 6,339.4

M cap (INR bn/USD mn) : 14,148 / 70,157 Ten-year Jio 35% CAGR, eh; high WACC; negative economic spread Avg. Daily Vol.BSE/NSE(‘000) : 11,335.2 Our two-stage reverse-DCF analysis shows the market is baking in high EPS growth, particularly for Jio Platforms (35% CAGR sustaining for ten years). We believe the SHARE HOLDING PATTERN (%) associated risk is high, and despite its strong past execution, even RIL is not infallible. Current Q4FY20 Q3FY20 Besides, deleveraging to zero-debt has counterintuitively lifted RIL’s WACC to its high Promoters * 49.1 48.9 48.9 cost of equity (CoE). In fact, we reckon RIL earns a sub-optimal economic spread (RoE- MF's, FI's & BK’s 13.4 13.6 13.6 CoE), even after we assume a robust earnings CAGR of 23% (FY20–25E). FII's 24.2 23.5 24.0

Others 13.3 14.0 13.5 Jio Platforms/Mart: Value but a long haul; presupposes right to win * Promoters pledged shares : NIL The planned integration of digital, retail and financial services is distant and not (% of share in issue) without risks. While Reliance Retail has turned out to be a success, it took 14 years, and the firing telecom business has been long discounted and demanded loads of cash. PRICE PERFORMANCE (%) EW O & G The newest platform has strong drivers: FAANG global tailwind, the very best global Stock Nifty Index partners and a prized opportunity. But it has not really been able to exhibit leadership (entertainment, other verticals) so far, and RIL’s right-to-win in a winner-takes-all is far 1 month 18.1 8.3 8.7 from established. The prospect of a super app is also compelling, but India’s open 3 months 56.8 20.7 28.4 architecture—like the US’s, and unlike China’s—makes its success somewhat uncertain. 12 months 39.3 (12.0) (13.1)

Outlook: Downgrade to ‘HOLD’ wary of newFAANGled exuberance RIL’s FAANG-like valuation (particularly Jio’s) is misplaced as O2C and telecom make up Jal Irani +91 22 6620 3087 70% of value. We are raising SoTP-based TP by 25%—hikes of 38% for Jio and 54% for [email protected] Retail—despite a 17%/9% cut in FY21E/FY22E EPS (mainly O2C, Retail). Risks: upside— BPCL, Retail acquisitions, retail IPO; downside—petrchem cycle, Jio letdown. We are Pranav Kshatriya +91 (22) 4040 7495 removing RIL as a BRAVEHEART. [email protected] Financials (INR mn) Sandip Agarwal

Year to March FY19 FY20 FY21E FY22E +91 (22) 6623 3474 Net revenue 5,671,350 5,967,430 4,862,215 6,508,306 [email protected]

EBITDA 839,180 882,170 915,314 1,339,880 Shubham Mittal Adjusted Profit 395,880 393,540 418,460 663,136 +91 22 4063 5459 Adjusted diluted EPS (INR) 66.8 62.1 61.9 98.1 [email protected]

Diluted P/E (x) 32.2 34.6 34.7 21.9 EV/EBITDA (x) 18.2 18.1 18.4 12.6 July 27, 2020

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Oil, Gas and Services

Investment Argument: Negative economic spread belies excessive growth ask Chart 1: RIL’s path to zero debt is complete…. Chart 2: …but zero debt increases WACC, lowers valuation

2,700 1521 2,508 ZERO net CMP debt 2,100 achieved INR220bn 2,143 of Net Cash Intrinsic value falls as zero 1,500 by FY22 1,778 debt increases WACC 531 towards CoE 900 76 1,413 450

Net Debt/ Cash (INR bn) (INR Cash Debt/ Net 300 - 220 Intrinsic value/shareIntrinsic 1,048 (300) Net 33% Jio Rights Fuel Free Net 683 debt stake Issue retail cash debt/ 9.9% 10.9% 11.9% 12.9% 13.9% 14.9% (FY20) sale till FY22 flow Cash (FY22) WACC Chart 3: Extreme pessimism swings to excessive exuberance… Fig. 1: Overwhelming ‘BUY’ recommendations a la 2008

2,000 Deleverage: 31 Monetisatio Stake sales in n (BP Plc, Jio JIO, in O2C to JIO data Aramco launch: Re- INvit) on; 26.5 1,600 value release Pessimists rating, fast discount JPL customer investments acquisition 22 30–50%:–ve 1,200 equity value

17.5

yr Forward P/E (x) P/E Forwardyr SharePrice(INR) 800 - 13 1 3x valuation re-rating: Deleveraging, rights and RJio monetisation

400 8.5

17

16

19

18

16

18 19 20

17

18

20

- -

-

-

-

- - -

-

-

-

Jul

Jan

Jun

Oct

Apr

Sep Feb

Aug

Nov

Mar May Share price Forward PE Chart 4: High growth ask, particularly for Jio (reverse DCF) … Chart 5: Negative economic spread despite high EPS CAGR

2,500 (82) 71.0

2,000 Jio (175) 55.0 O2C Retail requi Consol require requir d grt = red require ed grt 8% grt = d grt = 1,500 = 31% (268) 39.0 CAGR 35% 20% CAGR

CAGR CAGR (%) (%)

(INR/share) 1,000 (361) 23.0

500 (454) 7.0

0 (547) (9.0)

yr grt

yr grt yr grt

yr grt

-

- -

- FY19 FY20 FY21EFY22EFY23EFY24EFY25E

8% 10

3% Term grt 3% Term grt 3% Term grt 3% Term grt 20% 10 31% 10 ROE-COE EPS Growth 35% 10 Source: Bloomberg, Edelweiss research

2 Edelweiss Securities Limited Reliance Industries

Summary: Extreme pessimism to excessive exuberance

Re-rating triggers successfully accomplished In a span of four years, RIL’s stock price has quadrupled and valuation tripled as deleveraging, asset monetisation and digital-driven euphoria spiked interest in the stock.

For Street, it is a flip-flop—a complete U-turn over the past four years. At one stage, prior to Jio’s mobile telephony launch, investors were discounting invested capital by 30–50%, effectively valuing Jio at a negative equity value. The market is now extrapolating that RIL can endlessly create value by doing more of the same and is incrementally ignoring risks. This proverbial excessive exuberance is a recipe for disappointment in our view.

Lofty valuation discounting excessive expectations Using a few key tools to size up the stock metrics, we demonstrate and conclude that RIL’s valuations are unjustifiably high at a time when risk has in fact risen.

First, our reverse DCF calculation suggests that the market is baking in a very high earnings CAGR of 35% for Jio Platforms and 31% for Reliance Retail sustaining over the next ten years, which by any measure is a tall ask.

Second, deleveraging to zero-debt has swung the needle to the other extreme, raising RIL’s WACC to match its cost of equity (CoE). The sharp rise in WACC precipitates a negative economic spread even after assuming a robust earnings CAGR of 23% over FY20–25E.

Finally, even on conventional valuation parameters such as PER, EV/EBITDA and PBV, RIL’s stock is close to historical peaks. Similarly, Street’s ‘BUY’ recommendations on the stock are nearly at an all-time high, another sign of extreme exuberance. History suggests that a stock price fall is in order.

Street’s new-FAANGled makeover but RIL old-line O2C/telecom at heart We believe that comparing Jio Platforms with the FAANG companies is the market’s newfangled makeover of the stock. While RIL management has a tenable vision that promises long-term growth potential in that direction, we believe it shall be a long journey nevertheless.

In our view, markets have significantly and prematurely fired up the valuation of the entire consolidated entity—RIL—to those commanded by the FAANG companies. This unhindered run-up in the stock price is primarily fuelled by a slew of big-ticket investments in Jio Platforms at heady valuations. The cutting-edge FAANG companies boast large free cash flows already; for RIL in a stark contrast, it is primarily the O2C business that shall continue to generate the bulk of cash flows over the medium term.

Moreover, the telephony business currently accounts for the bulk of Jio Platforms’ current valuation. And global telecoms companies’ valuation benchmarks are significantly lower than that of the FAANG companies.

3 Edelweiss Securities Limited Oil, Gas and Services

RJio: Gigantic opportunity, but ‘right to win’ critical At the time of its telecoms services launch, RJio had a ready ecosystem of communication, entertainment, payment and utility applications, more sophisticated than most telecom operators then. The company has since bolstered it lead via several bolt-in acquisitions and now offers products and services in education, fleet management, e-commerce, healthcare, and communication network. In the process, it has leveraged cutting-edge technologies such as AI, IoT, ML, and AR/VR. The highest-in-the-industry ~400mn subscriber base and a gamut of product offerings do give an impression of certain scalability in the related business.

But there can be many a slip twixt cup and lip. Although RJio launched its entertainment apps at an early stage of business evolution, invested aggressively in business and forged the right partnerships, it has not been able to achieve leadership in any of these businesses. Naturally, some of the competition was more agile and responded faster to consumer needs.

In the entertainment ecosystem space for instance, rival apps have gained a clear leadership. Displacing them will be a Herculean task. In the healthcare and IoT ecosystems too, RJio, despite a few acquisitions, is lagging; it would demand more focused partnerships and probably cash burn. The Education vertical has its set of strong participants, notably BYJU, and while they may have some fault lines, snatching the pole position is a tall order.

Super app: A potential mirage Success of Chinese super apps such as WeChat and Alipay has inspired many. A swathe of companies have taken a leaf out of that book and are adding functionalities to core offerings to create a turnkey commerce ecosystem—from business communication to transaction and aftersales—so that customers do not have to venture out of their apps.

In the western world though, internet evolution, which took off with the unbundling of Craigslist, continues to chart a different trajectory: customers thereof prefer a separate app for each function with an uncluttered UI and clear value proposition. This largely explains why Spotify and Netflix, to name a couple, continue to expand their leadership despite presence of behemoths such as Apple and Google in the space.

We argue that the evolution of internet ecosystem in India is more along the lines of the western world than China; hence, we see limited scope of super apps succeeding in India. For a reality check, Paytm and MyJio tried a super-app strategy, but that did not leave a mark beyond a very small set of verticals.

Consumer-facing integrated strategy — A long haul A comprehensive vertical and horizontal integration coupled with huge economies of scale has been the hallmark of RIL Group’s past successes, particularly in its refining and petrochemicals businesses. Similarly RIL is in the process of integrating digital, retail and financial services, which—if successful—would create a formidable value proposition.

Nevertheless, we believe it would be a long haul. Notably, Reliance’s retailing success is the culmination of 14 years of hard work, with the ball first set in motion in 2006. Similarly, the company’s current ambition is not only likely to take a very long time in our view, but also entail meaningful cash burn. The nature of the cash burn is likely to be in the form of intellectual capital such as R&D, promotions, differently skilled manpower vis-à-vis

4 Edelweiss Securities Limited Reliance Industries

traditionally physical capital expenditure, which shall demand staggering capital as well. In its ambitious quest, RIL is in fact opening several battle fronts simultaneously, including digital, e-commerce and banking against some of the most deep-pocketed global majors.

O2C: Cyclical downturn, but the jewel in the crown We believe RIL’s refining and petrochemical (O2C) businesses are undergoing a severe covid-19-induced global cyclical downturn. Moreover, the O2C business is increasingly viewed as environmentally unsustainable. Growth in such businesses is forecast to ebb structurally in ten years; hence the market is ascribing a modest growth rate of 8% to RIL’s O2C business.

We, on the contrary, believe that RIL’s O2C business is in fact The Jewel in The Crown as it is among the most competitive O2C businesses globally. India’s petroleum products demand growth itself is poised to continue beyond 20 years. Moreover, Reliance’s chairperson recently announced its intent to become a zero-carbon emissions company by 2035, alleviating ‘pollution’ concerns and heralding a valuation re-rating.

Further M&A – Law of diminishing returns The market expects further M&A triggers. We attribute a high probability thereof, but argue that the key triggers of debt reduction and asset monetisation have already played out, and any M&A transaction hereafter shall have to be examined even more critically (for further value accretion). Now that RIL has turned debt-free, further cash infusion through stake sales may in fact have the opposite effect as WACC is skewed towards high cost of equity.

Potential acquisitions or even misses of value-accretive acquisitions shall be watched closely by the market. We believe BPCL is one such significant acquisition potential, which should be highly value-accretive as RIL can derive the greatest synergies. We believe the market may even be disappointed in case RIL does not attempt to acquire BPCL.

Enviable execution, but Reliance is not infallible We do give credit to RIL for its enviable execution, and if that were not the case it would not have reached its current great heights in the first place. Unfortunately, perfection although highly desirable: KG-D6, US shale, and fuel retailing did not live up to expectations. Some of these may not have blossomed due to changes in external circumstances. Nevertheless, they demonstrate that the leviathan—RIL—is not infallible.

High earnings growth prospects; modest profitability We reiterate that the culmination of staggering capex of INR4.5tn incurred over the past five years shall fuel RIL’s earnings by 23% CAGR over the next five years. However, we note that hasn’t happened so far, and even as recently as FY20, RIL’s earnings show some stagnation. That said, going forward, RIL’s O2C businesses and Jio shall be the key earnings drivers.

We forecast RIL would turn strongly free cash flow positive and that its profitability ratios are poised to improve, but it shall nevertheless struggle to achieve a positive economic spread as zero debt shall bump up its weighted average cost of capital (WACC).

5 Edelweiss Securities Limited Oil, Gas and Services

Key risks: Corporate actions, large spends, execution

We believe markets will keenly watch out for potential acquisitions, or even a miss-out on value-accretive acquisitions. BPCL and Retail acquisitions (marginal diminishing utility), or retail listing (and marquee investors) top the list for upside triggers. Downside risks lie in KG- D6 execution or Jio disappointments (including potential large capex). We enlist them below.

Upside risks (1) Jio Platforms’ IPO at a premium to recent placement EV of USD65bn. In addition, the market may continue assigning a rising value to Jio’s Apps and value added services. (2) Similarly, placements in the Retail and O2C business to strategic investors. (3) An earlier-than-expected V-shaped revival of the O2C business cycle. (4) Acquisition of BPCL at compelling valuations. (5) Potential exports of 5G solutions to other telecom operators globally once Jio's 5G solution is proven. (6) Creditable progress towards becoming a zero-carbon emissions company by 2035, thereby alleviating pollution/ESG concerns. Downside risks (1) Slower-than-expected ramp-up in JioMart rollout and customer acquisition. (2) Stiff competition from the likes of Amazon may entail large cash burn to build on the existing customer base in the retail business. (3) Steeper-than-expected hikes in telecom tariffs may slow down customer additions. (4) KG-D6: Potential undershoot once again on production guidance.

Business value concentration: O2C/Telecom make up 70% We believe the market is prematurely attributing FAANG-like valuations to Reliance (beyond Jio), overlooking the fact that the consolidated RIL is predominantly an O2C/telecom play (70% of value). We are raising SoTP-based TP by 25%, primarily on the back of hikes in valuations by of 38% for Jio and 54% for Retail. This is despite a 17%/9% cut in FY21E/FY22E earnings, primarily attributable to the O2C and retail businesses indicates full valuations and blue-sky expectations.

Table 1: SoTP-based valuation of INR2,105 – O2C/Telecom account for 70% Base Base value value Base value (USD bn) (INR bn) (INR/share) % Comments Refining (@ EV/FY22E EBITDA = 9.5x) , 45.7 3,426 532 25% Global Refining peers trade at 7.2x. Assumed GRM of USD8.0/bbl, Upstream USD11/bbl in FY21/22 Petchem (@ EV/FY22E EBITDA = 9.5x) 47.5 3,563 553 26% Global petchem peers trade at 7.1x. Assumed EBITDA of USD98/mt, USD146 in FY21/22 Retail (@ EV/FY22E EBITDA = 26x) 39.5 2,966 460 21% RIL has 94.38% stake in RIL Retail; Indian retail peers trade at 26x; 5.6 422 65 3% RIL has 94.38% stake in JIO Mart; Valued at 35x gross margin, JIO Mart similar to D-Mart JIO platform: Telecom/ Digital business 36.0 2,702 419 20% DCF based EV of INR5.1trn, RIL has 67% stake of that. 33% stake : Value added services 9.6 719 112 5% held by Strategic/ PE funds Net debt 7.8 586 91 Less: Holding company discount (10%) 24.8 1,859 288 10% Holdiing company discount SOTP 180.8 13,564 2,105 CMP 13,850 2,149 Return on CMP (%) -2.1% Source: Edelweiss Research

6 Edelweiss Securities Limited Reliance Industries

Re-rating triggers successfully accomplished

In a little less than four years, RIL’s stock price has quadrupled and valuations have tripled. Even during the past 18 months RIL’s stock has re-rated in line with our expectations of the dual triggers of deleveraging and value unlocking playing out. This re- rating is reminiscent of the one during 2005–07. Refer to our reports below.

 ‘Right’ on track to zero net debt (May 1, 2020)

 Value unlocking, deleveraging with Facebook stake (Apr 22, 2020)

 Further value unlocking underway via Jio (Oct 29, 2019)

 Of value unlocking and deleveraging (Aug 13, 2019)

 Upcoming asset monetization to trigger significant value (Jan 17, 2019)

 Reliance Jio: The winner's edge (Mar 3, 2017)

Street has done a full U-turn during the same period. At one stage, prior to Jio mobile telephony launch, investors were attributing a 30–50% discount to invested capital, effectively valuing Jio at negative equity value.

In contrast, the market is now extrapolating that RIL can endlessly create value by doing more of the same and is incrementally ignoring risks. We argue this excessive exuberance is a recipe for disappointment.

Chart 6: Investor sentiment swings from extreme pessimism to excessive exuberance, firing up valuation 3x in four years

2,000 Explicit announcement 31 Re-rating Asset monitisation to de-leverage by selling accompanying (BP Plc, Jio INvit) stake in JIO and 20% commences, JIO data launch stake in O2C to Aramco 26.5 triggering value 1,600 & corresponding Pessimistic analysts rapid customer release attribute 30-50% acquisation discount to Jio 22 Platform's proposed 1,200 investments, suggesting a large –

ve equity value 17.5

yr Forward P/E (x) Forward P/E yr

SharePrice(INR)

- 1 800 13 3x valution re-rating following actual de-leveraging to zero debt, rights issue &

400 monitisation of JIO. 8.5

16 19 17 18

18 20 16 17 19

16 17 19 19 20 17 18 18

18 19 20 17

17 18 20 16 19

- - - -

- - - - -

------

- - - -

- - - - -

Jul Jul Jul Jul Jul

Jan Jan Jan Jan

Sep Sep Sep Sep

Nov Nov Nov Nov

Mar Mar Mar Mar

May May May May May

Share price Forward PE

Source: Edelweiss research

7 Edelweiss Securities Limited Oil, Gas and Services

Trigger 1 achieved: Re-rating following debt reduction We believe RIL would comfortably achieve zero net debt by FY22 following its rights issue and stake monetisation in several businesses, even after accounting for creditor capex and spectrum liabilities. Adding the creditor capex of INR500bn and spectrum liability of INR200bn, we reckon an adjusted net debt figure of about INR2.57tn. RIL recently raised INR2.13tn through an INR0.53tn rights issue and INR1.52tn sale of Jio Platform shares. Along with free cash flows, we believe that RIL shall comfortably turn net cash by FY22E.

Chart 7: Zero net debt, even after creditor capex and spectrum liabilities 2,700 2576 1521

2,100

ZERO net debt 1,500 INR220bn of Net Cash by FY22 achieved 531 900

Net Debt/ Cash (INR bn) (INR Cash Debt/ Net 76 450 300 - 220

(300) Net debt (FY20) 33% Jio stake sale Rights Issue till Fuel retail Free cash flow Net debt/ Cash FY22 (FY22) Source: Edelweiss research

Trigger 2 achieved: M&A – History repeats itself Over the past 18 months, we had forecast that RIL’s share price shall rise sharply upon value release accompanying the demerger and restructuring of businesses much like it happened over 2005–06. In addition, IPCL was merged into RIL during FY07. RIL skillfully enhanced IPCL’s earnings nearly tenfold following its acquisition in 2002. We believe RIL’s M&A triggers have now significantly played out.

Chart 8: Surge in value following restructuring of RIL’s businesses during 2005–06

8 Edelweiss Securities Limited Reliance Industries

Similarly in the recent past, Jio Platforms monetisation has been a key trigger. While we concur that RJio’s offerings are second to none, the bulk of RJio’s near-term revenue and EBITDA will come from the telecom business. The success of other components of the ecosystem now hinges on execution.

Trigger 3: Jio Platforms trigger has largely played out RJio’s game plan — to capture value from internet-enabled content delivery and service platform, a la Xiaomi, Tencent, etc rather than being a me-too telecom operator — was quite clear even before launch. RJio, even at the time of its telecoms services launch had ready ecosystem of communication, entertainment, payment and utility applications.

We had elaborated this in our reports during 2016 (Betting big on integrated play stratagem). However, market’s confidence on this business model has come a full circle. From complete disbelief then, to near euphoria now. The halo effect of Facebook’s significant minority stake has shifted discussion from the potential steady state cash generation to the addressable markets of its ecosystem.

While we concur that RJio’s offerings are second to none, the bulk of its near-term revenue and EBITDA will come from the telecoms business. Success of other components of ecosystem will depend on the execution as well as evolution of those businesses. Despite having a ready ecosystem at the time of launch, RJio’s plan to monetise it via Jio Prime Membership did not succeed, as it has not been able to create near monopoly in any part of the ecosystem. However, the ecosystem is still evolving and RJio may succeed in some of them if the execution follows.

Further triggers: Jio IPO, Retail and O2C monetisation; BPCL bid Street expects further M&A triggers. We attribute a high probability thereof, but argue the key triggers—debt reduction and asset monetisation—have largely played out. Each M&A transaction henceforth shall have to examined more critically than ever for value accretion.

Moreover, since RIL has turned debt-free, further cash infusion via stake sales may have the opposite effect as WACC is skewed towards the higher cost of equity. Potential acquisitions or even a miss-out on value-accretive acquisitions shall be watched closely by the market.

 Jio Platforms’ IPO is expected over the next one year at an EV of more than USD65bn, i.e. the value at which PE investors (other than strategic investors Google and Facebook) were allotted shares.

 Retail and O2C business stock placement to strategic investors along similar lines as Jio Platforms. The chairperson stated the company’s intent to rope in strategic investors for the Retail business over the next few quarters. Similarly, partners for the O2C business is a stated intent.

 BPCL acquisition: The government has invited an expression of interest (EoI) by 31st July, 2020 for a strategic divestment of its 53% stake in BPCL. We believe BPCL presents deep value and that Reliance would derive among the greatest synergies.

 V-shaped revival of O2C business cycle: RIL’s refining and petrochemical (O2C) businesses are undergoing a covid-19-induced global cyclical downturn. We forecast benchmark Singapore complex GRMs would remain negative for most of 2020 with a meaningful recovery unlikely for two years. In case of a surprise V-shaped recovery in demand growth, the O2C business could become RIL’s largest earnings drive.

9 Edelweiss Securities Limited Oil, Gas and Services

Lofty valuation discounting blue-sky expectations

Using a few key tools to size up the stock metrics, we demonstrate and conclude that RIL’s valuations are unjustifiably high at a time when risk has in fact risen.

First, our reverse DCF calculation suggests that the market is baking in a high earnings CAGR of 35% for Jio Platforms and 31% for Reliance Retail sustaining over the next ten years, which by any measure is a tall ask.

Second, deleveraging to zero-debt has swung the needle to the other extreme, raising RIL’s WACC to match its cost of equity (CoE). The sharp rise in WACC precipitates a negative economic spread even after assuming a robust earnings CAGR of 23% over FY20–25E.

Finally, even on conventional valuation parameters such as PER, EV/EBITDA and PBV, RIL’s stock is close to historical peaks. Similarly, Street’s ‘BUY’ recommendations on the stock are nearly at an all-time high, another sign of extreme exuberance. History suggests that a stock price fall is in order.

Two-stage reverse DCF: High asking rate for medium term ‘g’ We double-checked our findings. In order to gauge whether excessive exuberance is built into stock valuations, we performed a two-stage reverse DCF (FCFE-based) for each of RIL’s three major businesses: refining/petrochemicals (O2C), Jio Platforms and Retail.

Essentially, for each of Reliance’s three key businesses, we estimated the required growth rate for the next ten-year period that Street is baking in in the stock valuation.

Based on these parameters, we conclude that investors are pricing-in overly high growth expectations for Jio Platforms—of a 35% CAGR for the ten-year growth period. Similarly for Retail, expectations are only slightly less sanguine at a 31% CAGR. For the O2C business though, the growth ask is a very modest 1%, and in fact on subdued FY20 earnings as well as after assuming a 0% terminal growth rate. Hence, the O2C business presents deep value.

Chart 9: Two-stage reverse DCF: Stock pricing in high growth ask, particularly at 35% CAGR for Jio Platforms

2,400

2,000 Retail Jio 1,600 O2C required required required grt = 8% CAGR grt = 31% grt = 35%

1,200 CAGR CAGR (INR/share) 800 Consol required

400 grt = 20% CAGR

0

JIO

Retail

year grtyear

-

RIL Consol RIL

year growth year

year growth year

year growth year

-

-

-

Refining & Refining

35% 10 35%

8% 10 8%

31% 1031%

3% Terminal Growth Terminal 3% Growth Terminal 3% 3% Terminal Growth Terminal 3% Growth Terminal 3% 20% 10 20% Petchem/Standalone Source: Edelweiss research

10 Edelweiss Securities Limited Reliance Industries

Negative economic spread does not justify high valuations We estimate that RIL would generate a negative economic spread (return on equity minus cost of equity) despite our assumption of a robust earnings CAGR of 23% from FY20–25E.

We estimate that RIL’s RoE will expand modestly to 11.5% from FY20 levels of 9.3%, but that is still below its cost of equity of 12.6%. The negative economic spread implies no value creation since companies with zero or negative economic spreads should ideally trade at book value. Yet, investors attribute a rich PBV in excess of 2x for RIL.

Similarly, while RIL’s RoCE is poised to rise, we believe given its zero-debt target, the company’s WACC shall rise to its CoE of 12.6%. RIL shall, therefore, continue to earn a suboptimal return.

Chart 10: Economic spread (RoE–CoE) to remain negative despite strong EPS forecasts (82) 71.0

(175) 55.0

(268) 39.0

(%) (%) (361) 23.0

(454) 7.0

(547) (9.0) FY19 FY20 FY21E FY22E FY23E FY24E FY25E

ROE-COE EPS Growth

Source: Edelweiss research

The paradox of zero debt: A suboptimal capital structure While deleveraging allays investor concerns on solvency, a zero-debt structure raises the cost of capital for RIL. We highlight that the company’s WACC will jump to 12.6% as it becomes debt-free, from 9.9% in FY20.

Notably, an optimal debt mix lowers WACC as the tax break on debt exceeds risk. Of course, beyond an optimal debt mix point, WACC rises as enhanced risk outweighs the tax break benefit. For calculating WACC, we use the following assumptions: 1) Risk free rate: 6%, market risk premium: 6% 2) Equity beta: 1.1. Notably, de-leveraging has already led to a decline in beta (chart 12) 3) FY20 debt/capital: 41%, target debt/capital: 0

Using the Gordon Growth valuation model for calculating the PE multiple and WACC of 9.9%, the implied terminal growth for RIL is 5.7% (refer to table below). With WACC rising to 12.6%, at similar growth rates, the target price potentially falls by 40% to INR1,090/share with fair valuation at 14.5x PER. Therefore, while near-term concerns on solvency stand allayed due to deleveraging, RIL’s higher cost of capital would affect its valuation in the long term.

11 Edelweiss Securities Limited Oil, Gas and Services

Chart 11: Zero debt lifts WACC, lowers justifiable valuation

2,508

Intrinsic value falls as zero 2,143 debt increases WACC towards CoE 1,778

1,413

Intrinsic value/shareIntrinsic 1,048

683 9.9% 10.9% 11.9% 12.9% 13.9% 14.9%

WACC

Table 2: Zero-debt cause a surge in WACC to 12.6%, denting target price by 40% Implied multiple WACC Implied TP WACC 15.73 9.1% 10.7% 12.6% 14.5% 16.7% 0.07 7.2% 9.9% 12.6% 15.3% 18.0% 5.2% 25.7 18.2 13.6 10.8 8.7 5.2% 1672 1183 880 700 567 5.8% 30.3 20.4 14.7 11.5 9.2 5.8% 1966 1322 955 747 598 6.3% 35.7 22.7 15.9 12.2 9.6 6.3% 2316 1472 1031 793 627

Terminal Growth Terminal 6.8% 43.4 25.6 17.2 13.0 10.1 6.8% 2819 1661 1120 844 658

7.5% 62.4 31.2 19.6 14.3 10.9 Growth Terminal 7.5% 4049 2023 1273 929 709 Source: Edelweiss research

Chart 12: RIL stock beta: Down since announcement of deleveraging to zero debt

1.3

1.2 Beta declined following 1.1 delevaring plan

Beta (X) Beta 1.1

1.0

0.9

17 19 15 16 18

16 18 19 17 20

17 18 19 20 15 16

- - - - -

- - - - -

------

Jun Jun Jun Jun Jun Jun

Oct Oct Oct Oct Oct

Feb Feb Feb Feb Feb

Beta

Source: Bloomberg, Edelweiss research

Nearing historical high valuations; a potential fall ahead? RIL is trading at a lofty valuation that is now close to its historical peak of 2007. At that time, the stock had crashed shortly thereafter.

12 Edelweiss Securities Limited Reliance Industries

One may expectedly argue that RIL’s growth prospects are significantly greater now, but we argue so are the risks. Anybody who has lived through RIL’s earlier peak valuations cycles shall tell you that RIL’s growth prospects were equally strong (and perhaps even more so) during the 2004–07 cycle as they are now.

Notably, some of the high-growth opportunities materlised (refinery and petrochemical upgradation and expansions) while some did not (KGD6, shale), but valuations normalized rather quickly.

Chart 13: RIL’s 1-year forward PER and EV/EBITDA within striking distance of 2007–08 peak, which was followed by a fall

35 19 31 27 17 23 14 +1SD 19 +1SD 12 15 9 11 -1SD -1SD

7 7

18 05 06 07 08 09 10 11 12 13 14 15 16 17 19 20

------

10 17 05 06 07 08 09 11 12 13 14 15 16 18 19 20

------

Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul

Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul EV/EBITDA 10 year average PER 10 year average Source: Edelweiss research

RIL’s one-year forward PBV is also at a high level, exceeding 1 standard deviation. However, it is not close to historical peaks. Notably, large equity raisings recently (Jio Platform stock sale, rights issue) have shored up equity and hence subdued PBV. Moreover, as argued earlier in this report, RIL earns a suboptimal RoE and hence a negative economic spread. This, in our view, does not justify the current PBV.

Chart 14: RIL 1-year forward PBV: Above 1 std. deviation, but not near historical peak

4.8

4.0

3.2

2.4 +1SD 1.6 -1SD

0.8

05 07 08 09 11 12 13 14 15 16 18 19 20 06 10 17

------

Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul

P/B 10 year average

Source: Edelweiss research

13 Edelweiss Securities Limited Oil, Gas and Services

Similarly, ‘BUY’ recommendations on Street are nearing an all-time high (80%), which reflects extreme exuberance. If history is any guidance, a stock price fall is in order.

Fig. 2: Déjà vu: Overwhelming ‘BUY’ recommendations similar to 2008

Source: Bloomberg, Edelweiss research

14 Edelweiss Securities Limited Reliance Industries

Table 3: SoTP-based TP at INR2,105/share Base Base value value Base value (USD bn) (INR bn) (INR/share) % Comments Refining (@ EV/FY22E EBITDA = 9.5x) 38.1 2,860 444 21% Global Refining peers trade at 7.2x. Assumed GRM of USD8.0/bbl, USD11/bbl in FY21/22 Petchem (@ EV/FY22E EBITDA = 9.5x) 47.5 3,563 553 26% Global petchem peers trade at 7.1x. Assumed EBITDA of USD98/mt, USD146 in FY21/22 India Upstream 6.3 475 74 3% DCF basis. Includes CBM, R-Series and Satellite fields BP Petro Retail @51% stake 1.2 91 14 1% 20% premium to BP Plc's acquisation of 49% during 2019-20

Retail (@ EV/FY22E EBITDA = 26x) 39.5 2,966 460 21% RIL has 94.38% stake in RIL Retail; Indian retail peers trade at 26x

JIO Mart 5.6 422 65 3% Valued at 35x gross margin, similar to D-Mart Digital (Implied EV/EBITDA=11x) 68.1 5,105 792 Less: Minority Interest in Jio 22.5 1,684 261 RIL's holding in Digital business 45.6 3,422 531 25% DCF based EV of INR 5.1 trn; 33% stake held by PE funds Gross Debt 21.4 1,603 249 11% Net debt 7.8 586 91 4% Value of non operating assets 24.8 1,859 288 12% At book value SOTP (pre-holdco discount) 201 15,071 2,338 100% Before Holding co discount Less: Holding company discount (10%) 20.1 1,507 234 10% Holdiing company discount SOTP 180.8 13,564 2,105 CMP 13,850 2,149 Return on CMP (%) -2.1% Source: Edelweiss research

Table 4: 9–17% earnings cuts, but 25% target price hike given richer valuations FY21E FY22E Comments New Old % change New Old % change While we cut our Earnings by EBITDA (INR bn) 915 1,011 (9.5) 1,340 1,418 (5.5) 17%/9% for FY21/ FY22, we have EPS (INR) 61.9 75.1 (17.5) 98.1 108.6 (9.7) given rich valuation to their consumer business (Jio / Retail) Target Price New (INR) 2,105 which will be ~50% of their total Target Price Old (INR) 1,678 EBITDA by FY23.Hence increased % change 25.4 the TP to INR2105 (up ~25%) Source: Company, Edelweiss research

Table 5: Key changes is assumptions Major assumption change FY21E FY22E New Old % change New Old % change GRM ($/ bbl) 8.5 8.0 6.3 11.5 11.5 0.0 Petchem EBITDA (USD/ mt) 98 117 (15.7) 146 137 6.2 RJIO Subscribers (mn) 454 464 (2.2) 498 508 (2.0) RJIO ARPU (INR) 148 161 (7.8) 180 192 (6.3) Retail EBITDA (INR bn) 90 107 (16.4) 134 118 13.2 Source: Edelweiss research

15 Edelweiss Securities Limited Oil, Gas and Services

New-FAANGled but old-line O2C/telecom play at heart

We believe comparing Jio Platforms with FAANG is the market’s newfangled makeover of the stock. While RIL management has a tenable vision that promises long-term growth potential in that direction, we believe it shall be a long journey nevertheless.

In our view, markets have significantly and prematurely fired up the valuation of the entire consolidated entity—Reliance Industries—to those commanded by the FAANG companies. This unhindered run-up in the stock price is primarily fuelled by a slew of big- ticket investments in Jio Platforms at heady valuations. While new-generation FAANG generate large free cash flows, in a stark contrast, it is primarily the O2C business that shall generate the bulk of cash flows for RIL over the medium term. To put in a technical perspective, the FAANG-heavy Nasdaq itself is trading 21% above its 100 DMA.

Moreover, telephony accounts for the bulk of Jio Platforms’ current valuation. And global telecoms majors’ valuations are significantly lower than that of the FAANG companies.

Reliance is mostly an O2C and telecom play…. Investors have recently driven up RIL’s valuations on the back of comparison with the FAANG companies. We demonstrate that whichever way you slice it, Reliance is predominantly a refining, petchem & upstream (O2C) and telecom play.

 O2C is more than half of RIL’s SoTP: Jio Platforms as a share of SoTP is limited to 25%, especially as one-third of that company was recently divested to Facebook, Google and other strategic investors. As we argue in the valuation section, the market is building in a steep 35% CAGR for Jio Platforms, which in fact means that the risk associated with the valuations is very high.

 Within Jio Platforms, telecom business dominates SoTP at 86%. We estimate that the mobile telephony (wireless) and fibre-to-home (wired broadband) businesses account for 86% of Jio Platform’s sum-of-parts valuation, while the value-added tech-related business contributes only 14%. Moreover, value-added businesses are nascent, essentially in the nature of relatively high-risk start-ups.

 O2C dominates EBITDA breakdown at 50% even during FY25E: In fact, contribution of O2C could be even higher as the O2C business cycle is at its worst-ever currently; hence there is potentially a base-effect earnings bias during forecasting. In contrast, we are building in a high growth rate in our Jio Platforms earnings growth forecasts. More importantly, even through FY25E, the telecoms businesses shall continue to constitute the bulk of Jio Platforms’ earnings.

16 Edelweiss Securities Limited Reliance Industries

Chart 15: SoTP valuation demonstrates RIL is mostly an O2C and telecom play O2C is more than half of RIL’s SoTP, despite Telecom is 86% of Jio’s SoTP; value-added low assumed O2C growth services a high-risk option value JIO Entertainm Refining Education IOT platform ent apps 21% 2.3% 2.8% 25% 2.5%

Enterprise business 4.9% JIO Mart 3%

Petchem Telecom 26% Retail (Wireless+ 22% Upstream FTTH 3% 85.9%

Chart 16: Similarly, O2C shall contribute more than three–fifths of RIL’s PAT even in FY25E ….and O2C is three-fifth’s of PAT as Jio has O2C is half of FY25E EBITDA despite low base high depreciation effect…. 100 100.0 13 20 25 32 80.0 JIO's PAT 80 O2C 13 contribution 11 shall is much 18 contribu 60 17 60.0 lower than te half of EBIDTA as it EBIDTA has a high

during (%) PAT 40.0 40 73 interest & EBITDA (%) EBITDA 64 FY25E depreciation 62 51 20 20.0

0 0.0 FY20 FY25E FY20 FY25E O2C Retail Telecom/JIO O2C Retail Telecom/Jio

Source: Edelweiss research,

….but Street is ascribing new-FAANGled valuations We believe that investors have driven up the valuations of the entire consolidated Reliance Industries significantly and prematurely to those commanded by the FAANG companies. This is primarily on the back of Jio Platforms’ heady valuations. While the new generation businesses of the FAANG companies generate large free cash flows, in a stark contrast, it is primarily RIL’s O2C business that shall continue to generate the bulk of cash flows, at least for the foreseeable future.

 Operating cash flows: RIL’s cash cow is its O2C business, while equity raising—primarily by Jio Platforms—is its current major source of cash flow. RIL should turn FCF-positive going forward though. In contrast, the FAANG companies generate several billions of dollars of free cash flows each year and hence already have a large net cash balance.

 RoE: Similar to FMCG companies, the FAANG companies earn very high and sustainable RoEs in excess of 20%. While Reliance’s retail business earns a high RoE, RJio and

17 Edelweiss Securities Limited Oil, Gas and Services

standalone RIL’s consolidated RoE is less than 10%. This is so despite RJio forecast to earn strong earnings CAGR of 43% and RIL 23% over the next five years.

 EV/Sales and EV/EBITDA valuations: RJio’s EV/Sales is richer than that for the FAANG companies and yet RJio is not as expensive on EV/EBITDA, suggesting that the market is building in margin-driven earnings growth for RJio.

Chart 17: Valuation are comparable to FAANG despite high growth expectations and inferior RoE as well as OCFs EPS growth: Much greater expectations …and yet RJio’s RoE is nowhere near FAANG for Jio than FAANG* companies’ 50.0 40.0

40.0 32.0 24.0 30.0

16.0 ROE (%) ROE

EPS CAGR (%) CAGR EPS 20.0 8.0 10.0 0.0 0.0 FY20 FY21E FY22E RIL RJIO Retail RIL FAANG- Petchem, consol mean RIL Petchem, refining, gas RJIO refining, Retail RIL consol gas FAANG- mean * Five-year forecast for RIL’s divisions versus two years for FAANG

Chart 18: OCF: FAANG have significantly greater and growing cash flows… ….and hence they are already hugely net cash OCF: FAANG have significant greater and (FY20) growing cash flows… 38 30

30 14

23 (2)

OCF (USD bn) (USD OCF 15 (18)

8 bn) (USD Debt Net (34)

0 (50) FY20 RIL RJIO Retail RIL consol FAANG- RIL Petchem, refining, gas RJIO Petchem, mean Retail RIL consol refining, FAANG- mean gas Source: Edelweiss research, Bloomberg consensus estimates

18 Edelweiss Securities Limited Reliance Industries

EV/Sales of RJio is richer than FAANG…. …but, EV/EBIDTA is lower, suggesting higher 10.0 EBIDTA ratio for Jio 40.0

8.0 32.0

6.0 24.0

4.0 16.0 EV/ Sales (x) Sales EV/ EV/ EBITDA (x)EBITDA EV/ 8.0 2.0 0.0 0.0 FY20 FY21E FY22E FY20 FY21E FY22E RIL Petchem, refining, gas RJIO RIL Petchem, refining, gas RJIO Retail RIL consol Retail RIL consol FAANG- mean FAANG- mean Source: Edelweiss research, Bloomberg consensus estimates

Even FAANG-heavy Nasdaq is 21% above its 100 DMA From a technical perspective, the FAANG-heavy Nasdaq is scaling higher tops, and now the widest gap (21% above 100 DMA) since the dotcom peak of March 2000. Year to date, Nasdaq is up 25%. By component, it is primarily the FAANG stocks that have driven up the index. Notably, the FAANG stocks account for one-third of Nasdaq weighting.

We believe that investors have similarly fuelled the valuations of the entire consolidated Reliance Industries, significantly and prematurely to ape those of the FAANG companies. We believe that while Reliance management has a significant and tenable vision with long-term potential to grow in that direction, it is a long way nonetheless.

Fig. 3: FAANG-heavy Nasdaq is 21% above its 100 DMA, highest since the dotcom peak of March 2000

Source: Edelweiss research, Bloomberg

19 Edelweiss Securities Limited Oil, Gas and Services

Table 6: Global valuation comparison with FAANG companies

4.9

4.8

6.5

4.9

3.2

5.3

2.6

1.4

4.7 3.8

FY22E

5.7

5.6

7.6

5.2

3.7

6.3

3.5

2.1

6.5

5.3

FY21E

EV/ Sales (x) EV/ Sales

6.7

6.7

8.9

5.8

4.4

7.9

FY20

2.7

1.9 9.2

3.4

15.5

NA

NA

5.1

6.3

1.9

2.7

22.6

20.5

22.8 FY22E

15.5

NA

NA

5.1

6.3

2.2

3.1

22.6

20.5

22.8

FY21E P/B (x)

15.5

NA

NA

FY20

5.1

6.3

3.0

3.2

22.6 20.5

22.8

2.2

8.1

(2.9)

39.2

54.5

69.4

38.5

36.3

13.1

10.2

FY20

bn) bn)

OCF (USD OCF (USD

29.4

5.7

1.4

5.6

-1.3

24.4

68.5

36.2

19.1

14.8 FY22E

23.2

0.0

3.7

3.1

0.5

0.6

16.9

62.1 22.6

14.2

FY21E

FCF (USD bn) bn) FCF (USD

25.9

FY20

2.9

3.1

7.1

-3.1

-6.5

31.0

58.9

21.7 21.2

28.2

NA

NA

NA

19.6

38.3

22.3

42.7

17.9

21.9 FY22E

35.4

NA

NA

NA

23.2

50.5

24.8

57.0

21.5

34.7 FY21E

P/E (x)

50.1

NA

NA

NA

FY20

29.5

72.1

29.8

90.9

28.0 34.6

FY20

(42.3)

0.5

6.6

11.4

22.5

30.1

34.2

-97.9

-44.1

-103.7

(USD bn) bn) (USD

Net debt

29.3

(%) (%)

22.7

37.3

15.7

45.9

24.9

22.6

28.9

43.1

18.9

EPS EPS CAGR#

36.4

9.4

9.4

8.2

13.6

10.9

18.3

28.0

10.0

129.9 FY22E

22.9

9.6

8.0

6.3

7.4

14.6

60.8

10.5

18.8

23.7

FY21E

ROE (%) (%) ROE

15.8

9.1

6.9

9.3

5.4

8.5

FY20

13.5

32.3

17.2 36.7

17.0

11.2

26.9

17.3

19.6

10.2

12.6

23.4

11.0

15.4

FY22E

20.6

13.0

35.1

18.0

24.6

12.5

18.4

35.0

15.5

25.5 FY21E

EV/EBITDA( x) x) EV/EBITDA( 26.5

FY20

16.2

46.1

20.5

33.8

16.1

18.1

32.5

22.6

21.8

NA NA

NA

Mcap

2,10,620

6,63,221

1,89,072

(USD mn) (USD

10,34,980

16,09,685

14,89,620

FAANG- mean

Alphabet

Netflix

Apple

Amazon

Facebook

FAANG

RIL Consolidated RIL

RIL Retail

RJIO

RIL Petchem, refining,RIL Petchem, gas (standalone) Reliance Industries LimitedReliance Company Source: Edelweiss research, Bloomberg

20 Edelweiss Securities Limited Reliance Industries

Table 7: Global valuation comparison with telecom companies Div yield EPS CAGR Mcap Diluted EPS (LC) EV/EBITDA( x) ROCE (%) Company (%) (%) (USD mn) FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY21E FY20-22E India Telecom Vodafone Idea Ltd 3,226 (10.7) (5.6) (4.7) 9.3 6.8 5.6 -6.7 23.0 2.6 0.0 -33.8 Bharti Airtel Ltd 40,791 (4.5) 3.7 14.7 12.5 9.9 8.2 -5.9 1.3 3.9 0.4 NA Reliance Jio NA 1.0 2.5 3.9 22.6 15.5 11.0 9.1 10.2 13.6 NA 43.1 Reliance Consol 1,89,072 62.1 61.9 98.1 18.1 18.4 12.6 8.0 7.9 9.5 0.3 25.7 India Telecom-Mean (4.7) 0.2 4.6 14.8 10.8 8.3 -1.2 11.5 6.7 0.2 4.7 US Telecom AT&T INC 2,13,038 3.2 3.3 3.4 6.9 6.7 6.7 6.0 6.0 6.4 6.9 3.4 Verizon Communications Inc 2,31,107 4.7 4.9 5.0 7.4 7.2 7.1 9.5 8.9 8.4 4.5 2.8 US Telecom-Mean 4.0 4.1 4.2 7.1 7.0 6.9 7.7 7.5 7.4 5.7 3.1 Europe Telecom Telenor Asa 22,628 9.4 11.0 11.3 6.5 6.2 6.0 8.4 10.0 12.2 6.2 9.4 Telefonica Sa 24,168 0.5 0.5 0.5 5.2 5.2 5.2 4.2 4.2 4.6 9.5 5.8 Deutsche Telekom Ag-Reg 83,083 1.1 1.1 1.3 5.3 5.0 4.6 4.3 4.0 4.3 4.3 13.0 Europe Telecom-Mean 3.7 4.2 4.4 5.7 5.5 5.3 5.7 6.1 7.0 6.7 9.4 APAC Telecom China Telecom Corp Ltd-H 23,911 0.2 0.3 0.3 2.2 2.2 2.1 4.2 4.4 4.6 5.6 8.2 China Tower Corp Ltd-H 32,244 0.0 0.1 0.1 5.7 5.2 4.9 2.3 2.9 3.5 2.6 32.3 Nippon Telegraph & Telephone 92,793 232.0 239.4 259.9 5.2 5.2 5.1 6.6 6.5 6.6 4.0 5.8 APAC Telecom-Mean 77.4 79.9 86.7 4.4 4.2 4.0 4.4 4.6 4.9 4.1 15.4 Middle-East Telecom Saudi Telecom Co 51,777 5.4 5.5 5.8 9.1 8.8 8.5 14.3 14.1 14.1 4.3 3.9 Middle East -Mean 5.4 5.5 5.8 9.1 8.8 8.5 14.3 14.1 14.1 4.3 3.9 Source: Edelweiss research, Bloomberg

21 Edelweiss Securities Limited Oil, Gas and Services

Gigantic opportunity but right-to-win critical

Even at the time of its telecoms services launch, RJio had a ready ecosystem of communication, entertainment, payment and utility applications, much wider than most incumbent telecoms operators. Bolstered by several bolt-in acquisitions, the company has further expanded its lead, offering products and services in the education, fleet management, e-commerce, healthcare, and communication network verticals. It did so leveraging cutting-edge technologies such as artificial intelligence (AI), Internet of Things (IoT), machine learning (ML) and augmented/virtual reality (AR/VR). The highest-in-the-industry subscriber base of about 400mn and a gamut of product offerings do give an impression of certain scalability in the related business.

But there can be many a slip twixt cup and lip. Although RJio launched its entertainment apps at an early stage of business evolution, invested aggressively in them and forged the right partnerships, it has not been able to achieve leadership in any of them as some of the competition was a lot more agile and responded much faster to consumer needs. For example, in the entertainment ecosystem space, we believe competition apps have gained a clear leadership. Displacing them will be a Herculean task. In the healthcare and IoT ecosystems too, RJio, despite its acquisitions, is lagging and will require a lot of focused partnerships and probably some cash burn to succeed. The Education vertical has its strong set of participants such as BYJU that may have some fault lines, but snatching the pole position is a tall order.

Apps: Execution lags telecom business RJio has secured a clear leadership in the telecom space, but its success in apps does not measure up. In the internet ecosystem, leaders create outsized value while other players typically falter, not even generating economic returns. At the time of its telecom launch, RJio bundled its apps subscription in ‘Jio Prime Membership’, which included a multitude of entertainment apps (such as JioTV, JioMusic, JioCinema, JioMags, and JioNews) and productivity apps (JioCloud, JioSecurity, etc). Its entertainment offerings were very competitive, with JioTV streaming live the highest number of channels. JioCinema, a video- on-demand platform, also had excellent content in collaboration with Eros, AltBalaji, etc.

Chart 19: Share of OTT viewers subscribed to the app 48.6 50.0 42.4 40.0 29.7

30.0 (%) 20.0 15.2 12.8 8.9 7.9 10.0 5.6 5.4

0.0 Hotstar MX JioTV Amazon Netflix Sony Liv Airtel TV Voot TV Zee 5 Player Prime Video Share of Indian OTT viewers

Source: Unomer, Jume 2019

22 Edelweiss Securities Limited Reliance Industries

With emergence of high-speed data at globally low prices, Indian consumers got hooked onto such entertainment platforms. However, RJio could not establish leadership in apps as rivals provided better user experience and responded quickly to consumer feedback. Disney+Hotstar (Hotstar) has clearly established leadership with 300mn+ MAU while JioTV is trailing. Some of the late entrants such as MX Player also garnered sizable market share with a more focused strategy. Similar is the case with other platform as Gaana retaining the leadership versus JioSaavn in music streaming platform category. Magzter leads versus JioMags and Inshorts is way ahead of JioNews.

Chart 20: Share of music streaming platform in India 40.0

32.0 30 24 24.0

(%) 15 15 16.0 10 8.0

0.0 Gaana JioSaavan Wynk Spotify Google Play Music Share of music streaming platform in India

Source: OTT Audience Measurement Insights

We notice that RJio is prioritising traction with premium telecom subscribers over promoting on its own OTT. The company has now started bundling Zee5 and Hotstar subscriptions with its premium plans. Over the medium term, RJio may look for an external partner for its media apps and businesses as it focuses on other verticals. With several bolt- in acquisitions, RJio has narrowed its focus on education, healthcare, e-commerce and network verticals for future growth.

Some of the RJIO’s products have other successful equivalent businesses, which have created significant value for its investors. These businesses are winner-takes-all business and hence the category leaders are creating astronomical value as shown in below table.

Table 8: RJIO select offering and comparable business valuations Valuation Company Subscriber base (mn) Equivalent RJIO Offering (USD bn) Netflix 211.9 193 JioCinema, Jio TV Zoom 69.6 NA JioMeet Spotify 50.0 Total 286/Premium 130 JioSaavn BYJU 10.5 Total 50/Premium 3.5 Embibe Magic Leap 6.0 NA Tesseract Source: Companies, media reports, Bloomberg

23 Edelweiss Securities Limited Oil, Gas and Services

Table 9: RJio has presence across verticals but hankers for leadership App Google Play downloads Rating Reviews Entertainment JioTV 100m+ 4.1 2m JioCinema 50m+ 4.2 764k Hotstar 100m+ 4.1 8m Zee5 100m+ 3 768k Voot 100m+ 3.7 2m MxPlayer 500m+ 4.4 9m Amazon Prime 100m+ 4.3 1m Netflix 500m+ 4.5 9m ALTBalaji 10m+ 3.1 262k Healthcare JioHealthHub 1m+ 4.3 5k Practo 5m+ 4.3 105k Music JioSaavn 100m+ 4 2m Wynk 100m+ 4.4 1m Gaana 100m+ 4.5 3m Spotify 500m+ 4.5 19m Soundcloud 100m+ 4.5 4m Amazon Music 100m+ 4.5 1m News JioNews 10m+ 4.1 97k Inshorts 10m+ 4.6 452k Times of India 10m+ 4 549k Hindustan Times 1m+ 4.5 13k The Hindu 5m+ 4.2 195k Livemint 500k+ 4.6 10k Economic Times 5m+ 4.6 175k Payments MyJio (Jiopay) 100m+ 4.4 8m Paytm 100m+ 4.4 7m Phonepe 100m+ 4.4 4m Google Pay 100m+ 4.3 4m Source: Company, Edelweiss Research

Now focusing on Education, Healthcare and Network business Over the last few years, RJio has acquired several companies in different domains to bolster its digital offerings. These companies are in different fields ranging from healthcare, education, governance, AI, blockchain, transportation, operating system, chatbots, etc. We broadly categorise them in the Healthcare, Education, Networks, and IoT categories.

The company has made acquisitions across the broad spectrum of technologies and applications. The big game plan is to integrate them to forge unified delivery of services across the spectrum. For instance, Nowfloats, Reverie and EasyGov are all focused on the rural theme aimed at smaller businesses or attracting the rural populace online. EdTech acquisitions cover the entire gamut of learning from schooling, college and corporate. All these acquisitions are aimed at creating a digital ecosystem for customers and pitching Jio as a one-step solution for several services.

24 Edelweiss Securities Limited Reliance Industries

We believe that India does have plenty of opportunities in the digital delivery of services and goods. However, the companies need to build capabilities and execute well to succeed. Some of the consumer-facing businesses need to be agile to consumer feedback as product evolution and adoption tends to be quick. We believe that RJio does have a right to win in the healthcare segment, although it is lagging established peers. It will have to be nimble to scale up its offerings thereof.

In the education vertical, BYJU is the strongest established players and displacing it would be a task. The Network vertical too will pose challenges considering this is a long sales-cycle business wherein the network providers need to demonstrate an ability to operate in respective countries and operators need to build trust with service providers.

Fig. 4: RJio has expanded offerings from Entertainment to other verticals

Source: RIL Annual report 2020

Healthcare business RJIO aims to digitally capture healthcare value chain end-to-end: from diagnostics, medical records, doctor appointment, and video consultations to delivery of medicines. There are already established players in the space addressing part of these problems, such as Practo, 1mg, PharmEasy and NetMeds. Practo is clearly one of the leading app for doctor appointment booking, and we believe that RJio may have to incentivise customers to catch up with the likes of Practo.

That said, Reliance is making moves to enhance its capabilities in the healthcare industry, e.g. acquisitions of start-ups KareXpert and C-Square. KarExpert connects patients with different care providers: hospitals, nursing homes, clinics, doctors, pharmacy shops, diagnostic labs, imaging centres, blood banks, organ banks and ambulance. On the other hand, C-Square provides software solutions with specific focus on the pharma sector, including various stakeholders such as distributors, retailers, e-commerce, etc.

25 Edelweiss Securities Limited Oil, Gas and Services

Fig. 5: RJio virtual health from home offerings

Source: RIL annual report 2020

Education business RJio intends to leverage its connectivity prowess to digitally power classrooms in India. Although the online education space in India is fairly crowded, with BYJU clearly leading the pack, the solutions by these players targeted at bringing the learning and testing platforms online.

However, Reliance’s plan is quite different; it plans to integrate software and connectivity solutions with those of schools and colleges. The company has created a smart suite of software for virtual learning, tests, teacher interaction and assignments. The company’s FY19 annual report outlined an ambitious goal to connect 58,000 colleges and 1.9mn schools, and infra for 200mn children in two years. We believe that the company could be falling behind in meeting these targets, but the eventual plan is to integrate technology in the school infrastructure and deliver integrated solution.

Fig. 6: RJio virtual learn-from-home offerings

Source: RIL annual report 2020

To enhance its education content and technology prowess, Reliance has invested in two EdTech start-ups: Emibe and Edcast. Embibe has developed an AI-based education platform that uses data analytics to deliver personalized learning outcomes for each student. EdCast’s AI-powered cloud focuses on both educators and institutions to deliver their content across the world. BYJU is the largest player in this segment in India and already clocking INR28bn in revenue with over 50mn subscribers and 3.5mn paid consumers. With its leadership position, BYJU has top-of--mind recall, which helped it capitalise even higher market share during covid-19. We believe RJio faces an uphill task in executing its large-scale digital classroom strategy and displace its already well-entrenched rivals.

Network business Reliance’s announcement of a complete, indigenous 5G solution ready for deployment and its intention to export it across the world is bold. Product exports from India have languished despite software prowess, due to lack of focus and ecosystem. RJio plans to change that with exports of 5G equipment. The company’s network capability largely

26 Edelweiss Securities Limited Reliance Industries

stems from the companies it acquired such as Radisys, Airhop Communications, Airspan Networks, etc. RJio may have leveraged the Open RAN technology promoted by Telecom Infra Project (TIP), which was started by Facebook in February 2016.

Managed Network solutions are a long sales-cycle business and operators typically prefer to engage with vendors for a long time, test their products and then scale up business as they find comfort with the product, aftersales service, etc. Since operators use network equipment for a decade or more, they need to confident about vendors’ commitment for product updates and their relevance in the future. Lastly, one of the reasons Chinese vendors were successful in this area was their ability to extend finances to operators to purchase equipment by collaborating with China Development Bank. Considering these factors, we believe that although this space offers a good opportunity, particularly in light of heightened hesitation in using Chinese equipment for 5G, scaling up this business would entail significant time and investments.

What does global partnership imply for the right-to-win? Recent partnerships with Facebook and Google have lent great credibility to RJio’s digital offerings, particularly in minds of financial investors. The hypothesis is that considering the scale of businesses run by Facebook and Google, their cutting edge technological and strategic knowhow can help RJio scale up its platform business. In this context, what role does Jio Platforms (JPL) plays from Facebook and Google’s perspective is important, especially since they also have large operations in India.

We believe that Facebook’s deal with JPL also provides an impetus for Facebook to monetise WhatsApp. Reliance Retail’s new commerce platform, JioMart, will seamlessly enable transaction using WhatsApp from millions of small merchants whom JioMart plans to partner. This transaction ability could help Facebook monetise WhatsApp in India, its largest market by subscribers. Facebook has managed to expand engagement of businesses it has acquired such as Instagram and Oculus. This knowhow would be valuable for RJio in scaling up its apps business.

Google’s deal with JPL also envisages joint development of an entry-level affordable smartphone with optimisations to the Android operating system and the Play Store. Google had introduced a similar Android One program in 2014 in India and then redefined it a few years later, but with only limited success. We believe that slow smartphone adoption by 2G customers is less of an affordability issue and more of a battery, durability and user interface hurdle. If the Google-Jio duo can solve this bit, we believe it would benefit for telecom operators at large. We also believe that this partnership has further scope of enhancement in managing the JPL’s advertising engine.

All in all, we believe that both partnerships (with Facebook and Google) are exploratory in nature, attempting to create a new business model for the Indian ecosystem. However, Google and Facebook would continue to pursue their core advertising business. There are possible opportunities in collaborating with JioMart supplier base for their advertising on these platforms, but we are yet to see it happen. Also, in this case, we believe that the market power resides with and hence value creation is likely to be with platforms.

27 Edelweiss Securities Limited Oil, Gas and Services

Track record of minority investments: Patchy Historically, there have been many instances of large technology companies acquiring minority stakes in related or even loosely related companies for strategic reasons. Financial investment gives confidence to the investee company for deeper collaboration. Microsoft had invested in many companies, such as Apple, Comcast, AT&T, Barnes & Noble and Facebook. Microsoft invested USD150mn in Apple in 1997 for a deeper engagement, which included broad patent cross-licensing agreement and Microsoft Office support for the Mac while Apple made Internet Explorer the default web browser on the Mac.

Microsoft invested USD240mn in the four-year old Facebook with an arrangement wherein Microsoft sold the banner ads appearing on Facebook outside the United States, splitting the revenue. This deal also fizzled out, although Microsoft made financial gains. Google invested in a Chinese consumer electronics and AI company, Mobvoi, to help it power Wear OS by Google to China. We clearly see that some of the deals achieved their strategic objectives, but many others made money that resulted in financial gains.

We have also seen technology companies investing in China as regulation blatantly favoured local players. Yahoo! invested USD1bn in Alibaba and handled over its Chinese unit to Alibaba for two seats on the four-member board of Alibaba, not to mention a 35% voting stake in the company. The salience of this deal for Yahoo! is evident from its high stake and board representation. This deal again was a financial success while it did not achieve any strategic objective for Yahoo!, which eventually sold off the stake.

It is possible as technology companies may want to hedge themselves from possible rising protectionism in India by making financial investments. Facebook, which does not typically make minority investments, has invested USD25mn in Meesho, a Bangalore-based social commerce start-up, and Unacademy, an edtech platform.

India’s privacy and data protection laws are evolving as the internet has started playing a bigger role. The government has proposed Personal Data Protection Bill, which mandates local data storage to safeguard critical data of its citizens and to ensure due taxes are paid by firms for services including advertisements sold to local clients. This will mean that having a dependable local partner with robust infrastructure would be desirable. Besides, India is a large market and local knowhow, feet-on-the-street would be crucial for some of these businesses to scale up.

28 Edelweiss Securities Limited Reliance Industries

Table 10: Select minority investments by tech companies Deal Description Microsoft investment in Apple Microsoft invested USD150mn in Apple in 1997 for deeper engagement which included broad patent cross-licensing agreement, Microsoft Office support for the Mac while Apple made Internet Explorer the default web browser on the Mac. Eventually, the collaboration didn’t extend and Microsoft subsequently sold its investments. Yahoo investment in Alibaba Yahoo invested USD1bn in Alibaba and handled over its Chinese unit to Alibaba for two seats on the four-member board of Alibaba, and a 35% voting stake in the company. Importance of this deal for Yahoo is indicated by high stake and high board representation. This deal again was a financial success but did not achieve any strategic objective for Yahoo, who eventually sold the stake. Microsoft investment in AT&T In early 2002, Microsoft invested USD5bn in AT&T in a move being seen as allowing Microsoft to be a part of the broadband boom. Under the agreement, AT&T would use Microsoft’s software in set top boxes and both companies would run market tests of new digital cable services. Nearly 17 years later, AT&T signed a $2bn with Microsoft in which AT&T will tap Microsoft’s Azure cloud services for its computing needs and use Microsoft 365 for its employees. Microsoft investment in Back in 2007, Microsoft had invested USD240mn in Facebook for a 1.6% stake. This valued Facebook Facebook at USD15bn. The original deal which allowed Microsoft to be the exclusive third party ad partner never really materialized. Microsoft sold some of its stake in Facebook post its IPO in 2012. While it might have made significant returns as a part of the investment, its objective while signing the deal did not fructify. Google Investment in SpaceX In 2015, Google invested USD900mn with support in areas space transport, reusability and satellite manufacturing. The move was expected Google achieve its aim of bringing satellite internet to remote corners of the world. This investment was seen complementing Google’s acquisition of Skybox imaging, which made small, high resolution imaging satellites. Microsoft investment in Comcast In 1997, Microsoft invested USD1bn, then nation’s fourth largest cable television operator and a diversified telecommunications company. The deal would enchance Comcast’s deployment of high speed data and video services via its cable delivery network .In 2009, it disclosed that it had sold its stake in Comcast underscoring how the company’s strategic investment in Cable TV operations had grown less relevant Microsoft investment in Best Buy In 1999, Best Buy Best Buy and Microsoft announced their plans for a comprehensive strategic alliance that encompasses broadband, narrowband, in-store and online efforts . Under this alliance, MSN TM Internet access and Microsoft’s full range of connectivity solutions would be demonstrated and sold at the more than 350 Best Buy stores in the U.S. and through BestBuy.com. In addition, Microsoft would invest USD200mn in Best Buy common stock. Microsoft investment in Barnes Microsoft made an investment of USD300mn in 2012 in Barnes and Noble in a new subsidiary- and Noble Newco which would bring together the digital and college businesses of Barnes and Noble. However, just 2 years later the deal came to a bitter end with a litigation settlement regarding the use of Linux based Android Operating System in B&N’s Nook electronic reader devices.

Source: Edelweiss Research

29 Edelweiss Securities Limited Oil, Gas and Services

Table 11: Jio Platforms – Statement of profit and loss, and assumptions FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 Subscribers (mn) 186.6 306.7 387.5 453.5 497.5 500.5 503.5 506.5 ARPU (INR) 130 131 127 148 180 200 216 234 Total revenues (INR mn) 2,01,579 3,88,381 5,28,360 7,49,150 10,26,352 11,95,275 13,03,010 14,17,524 EBITDA (INR mn) 67,338 1,50,960 2,15,670 3,13,929 4,43,206 5,15,023 5,74,299 6,39,644 EBIT (INR mn) 31,573 86,976 1,41,710 2,00,504 2,79,715 3,15,178 3,46,019 3,79,963 PBT (INR mn) 11,087 45,555 76,410 1,48,682 2,32,644 2,73,095 3,09,873 3,49,632 PAT (INR mn) 7,225 29,639 57,080 1,11,259 1,55,872 1,82,974 2,07,615 2,34,253

Table 12: NPV analysis of Jio Platforms DCF ANALYSIS FY18 FY19 FY20 FY21 FY22 FY23 FY24 EBIT*(1-t) 23,626 65,084 1,06,042 1,50,037 2,09,311 2,35,848 2,58,926 Depreciation (INR mn) 35,765 63,984 73,960 1,13,425 1,63,490 1,99,845 2,28,280 Gross Cash Flow (INR mn) 59,391 1,29,068 1,80,002 2,63,462 3,72,801 4,35,693 4,87,206 Working Capital (INR mn) (4,61,890) (3,83,460) 46,740 49,819 50,958 51,652 52,095 Investment in WC (INR mn) (48,127) 78,430 4,30,200 3,079 1,139 694 443 Capex (INR mn) 5,01,957 (5,38,339) 2,34,280 2,20,873 2,63,402 2,64,325 2,64,159 FCFF (INR mn) (3,94,439) 5,88,977 (4,84,478) 39,510 1,08,260 1,70,674 2,22,605 FCFF growth (%) PV FCF (3,94,439) 5,88,977 (4,84,478) 35,435 87,080 1,23,124 1,44,024 NPV (INR mn) 43,86,135 FY20 Debt (INR mn) 5,22,590 NPV of equity (INR mn) 38,63,545 Cumulative Investments 23,73,570 EV/IC 1.8 DCF ANALYSIS FY25 FY26 FY27 FY28 FY29 FY30 Terminal Value EBIT*(1-t) 2,84,326 3,32,799 3,38,172 3,43,408 3,53,234 3,72,119 Depreciation (INR mn) 2,59,680 2,53,436 3,03,740 3,55,387 4,05,350 4,47,989 Gross Cash Flow (INR mn) 5,44,007 5,86,236 6,41,911 6,98,795 7,58,584 8,20,109 Working Capital (INR mn) 52,565 53,029 53,473 53,918 54,392 54,897 Investment in WC (INR mn) 471 463 444 445 474 505 Capex (INR mn) 2,64,674 2,64,587 2,63,446 2,61,980 2,79,284 2,77,882 FCFF (INR mn) 2,78,862 3,21,185 3,78,022 4,36,370 4,78,826 5,41,721 75,11,866 FCFF growth (%) PV FCF 1,61,814 1,67,150 1,76,438 1,82,665 1,79,765 1,82,401 25,29,293 NPV (INR mn) 43,86,135 FY20 Debt (INR mn) 5,22,590 NPV of equity (INR mn) 38,63,545 Cumulative Investments 23,73,570 EV/IC 1.8 Table 13: SoTP of Jio Platforms RJIO SOTP INR bn Wireless+FTTH 4,386 Enterprise business 253 Entertainment apps 128 Other investments Education 119 IOT 145 Other 79.6 Total 5,111 Source: Edelweiss research

30 Edelweiss Securities Limited Reliance Industries

Super app: A potential mirage

Success of Chinese super apps WeChat and Alipay has inspired many. Companies are now bolting functionalities onto core offerings to build a comprehensive and turnkey commerce ecosystem—spanning business communication to transaction to aftersales—so that the customer does not have to venture outside the app.

In the western world though, internet evolution, which started with unbundling of Craigslist, continues with customers preferring specific apps for each function with an uncluttered UI and clear value proposition. This largely explains why Spotify and Netflix continue to expand their leadership despite the presence of behemoths like Apple and Google in their space. And here’s the difference: evolution of the Internet ecosystem in India is more along the lines of the western world than China. Consequently, we see limited scope for super apps succeeding. Paytm and MyJio both tried the super-app strategy but cut a sorry figure, unable to succeed beyond a very small set of verticals.

The great Craigslist unbundling… Internet ecosystem evolution over last decade was all about verticalisation of the web marketplace, or simply put the unbundling of Craigslist. Every section on Craigslist homepage was as a separate marketplace, which offered significantly better user experience. Very often, a new marketplace emerged which better addressed the needs of a specific vertical within that platform—by creating a user experience or business model that’s much more tailored to the unique attributes of that vertical.

Typically such sub-verticals have not only taken away the targeted users from erstwhile platforms, but have also expanded the respective markets, which contributed to stupendous growth in the internet economy.

Fig. 7: Craigslist unbundling: The original source of bulk of B2C internet marketplace

Source: Andrew Parker, a16z blog

31 Edelweiss Securities Limited Oil, Gas and Services

One example would be the vacation rentals space, which used to be one tab in Craigslist. It became a standalone company, which could address customer needs effectively by providing better product and price discovery and standardized services with ability to complete entire transaction backed by customer service. Similarly, Indeed captured the jobs marketplace, providing better experience to recruiters as well as job seekers. The typical formula has been competition coming from new companies that aspire to take chunks out of that emergent platform by better addressing the needs of a specific vertical within that platform—by creating a user experience or business model that’s much more tailored to the unique attributes of that vertical.

…and its pitfalls The Craigslist unbundling does have its share of pitfalls.

First, every platform has to separately acquire customers for services it caters to, thereby duplicating customer acquisition costs. Since these customers are monetised only for a particular set of services, it leads to suboptimal customer acquisition costs (CAC) and lifetime value (LTV).

Second, it reduces convenience, requiring customers to log in into each app separately and input payment details and other attributions, creating more friction.

Third, such unbundling creates a clutter of apps on the smartphone, thereby causing inconvenience.

Last but not least, the lack of meaningful differentiation may at times create confusion in minds of customers.

The JioMart super app: Tenable but success not given JioMart is an innovative business idea. Reliance is trying to tap into the most popular communication platform (WhatsApp), enabling subscribers to order from neighborhood kirana (mom-and-pop) stores that leverage Reliance Retail’s supply-chain backend.

If executed well, JioMart will be able to create a strong, scalable platform with an extremely high entry barrier. However: i) the grocery business yields a meagre 13% gross profit margin, which for this business model has to be divided between three participants: Jio, Facebook and kirana stores. Hence even with a 25% market share of online grocery segments by FY25, the available profit pool for the participants will be relatively small. ii) The sheer number of intermediaries, SKUs and scale of operations create numerous fault lines. iii) There are established competitors of varying size bringing in various competencies on the table.

32 Edelweiss Securities Limited Reliance Industries

Table 14: ioMart mini model Unit FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29 FY30 Online grocery market size INR bn 225 338 506 759 1,139 1,595 2,233 2,902 3,628 4,353 5,224 JioMart Penetration (%) - 5.0 8.0 11.0 14.0 17.0 19.0 19.0 19.0 19.0 19.0 JioMart GMV INR bn - 17 41 84 159 271 424 551 689 827 993 Gross margin (%) (%) 13.0 13.3 13.5 13.8 14.0 14.3 14.3 14.3 14.3 14.3 Revenue Pool INR bn 2 5 11 22 38 60 79 98 118 141 Contribution for Reliance (%) 10.0 20.0 25.0 30.0 40.0 40.0 40.0 40.0 40.0 40.0 Kirana (%) 80.0 70.0 60.0 50.0 40.0 40.0 40.0 40.0 40.0 40.0 Platform (FB) (%) 10.0 10.0 15.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 Revenue Reliance INR bn 0 1 3 7 15 24 31 39 47 57 Kirana INR bn 2 4 7 11 15 24 31 39 47 57 Platform (FB) INR bn 0 1 2 4 8 12 16 20 24 28

JioMart Target Multiple P/GP 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0 JioMart Valuations INR bn 8 38 99 230 531 846 1,100 1,375 1,650 1,980 FY25 Discounted PV 325.89 Source: Edelweiss Research

Financing Point of Sale machines: Potential cash burn for JioMart The company has deployed merchant point of sale (mPoS) terminals. Currently, there are 15,000 digitalised stores in the country. RIL plans to grow this to 5mn stores by 2023. While it has taken two decades to supply 3mn PoS terminals, we believe the company targets to roll out 300,000 PoS machines or 10% of the current PoS base, by FY22E. Reliance will use the PoS device as a loss leader to acquire a merchant, just like it did in voice telephony to acquire data-starved users. We estimate that RIL may have to burn several billions of dollars on the entire project, including financing of PoS machines.

Amazon capitalises on winner-takes-all business during covid-19 outbreak After nearly two years of beta testing, late last calendrer year Reliance formally rolled out JioMart services in the suburbs of Mumbai, followed by a full-fledged beta rollout in 200 cities during April 2020. We understand that Reliance has had mixed initial success so far with some teething issues, particularly in the wake of the covid-19-induced delivery disruptions. In the meanwhile, Amazon has rapidly been increasing its footprint. Similarly, online grocery competitors—including BigBasket—have also successfully fully resumed providing services again after covid-19-related glitches in April 2020. This provides incumbents, such as Amazon and BigBasket, the opportunity to further capitalise on their first-mover advantage, in a “Winner-Takes-It-All” e-retailing business.

A huge fillip from Facebook investment Facebook has picked up a 9.99% stake in Jio Platforms (JPL) and Google 7.7%; in addition, a group of private equity firms have lapped up a 15% stake, valuing the entity at an EV of USD65bn. The partnership with Facebook is aimed at tapping into Jio’s reach of nearly one- third of India’s population while also focusing on MSMEs. A commercial partnership has been also signed with Facebook-owned WhatsApp, which would put JioMart—the upcoming O2O offering of Reliance Retail—on an accelerated growth path.

This transaction creates India’s first new e-commerce platform by integrating JioMart with WhatsApp, similar to WeChat in China. The platform would target 60mn SMEs, 120mn farmers and 30mn small merchants in India’s informal sector. We see this deal as strategically significant for Facebook, as it would enable transactions on WhatsApp, giving a

33 Edelweiss Securities Limited Oil, Gas and Services

fillip to its effort to monetise the WhatsApp platform. On the one hand, JioMart could power inventory and backend supply chains for small shops and, on the other hand, the WhatsApp platform could facilitate orders and payments, thereby providing a seamless customer experience. Beyond the fabulous opportunity the deal offers, we do see formidable execution challenges.

Through its JioMart Pilot initiative, Reliance Retail supported its partner kirana (mom-and- pop) stores by offering uninterrupted services and supplies. The company would accelerate the rollout of JioMart and develop a portfolio of own brands, particularly in grocery, fashion and lifestyle.

RJio had an ambitious goal of enabling the entire digital application ecosystem. However, with mixed success thereof, the company has not been able to gain undisputed leadership in many verticals. We believe a partner like Facebook, which has experience of cultivating various apps and nurturing them to leadership positions, would provide a shot in the arm to RJio in powering its digital application ecosystem.

Fig. 8: RIL’s 100% stake in Jio Platforms would dilute to 67%, post-divestment to Facebook, Google and a clutch of PE investors

67% 7.73% 67%

Source: Company, Edelweiss research

Reliance mPoS: A differentiated approach Today’s mPoS market is crowded, populated by the likes of SnapBizz, Nukkad Shops and GoFrugal. While SnapBizz has deployed around 4,500 devices, Nukkad has sold 3,800 devices and GoFrugal works with over 25,000 businesses. However, we believe Reliance plans to offer a differentiated PoS device; refer to the figure below.

34 Edelweiss Securities Limited Reliance Industries

Fig. 9: RJio’s mPoS integrates payments with inventory, supply chain management

Source: News reports, Edelweiss research

RJio’s mPoS machine is a six-inch smartphone mounted atop a regular PoS device, enabling it to process both card and digital transactions. Additionally, there is no merchant discount rate (MDR), the tax shopkeepers pay per transaction. MDR is essentially a charge levied by banks on PoS transactions—roughly 1% of every transaction amount.

The machines have been given against a security deposit of INR3,000 to merchants. In comparison, these devices usually sell for up to INR50,000. By offering devices at throwaway prices, RRL is aggressively pushing POS adoption and reach.

RRL is indifferent about the stores it is targeting. From hardware shops to pharmacies, everyone is a potential partner. For faster adoption, it is also asking FMCG players to insist that kirana stores and distributors use its mPoS.

35 Edelweiss Securities Limited Oil, Gas and Services

Fig. 10: Reliance’s PoS offers differentiated features to incentivise platform adoption

• Higher tax compliance

•Adoption of digital payments

Govt

• No MDR •Consumption data Reliance new • Low interest loans FMCG Merchants • Store level inventory data company commerce platform •Bank account •Targeted promotions • Inventory management

• Supply chain management

Consumer

• Discount coupons

•Last mile delivery

Source: Edelweiss research

Luring consumers through discounts/last-mile delivery The PoS will allow all sorts of payment modes—cards, instant mobile payment system of the Unified Payments Interface, and Jio’s own wallet, Jio Money. It does not support any other wallet. With over 388mn subscribers on the RJio telecommunications network, Reliance has the ability to offer significant incentives to consumers through its payments app, JioMoney. For instance, consumers can get SMSs with coupons for HUL products that can be availed at the neighbourhood kirana stores, only on payment through JioMoney.

Additionally, shoppers can use the new commerce app to purchase products from local stores. These products would be delivered either by stores or Reliance’s delivery platform, Grab. Reliance has also acquired a majority stake in hyperlocal delivery platform Grab A Grub Services.

A major problem associated with last-mile delivery is unfulfilled orders. Issues such as cancelling, getting the refund and reordering can spoil customer experience, leading to dropouts. However, Reliance’s platform has a solution for this too. Reliance Brands, a subsidiary of RIL, works with Google-funded online-to-offline fashion e-commerce platform Fynd. Fynd links store inventories, so an item unavailable at a given outlet can be delivered from a different outlet. Fynd has worked with Reliance Brands for the past six years and has helped it curb loss of sales due to inventory shortfalls at the store level.

36 Edelweiss Securities Limited Reliance Industries

Consumer-facing integrated strategy: A long haul

A comprehensive vertical and horizontal integration coupled with huge economies of scale has been the hallmark of RIL Group’s past successes, particularly in its refining and petrochemicals businesses. RIL is similarly in the process of integrating digital, retail and financial services, which if successful, would create a formidable value proposition.

Nevertheless, we believe this is a very long haul. Notably, Reliance’s retailing success is the culmination of 14 years of hard work, with the ball first set in motion in 2006. Similarly, we feel the current ambition is not only likely to take a very long time, but also entail meaningful cash burn. The nature of the cash burn is likely to be in the form of intellectual capital such as R&D, promotions, differently skilled manpower versus traditionally physical capital expenditure, which shall demand staggering capital as well.

In its ambitious quest, RIL is in fact opening several battlefronts simultaneously, including digital, ecommerce and banking against some of the most deep-pocketed global majors.

Reliance’s omni-channel retailing strategy Reliance plans to become the largest omni-channel retailer through its hybrid online-to- offline new e-commerce platform. Modern retail and e-commerce only make up a small portion of India’s overall retail market. Reliance wants to dominate Indian retail by enlisting small retailers that make up the overwhelming majority. It wants to digitalise 30mn small merchants and shopkeepers (including kirana stores)—already battling the onslaught of e- commerce and modern retail.

Fig. 11: RIL’s new commerce ecosystem

Jio money wallet

350 mn Jio telecom Kirana subscribers stores Jio grocery Jio Payments app Bank

5000 ~50 Jio points Reliance cash present in and carry 4400 cities ( stores across ~2200 to add 500 ~45 cities Hindustan points every Unilever quarter) distributors

Source: News reports, Edelweiss research

37 Edelweiss Securities Limited Oil, Gas and Services

Amazon as a potential strategic investor in Reliance Retail At its recent annual general meeting, Reliance Group chairperson highlighted that they have received strong interest from strategic and financial investors in Reliance Retail and that they will induct global partners and investors in Reliance Retail over the next few quarters. According to recent press reports, Reliance Retail may be at an early stage of negotiations with Amazon to offload a 9.99% stake in Reliance Retail. Watch out whether Amazon and Reliance enter into some form of a strategic or commercial arrangement or whether the stake is in the nature of a purely financial investment.

Reliance Fintech: B2B and consumer credit, an NBFC-type proposition By means of digitalising kirana stores through its PoS machines, Reliance will also act as a supplier, using its scale and reach to offer better credit terms than traditional dealers/distributors. Reliance will also tap into its own cash-and-carry stores. It has about 50 such stores in 45 cities.

In addition, Reliance can help these small retailers get low-interest loans. Bundled with RJio’s PoS terminal comes the payments bank account. Reliance can do this by allowing NBFCs (non-banking financial companies) and financiers to view storeowners’ credentials, allowing them to better assess their eligibility for finance. Often kiranas do not get loans for lack of credentials.

Table 15: Reliance’s Fintech landscape: B2B and consumer as well as merchant lending likely to be main profit drivers RIL's fintech initiatives

Business Wallets (B2C) Merchants (B2B) Lending Payment Bank

Product/ Service JioMoney Merchant PoS Merchants Consumers 70:30 JV with SBI

Me-too product; One-stop POS (GST bills) + Printer + Based on real-time data of Merchant payment back-end Brief info Low loyalty Inventory alert merchants & credit score of users No standalone business case Competitors Google Pay , PayTM, PhonePe Ezetap, Mswipe, Traditional PoS Capital Float, Lendingkart Pay TM bank, Airtel bank Hygiene product No MDR below Rs 2k on debit card 1% fee on origination Economics Not make money 0.4% charge abov e Rs 2k Ty ing-up with NBFC's Negative EBITDA model Investing' a model for future No balance sheet risk Source: Edelweiss research

Table 16: Payment gateway comparison – RIL’s point-of-sale machines poised to be one-stop solution for merchants Jio Ecommerce/delivery companies Traditional Banks QR Jio Merchant PoS EzeTap Mswipe Pine Labs Verifone / Ingenico PayTM QR No. of Terminals NA 200k 350k 300k 2 - 2.5mn 3.5mn Costs Credit NA Upto 2% Upto 2% Upto 2% Upto 2% Zero Debit NA Upto 0.9% Upto 0.9% Upto 0.9%; Upto 0.9%; Zero max Rs 1k max Rs 1k max Rs 1k max Rs 1k Value - add features GST bills; Accept large Accept large Accept large - No change for bank Inventory alert payments payments payments transfer; Requires no device Types of payments Wallets used Only JioMoney Yes Yes Yes Yes Yes Debit Card Yes Yes Yes Yes Yes Yes Credit Card Yes Yes Yes Yes Yes Yes UPI Yes Yes Yes Yes Yes Yes Source: Edelweiss research

38 Edelweiss Securities Limited Reliance Industries

Table 17: Organised retail market has grown 2x of unorganised — USD1tn total market opportunity Market size (US$bn) Breakup (%) Organized Penetration (%) Organized Market Size (US$bn) Categories 2018 2021E CAGR (%) 2018 2021E 2018 2021E 2018 2021E CAGR (%) Food and Grocery 528 728 11 67 66 4 6 21 41 25 Apparel & Accessories 63 85 11 8 8 27 36 17 30 22 Jewelry & Watches 61 91 14 8 8 26 35 16 32 26 Consumer Electronics 47 75 17 6 7 29 34 13 26 24 Home & Living 34 49 13 4 4 12 13 4 6 18 Others 59 79 10 8 7 18 16 10 13 7 Total 792 1106 12 100 100 10 13 82 148 22 Source: Edelweiss research

Table 18: Operational peer matrix: RIL’s revenue/sq ft has risen 2x to achieve highest EBITDA/sq ft Revenue(INR / sqft) FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E Reliance Retail 12,889 14,320 19,583 29,071 46,339 45,424 43,153 53,941 Future Retail NA 5,306 12,400 11,762 12,679 13,495 13,907 14,716 Vmart 8,930 8,532 9,069 9,278 8,878 8,331 6,639 7,084 Dmart 26,831 28,660 32,026 33,407 37,045 36,307 31,622 36,160 Revenue / store (Mn/store) Reliance Retail 61.5 56.5 73.1 134.1 97.9 110.6 105.1 131.4 Future Retail NA 91.0 193.1 173.1 129.3 149.7 156.4 168.4 Vmart 66.7 65.8 71.0 71.5 67.0 62.5 53.4 55.1 Dmart 723.5 780.3 908.2 969.9 1136.6 1162.2 1132.9 1281.3 EBITDA(INR / sqft) Reliance Retail 682 713 862 1336 2691 3184 2805 3506 Future Retail NA 65 422 530 646 1748 1808 1957 Vmart 720 612 691 922 743 972 795 851 Dmart 1726 1993 2393 2761 2768 2729 2415 2987 EBITDA/ store (Mn/store) Reliance Retail 3.3 2.8 3.2 6.2 5.7 7.8 6.8 8.5 Future Retail NA 1.1 6.7 8.0 6.9 19.4 20.3 22.4 Vmart 5.9 5.0 5.9 7.8 6.2 8.0 6.6 7.0 Dmart 51.6 60.3 74.9 87.3 92.8 99.5 88.9 114.7 Stores Reliance Retail 2,621 3,245 3,616 3,837 10,415 11,784 12,962 15,555 Future Retail NA 738 864 1,035 1,511 1,423 1,423 1,423 Vmart 108 123 141 171 214 266 281 316 Dmart 89 110 131 155 176 214 224 254 OCF/ Capital employed Reliance Retail 7.2% 15.6% 35.7% 4.6% 6.6% 14.9% 12.1% 12.2% Future Retail NA 8.7% 5.2% 13.4% -5.1% 5.3% 8.3% 10.7% Vmart 16.6% 17.5% 21.9% 16.7% 18.7% 8.9% 14.0% 2.6% Dmart 11.1% 16.6% 9.1% 11.6% 13.1% 11.3% 1.7% 9.7% Source: Company, Edelweiss research

39 Edelweiss Securities Limited Oil, Gas and Services

Table 10: RIL Retail’s EBITDA breakdown (FY20) Chart 21: RIL turnover breakdown: High-margin businesses gain Consumption basket FY20 % Mix Change % 100 YoY Growth YoY 80 Consumer Electronics 2,785 28.9 930 47.0 Fashion & Lifestyle 3,242 33.0 1,059 52.0 60

Grocery 23.3 98.0 (%) 2,253 1,116 40 Connectivity 1,237 12.8 346 39.0 Petro retail 136 2.0 1 1.0 20 Total 9,654 100.0 3,453 56.0 0

Q4F20

Q1FY19 Q2FY18 Q3FY18 Q4FY18 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20

Q4FY17 Q1FY18 Q3FY17 Grocery & Others Consumer Electronics Fashion & Lifestyle Petro retail Connectivity Table 20: Traditional Retail valuation comparison Div yield EPS CAGR Mcap EV/EBITDA( x) ROCE (%) Company (%) (%) (USD mn) FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY20-22E India Grocery Reliance Retail NA 32.5 35.0 23.4 23.0 20.8 25.5 0.0 28.9 Avenue Supermarts 17,587 62.5 65.3 42.5 18.0 12.2 16.1 0.0 23.8 Future Retail 692 7.4 5.2 4.6 10.0 7.6 7.8 0.0 10.1 India Grocery-Mean 34.2 35.1 23.5 17.0 13.5 16.5 0.0 20.9 India Apparel ABFRL 1,325 NA 24.6 18.5 11.1 15.1 14.4 0.0 NA FLFL 280 3.1 3.0 2.5 4.1 2.1 4.8 0.4 29.0 Trent 2,743 43.7 63.5 32.7 3.4 0.1 4.6 0.3 48.4 V-Mart 438 25.3 17.7 14.2 17.4 18.1 18.0 0.1 21.8 India Apparel -Mean 24.0 27.2 17.0 9.0 8.9 10.4 0.2 33.1 India Footwear Bata 2,216 32.1 34.1 20.0 12.3 7.3 11.0 0.5 5.3 India jewellery Titan 12,549 41.2 49.7 33.0 15.2 10.4 15.3 0.6 13.0 India retail-Mean 31.0 33.1 21.3 12.7 10.4 13.0 0.2 22.5 US Retailing GAP 4,870 3.6 NA 4.8 6.0 -9.9 4.7 7.5 -25.7 Kroger 27,329 7.0 6.1 6.4 5.8 7.3 5.2 1.7 8.6 Costco 1,43,985 21.0 19.3 17.7 15.9 15.1 14.7 0.8 9.4 Walmart 3,72,798 12.9 12.8 12.5 9.8 8.7 10.7 1.6 4.4 US Retailing-Mean 11.1 12.7 10.3 9.4 5.3 8.8 2.9 -0.8 Europe Retailing M&S 2,364 4.5 6.0 5.3 5.5 1.4 3.0 4.1 -11.5 H&M 25,143 15.1 9.2 8.3 1.8 15.8 22.8 4.2 394.4 Inditex 81,490 9.1 14.3 10.4 17.6 8.5 14.4 4.8 -7.3 Carrefour 12,675 6.0 5.8 5.4 3.8 4.0 4.2 3.1 7.7 Europe Retailing-Mean 8.7 8.8 7.3 7.2 7.4 11.1 4.0 95.8 Japan Retailing Fast Retailing 58,752 26.4 17.4 15.2 6.2 10.4 11.1 0.8 45.2 Japan Retailing-Mean 26.4 17.4 15.2 6.2 10.4 11.1 0.8 45.2 Source: Bloomberg, Edelweiss research, Company

40 Edelweiss Securities Limited Reliance Industries

O2C: Cyclical downturn, but the jewel in the crown

We believe Reliance’s refining and petrochemical (O2C) businesses are undergoing a severe covid-19-induced global cyclical downturn. Moreover, the O2C business is increasingly viewed as environmentally unsustainable. Growth in such businesses globally is forecast to reduce structurally within ten years, and hence the market is ascribing a modest growth rate of 8% to RIL’s O2C business over the medium.

We, on the contrary, believe that RIL’s O2C business is in fact The Jewel in The Crown as it is among the most competitive O2C businesses globally. India’s petroleum products demand growth itself is poised to continue beyond 20 years. Moreover, Reliance’s chairman recently announced its intent to become a zero-carbon emissions company by 2035, alleviating ‘pollution’ concerns and heralding a valuation re-rating

Refining: Severe pain, greater gain; RIL highly competitive Near-term refining cycle is poised to remain painful. Global consultant FGE forecasts global refinery utilisations to remain below 75% and Singapore complex GRMs negative for most of 2020. (refer to Figs 12, 13 & 14).

However, on the flip side, acute pain will result in permanent closure of high-cost refineries, particularly in the EU and Japan, which have very high operating costs exceeding USD5/bbl. In sharp contrast, RIL’s operating cost is among the lowest globally at USD2–2.25/bbl (refer to chart 22). Its capital cost is also lower by more than 20%. Permanent closures augur well for the long- term health of the industry.

While FGE expects the next few years to be very challenging for refiners, those that can successfully manage their way through them will likely see better times in the long term; perhaps even a Silver Age!

Chart 22: Indian refiners: Among lowest operating costs globally

7.0

5.8

4.6

3.4 (USD/ bbl) (USD/ 2.2

1.0

IOCL

BPCL

HPCL

BORL

HMEL

Thai Oil Thai

Relaince

Valero (US) Valero

Tesero(US) Marathon (US) Marathon

Source: IEA, Companies, Edelweiss research

41 Edelweiss Securities Limited Oil, Gas and Services

Chart 23: Distillate-heavy and highly complex refiners such as RIL earn superior GRMs 80.0 Indian refiners lie at the top end of the spectrum with high distillate yield and PTT greater flexibility on crude sourcing 64.0 IOCL Repsol S-Oil BPCL SK Energy 48.0 Total HPCL Sinopec Exxon Mobil Shell Reliance 32.0 Andeavor

Marathon Middle Distillate Distillate Middle Yield (%) 16.0 Aramco PetroChina Refining Capacity

0.0 0 4 8 12 16 20

Nelson Complexity Index Source: Company, Edelweiss research

Refinery runs are likely to remain under pressure during 2020 FGE believes that refinery runs would have remained under 70mmb/d for the third consecutive month in June 2020 as demand recovery from the pandemic is taking a little longer than previously forecast.

Very high product inventories, particularly those barrels still in the more expensive floating storage, are impacting refiners’ ability to increase run-rates while the prospect of a second wave is keeping demand low. USGC refiners, normally leaders in terms of refinery utilisation, are likely to remain under pressure for longer than most given local and export demand remains weak due to the high/rising number of covid-19 cases.

FGE’s outlook for refinery runs shows rates reaching 2019 levels, on a consistent basis, in 4Q 2021; however, this may prove optimistic if a viable vaccine is not developed by end-1Q21, constraining demand. We have already seen signs of a ‘second-wave’ of covid-19 cases in Asia, which could feasibly drag through the winter months, presenting downside risk to our forecasts.

Those refiners that are able to withstand the projected poor margin environment over the next few months/rest of the year are likely to find themselves in good shape over the medium term, considering, as FGE expects, potential refinery closures of about 3mmb/d due to the gross overcapacity currently affecting the market.

42 Edelweiss Securities Limited Reliance Industries

Fig. 12: Global refinery utilisations to remain below 75% for most of 2020

Source: FGE, Edelweiss research Note: *Refinery runs in mmbpd

Fig. 13: Complex refining margins have bottomed, but recovery likely to be prolonged

Source: FGE, Platts, Edelweiss research Note: *Complex refinery margins in $/bbl

Gasoil/diesel cracks will remain under pressure for the next few months due to high stock pile-up, weak seasonal demand and further demand weakness in the wake of covid-19.

43 Edelweiss Securities Limited Oil, Gas and Services

Fig. 14: Weak jet demand is swelling gasoil (diesel) production and suppressing cracks

*Gasoil cracks in $/bbl Source: FGE, Edelweiss research

US gasoline inventories remain some 30mmb higher YoY as demand recovery slows.

Fig. 15: Gasoline cracks likely to follow similar slow recovery trend as GRMs

*Gasoline cracks in $/bbl Source: FGE, Edelweiss research

O2C is deep value – Market pricing in at best modest growth Our two-stage reverse DCF calculation suggests there is a modest 8% medium-term growth being priced into the O2C business.

This is not entirely surprising as investors globally are assuming that demand growth from refined products shall peak over the next ten years, after which it shall start declining.

In case of RIL, there are three fundamental differences for which we believe its O2C business deserves a much healthier valuation:

44 Edelweiss Securities Limited Reliance Industries

 First, about half of RIL’s O2C value is from petrochemicals, which is forecast to sustain strong growth globally in the medium as well as long-term.

 Second, India is one of the fastest growing markets for refined products with growth expected to continue at a fairly robust pace even beyond 20 years.

 Most importantly, at RIL’s AGM held as recently as 15 June, RIL chairperson highlighted that by 2035 they shall become a zero-carbon emissions company. This may well alleviate the low valuations associated with the refining business given ESG concerns.

Chart 24: O2C business has deep value: Market factoring in modest 8% growth 1,000

800

600

400 (INR/share) 200

0

-

Growth

& Petchem &

3% Terminal 3%

8% medium 8% growth term

Total Refining Refining Total Source: Edelweiss research

Table 21: Global Refining valuation comparison Div yield EPS CAGR Mcap Diluted EPS (LC) EV/EBITDA( x) ROCE (%) Company (%) (%) (USD mn) FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY21E FY20-22E India OMC Indian Oil Corporation Limited 11,675 (1.0) 12.6 27.3 7.7 6.1 3.3 0.2 7.6 13.6 6.6 NA Bharat Petroleum Corporation Limited 12,999 15.5 29.9 55.1 7.5 6.3 3.8 5.1 7.7 11.5 3.7 88.4 Hindustan Petroleum Corporation Limited 4,651 17.3 13.9 45.0 5.9 4.8 2.5 2.4 4.5 10.7 5.4 61.2 India OMC-Mean 7.0 5.7 3.2 2.6 6.6 11.9 5.2 74.8 India Refining Reliance Industries Limited 1,89,072 62.1 61.9 98.1 18.1 18.4 12.6 8.0 7.9 9.5 0.3 25.7 Chennai Petroleum Corp Ltd 174 (76.2) 10.8 18.2 5.6 4.4 4.4 10.1 13.5 13.5 7.2 NA India Refining-Mean 11.8 11.4 8.5 9.0 10.7 11.5 2.7 25.7 US Refining Marathon Petroleum Corp 25,282 (2.5) 1.8 3.6 13.2 7.6 6.2 -3.0 2.3 5.2 6.1 NA Phillips 66 28,462 1.4 5.7 7.8 15.7 7.5 6.3 1.6 8.9 8.9 5.8 136.6 Valero Energy Corp 23,512 (1.4) 3.6 6.5 19.8 7.0 5.1 -3.1 4.7 11.2 7.0 NA US Refining-Mean 16.3 7.4 5.9 -1.5 5.3 8.4 6.3 136.6 Europe Refining Rubis 4,846 2.7 3.2 3.4 10.8 9.5 8.9 6.6 6.9 7.1 4.7 11.9 Dcc Plc 8,895 3.5 3.3 3.7 12.4 12.6 11.3 6.9 6.2 6.7 2.1 2.8 Europe Refining-Mean 11.6 11.0 10.1 6.7 6.6 6.9 3.4 7.4 APAC Refining Vietnam National Petroleum 2,362 1,184 2,862 3,262 16.0 9.3 8.1 4.5 9.6 9.7 4.2 66.0 Petrochina 1,11,640 (0.1) 0.1 0.2 6.8 5.6 5.2 -0.7 0.6 1.9 2.2 NA Sinopec 65,835 0.1 0.3 0.4 6.6 5.1 4.5 1.2 3.3 4.3 6.0 105.0 APAC Refining-Mean 9.8 6.6 5.9 1.6 4.5 5.3 4.1 85.5 Source: Edelweiss research, Bloomberg consensus

45 Edelweiss Securities Limited Oil, Gas and Services

Table 22: Global petrochemical valuation comparison Div yield EPS CAGR Mcap Diluted EPS (LC) EV/EBITDA( x) ROCE (%) Company (%) (%) (USD mn) FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY21E FY20-22E India Petchem Indian Oil Corporation Limited 11,675 (1.0) 12.6 27.3 7.7 6.1 3.3 0.2 7.6 13.6 6.6 NA Reliance Industries Limited 1,89,072 62.1 61.9 98.1 18.1 18.4 12.6 8.0 7.9 9.5 0.3 25.7 India -Mean 30.6 37.2 62.7 12.9 12.2 8.0 4.1 7.8 11.5 3.4 25.7 US Petchem Dupont DE Nemours INC 40,615.7 2.9 3.3 3.7 12.3 11.5 11.0 3.0 8.9 8.9 2.3 12.9 Phillips 66 28,462 1.4 5.7 7.8 15.7 7.5 6.3 1.6 8.9 8.9 5.8 136.6 Valero Energy Corp 23,512 (1.4) 3.6 6.5 19.8 7.0 5.1 -3.1 4.7 11.2 7.0 NA US -Mean 1.0 4.2 6.0 16.0 8.7 7.5 0.5 7.5 9.7 5.0 74.8 Europe Petchem Basf Se 56,077 2.3 3.5 4.2 10.1 8.3 7.5 2.6 4.7 5.8 5.9 35.6 Lyondellbasell Indu-Cl A 22,989 4.8 7.5 8.7 9.3 7.1 6.5 7.7 11.4 11.4 6.3 34.8 Europe -Mean 3.5 5.5 6.4 9.7 7.7 7.0 5.1 8.0 8.6 6.1 35.2 Middle-East Petchem Saudi Basic Industries Corp 70,387 1.0 2.9 4.3 12.5 9.8 8.5 1.5 4.5 6.6 4.1 104.5 Aldrees Petroleum and Transp 945 1.3 3.4 3.7 12.8 9.8 9.2 2.6 6.6 6.5 4.2 71.1 Middle East -Mean 1.1 3.2 4.0 12.7 9.8 8.9 2.1 5.5 6.5 4.1 87.8 APAC Petchem Sumitomo Chemical Co Ltd 5,173 19 24 42 7.8 9.6 7.9 2.4 2.2 3.9 3.3 50.3 Petrochina 1,11,640 (0.1) 0.1 0.2 6.8 5.6 5.2 -0.7 0.6 1.9 2.2 NA Sinopec 65,835 0.1 0.3 0.4 6.6 5.1 4.5 1.2 3.3 4.3 6.0 105.0 APAC -Mean 6.3 8.2 14.3 7.1 6.8 5.9 0.9 2.0 3.4 3.8 77.7 Source: Edelweiss research, Bloomberg consensus

46 Edelweiss Securities Limited Reliance Industries

Further M&A – Law of diminishing returns

The market expects further M&A triggers. We attribute a high probability thereof, but argue the key triggers of debt reduction and asset monetisation have already played out, and any M&A transaction hereafter must be examined more critically for value accretion. The rationale follows. Now that RIL has turned debt-free, additional cash infusion via stake sales may in fact have the opposite effect as WACC becomes highly skewed towards high cost of equity. We have covered this at length in our section on valuations.

We believe BPCL is one such significant acquisition potential that shall be highly value- accretive to RIL, offering greatest synergies among all contenders. Although there is no value accretion explicitly built-in, we believe the market may be disappointed if RIL does not attempt to acquire BPCL at a reasonable value.

Potential purchase of BPCL could be value- accretive though We believe BPCL presents deep value. On divestment, the stock is worth INR624/share, implying 39% upside from current stock price (Table 23). More importantly, RIL shall get a foothold into a high-barrier fuel retailing three-player oligopoly. RIL has barely managed to gain one-tenth of the fuel retailing market, even after nearly two decades of operations.

Similarly, during 2002, RIL had purchased a 26% stake in India’s second-largest petrochemical company as part of the Government of India’s disinvestment programme. In addition, RIL acquired an additional 20% equity shares through a cash offer in terms of SEBI’s Takeover Regulations and held 46% of company's equity shares. RIL successfully enhanced IPCL’s earnings nearly tenfold, before merging it with Reliance Industries Ltd during 2007.

Table 23: Breaking down BPCL's value assuming strategic divestment by government Base value Base value Base value Particulars (USD bn) (INR bn) (INR/share) BPCL standalone refining (@ EV/EBITDA 7.5x) 3.7 280 142 Equity value of Bina refinery (@ EV/EBITDA 11x) 1.5 110 56 BPCL marketing (@ EV/EBITDA 7x) 12.4 930 473 BPCL pipelines (@ EV/EBITDA 7.5x) 0.6 48 25 NRL (@ EV/EBITDA 5x) 1.1 81 41 Mozambique (TOTAL buys 26.5% in Sept19 for US$3.9bn) 1.47 110 56 EV of operating assets 20.8 1,560 793 Non-current investments (IGL, PLNG, etc) 2.9 217 110 Net debt 7.3 549 279 Equity value 16.4 1228 624 CMP (INR) 448 Return on CMP (%) 39.3 Source: Edelweiss research

We believe that BPCL’s non-core assets/investments (which could be sold either prior to or after acquisition, Table 24), amounts to INR208/share, i.e. more than half of the current stock price, and hence core fuel retailing and refining assets are available at compelling valuations.

47 Edelweiss Securities Limited Oil, Gas and Services

Table 24: Value of BPCL's non-current investment in subsidiaries/JV/associates

Book value Mar- No. of shares CMP Fair Value Company 15 (INR mn) held (mn) (INR) (INR mn) INR/share Remarks IGL 9,800 157.5 409 64,418 33 CMP PLNG 12,000 197.5 241 47,598 24 CMP Oil India 5,618 20.1 100 2,006 1 CMP NRL (@ EV/EBITDA 5x) 0 81,403 41 5x EV/EBIDTA Mozambique (TOTAL buys 26.5% in Sept19 for US$3.9bn) 0 1,10,377 56 Recent transaction Others (CGD, Upstream, Other Pipelines, Aviation infra, LPG infra, etc) 1,02,782 1,02,782 52 At cost Total equity investments 2,18,200 4,08,584 208 CMP (INR) 448 Proportion of current stock price (CMP) (%) 46 Source: Edelweiss research

Reliance Retail monetisation a key potential trigger, but limited upside RIL chairperson did mention during the 15th June AGM that Reliance has received strong interest from strategic and financial investors in Reliance Retail, and that they will induct global partners and investors in Reliance Retail over the next few quarters.

We have valued the Reliance Retail business at an EV of USD40bn or 21% of RIL’s consolidated value. We believe that the potential monetisation of this business may not have the same effect as the recent monetisation of Jio Platforms. Jio Platforms’ monetisation was accompanied by deleveraging and hence risk reduction, which has now fully played out as RIL is now already a zero net debt company. Moreover, the market is already baking in heady valuations following Jio Platforms monetisation; hence the actual upside may be limited, if at all.

The potential acquisition of Future Retail Group may draw synergies with Reliance Retail. Future Retail’s ~350 Big Bazaar stores may complement RIL’s ~700 food and grocery stores as well as RIL’s ~50 cash-and-carry stores. The ticket size is unlikely to be large enough to swing the needle for a company of RIL's size though.

Saudi Aramco potential investment: No longer a big trigger In August 2019 Reliance stated that Saudi Aramco intends to purchase a 20% stake in the RIL’s refining and petrochemicals business (O2C) at an enterprise value of USD75bn, has been delayed and which we believe is being closely watched by the market. Even though the refining business has been weak since the outbreak of covid-19, Street would now expect a higher value after factoring-in the time-value of money.

48 Edelweiss Securities Limited Reliance Industries

Enviable execution but even Reliance is not infallible

We do give credit to RIL for its enviable execution track record, and if that were not the case it would not have reached the current great heights in the first place. Unfortunately, there is no perfection and even RIL has had businesses that did not live up to expectations: KG-D6, US shale, and fuel retailing. Some of these may not have blossomed due to a change in external circumstances. Nevertheless, they demonstrate that even RIL is not infallible.

We list a few of the most prominent instances:

 KG-D6 oil & gas mega find during 2002

 US shale gas asset purchase during mid-2010

 Reliance Fuel Retailing, which was first de-regulated during 2002

The KG-D6 roller coaster that did not really fire up KG-D6 was RIL’s first offshore gas field development and its first underwater discovery. It was also India's largest deposit of natural gas and the largest such discovery in the world in 2002. During FY10 KG-D6 was forecast to produce at a plateau of 550,000 barrels of oil equivalent per day (BOEPD). This would have been equivalent to 40% of India’s current oil & gas, and had the potential to double India’s gas production. The KG basin was in fact compared with the Gulf of Mexico and North Sea. Notably, analysts had then forecast that RIL’s upstream business would contribute as much as two–fifths to RIL’s total EBITDA by FY12.

During February 2011, BP Plc took a 30% participatory interest in 21 oil & gas production sharing contracts operated by RIL in India, including the KG-D6 block for a consideration of USD7.2bn, which enabled it to recover the bulk of the then envisaged capital expenditure of about USD12bn.

Unfortunately, KG-D6 did not quite turn out to be as productive as initially envisaged. Based on production data vis-a-vis original production geological model: i) the decline in pressure/production was higher than originally predicted; ii) volumes connected to existing wells were lower than envisaged; and iii) gas outside the main channel was in small uneconomic volumes which did not contribute towards production. In view of the above, the company sharply restated its proved reserves downward during FY12.

After several years of re-assessment, RIL-BP JV is once again poised to re-commence production from 2HFY21, but it shall now target to achieve a peak production of 28mmscmd by FY24, a clear markdown from the target of 80mmsmd in FY12. RIL plans to monetise three TCFE resources.

Notably, a new gas pricing formula introduced during 2016, which effectively allows for gas realisation (USD6.1/MCFe during 4QFY20) that is double of the earlier formula.

49 Edelweiss Securities Limited Oil, Gas and Services

Chart 25: RIL’s KG-D6 gas production poised to revive after a hiatus of nearly a decade

Source: Edelweiss research

Double whammy: Shale gas hit, LyondellBasell miss During FY10, RIL purchased multiple stakes in US shale companies. Even though Henry Hub prices had receded about one-third from their peak three years prior, they continued to halve over the next decade. This depressed RIL’s shale business earnings, eventually leading to either a shutdown of most of its operations or an exit altogether.

Chart 26: US shale gas prices have been falling relentlessly following RIL’s acquisition…

8.1 RIL acquires 45% stake in Pioneer 45.0 Eagle Ford (USD1.3bn) & 40% in Atlas 6.5 Energy (US$ 1.7bn) during FY10 34.0

4.9 23.0

3.3 12.0 bn) (INR ($/ mmbtu) ($/

1.7 1.0

0.1 (10.0)

FY10 FY11 FY12 FY13 FY16 FY17 FY18 FY19 FY20 FY14 FY15 RIL's Shale EBITDA (RHS) Henry Hub price (LHS) Source: Edelweiss research

During the same period, RIL attempted to purchase a controlling stake in LyondellBasell, which has a large petrochemical business and had gas as its primary input. LyondellBasell had filed for Chapter 11 in USA. Unfortunately, RIL was unable to acquire the company, which subsequently went-on to become a multi-bagger as price of input—gas—continued to fall sharply.

50 Edelweiss Securities Limited Reliance Industries

Chart 27: ….missed buying gas consumer LyondellBasell, turning out a multi-bagger

70 108 56 88 42 68

(USD) 28 48 bn) (USD RIL bid of USD14.5bn for 28 acquiring LyondellBasell failed 14 in 2010

8 0

Jul/15

Jan/12 Jan/19

Jun/11 Jun/18

Oct/13

Apr/10 Apr/17

Feb/16 Sep/16

Dec/14

Aug/12 Aug/19

Nov/10 Nov/17

Mar/13 Mar/20 LyondellBasell share May/14 price Market Cap (RHS)

Source: Edelweiss research

Fuel retailing: Tapered down operations after decades Following deregulation of gasoline (petrol) and gas oil (diesel) prices during 2002, RIL chose to set up its own fuel retailing gas stations. In early days, RIL’s target was to set up 5,000 gas stations, out of which it set up about 1,400 by 2006 capturing one-tenth of the market fairly quickly. Initially, the gas stations business held such great promise that during 2006 analysts forecast that fuel retailing would contribute as much as one–fifth to RIL’s total revenue by 2009.

Fig. 16: RIL rapidly gained auto fuel market share during 2004–06

Source: Edelweiss research

However, regrettably partial fuel pricing controls were re-instated, which rapidly brought down lofty valuations. Despite full deregulation during the past five–six years, RIL along with other private sector players has now once again managed to gain a moderate market share of less than 10% in what is a highly lucrative fuel retailing market for public sector oil marketing companies HPCL, BPCL and IOCL.

51 Edelweiss Securities Limited Oil, Gas and Services

RIL has very wisely though gained a market share of 20% of the operating airports. It is looking to increase its network to 45 locations as against 30 at the end of FY20, and is well geared to benefit from Indian aviation market’s promising long-term growth.

During August 2019, RIL announced a JV with BP Plc. BP Plc bought a 49% stake for INR76bn in the JV.

Chart 28: Private players’ auto fuel market share capped around 10% in recent past 100.0

80.0

60.0 (%) 40.0

20.0

0.0

Q1FY15 Q2FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY14 Q3FY15 Q4FY16 Q4FY18 Q4FY20

IOCL BPCL HPCL Private

Source: Edelweiss research, Compnaies

52 Edelweiss Securities Limited Reliance Industries

High earnings growth prospects; modest profitability

The culmination of staggering capex of INR4.5tn incurred over the past five years shall increase RIL’s earnings by 23% CAGR over the next five years. However, we note that that hasn’t materialised so far, and even as recently as FY20, RIL’s earnings disappointed. Notably, going forward the O2C businesses and RJio shall be the key earnings drivers.

We forecast RIL would turn strongly free cash flow positive, and that its profitability ratios would improve, but it shall nevertheless struggle to achieve a positive economic spread as the zero-debt status shall sharply increase its WACC.

Strong earnings growth expectations RIL is on a divestment spree across segments as it seeks to increase shareholder value. By FY23, as much as 50% of incremental EBITDA will come from consumer business, which is essentially Jio Platforms and Retail.

However PAT will be driven by RIL’s O2C business through FY23, not only as KG-D6 production ramps up, but due to the expansion in Retail and Jio that will bear high-fixed costs such as depreciation.

Chart 29: Incremental EBITDA to be dominated by O2C/JIO… Chart 30: ...but high interest cost may dilute RJio PAT growth 2,000.0 2,000 1,200 1,200 1,600.0 1,600 960 960 1,200.0 1,200

800.0 720 720 (INR bn) (INR 800 bn) (INR 400.0 400 bn) (INR (INR bn0 (INR 480 480 0.0 0

240 240

FY11 FY13 FY15 FY17 FY19

FY25E FY23E FY21E 0 0

Petrochemical EBITDA Refining EBITDA

FY11 FY13 FY15 FY17 FY19

FY25E FY23E Upstream/ Gas EBITDA Retail EBITDA FY21E Refining, petchem, gas Telecom/Digital Telcom/Digital EBITDA Consolidated EBITDA (RHS) Retail Consolidated PAT (RHS) Source: Edelweiss research

Table 23: Segmental PAT breakdown: We expect PAT CAGR of 23% through FY25E (INR bn) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E Segmental PAT Refining, petchem, gas 277 314 336 352 309 327 499 570 673 728 Telecom/Digital 0 0 7 30 57 111 156 183 208 234 Retail 3 5 13 33 58 53 81 129 179 217 Consolidated PAT 300 299 361 396 394 418 663 802 976 1,091 PAT growth (YoY) 21% 10% -1% 6% 58% 21% 22% 12% PAT growth (CAGR over FY20) 6% 30% 27% 26% 23% Source: Edelweiss research

53 Edelweiss Securities Limited Oil, Gas and Services

Strong FCF as capex declines, balance sheet turns net cash We have factored in a strong free cash flow trajectory from FY21 onwards as RIL’s capex would decrease going forward and the projects that are due for operation will start operations soon. The company has incurred cumulative capex of INR4.5tn over FY15–20. Its net debt/equity has also decreased to 0.2x in FY20 from 0.6x in FY18, which signifies its growth trajectory and how it transformed over the last five years.

Given our forecasts of sharp earnings growth from all divisions FY22 onwards, RIL’s RoE will start increasing once again, but only modestly.

Chart 31: Strong FCF as capex declines Chart 32: Balance sheet poised to turn net-cash

2,000 2,000 1,600 0.8

1,300 1,200 1,200 0.5 600 400

800 0.3 (x)

(100) (400) bn) (INR

(INR bn) (INR 400 0.0 (INR bn) (INR (800) (1,200) 0 (0.3) (1,500) (2,000)

(400) (0.5)

FY13 FY11 FY15 FY17 FY19

FY21E FY23E

FY13 FY15 FY17 FY19

Operating cash flow Capex FY11

FY21E FY25E FY23E FCFF (RHS) FCFE (RHS) FCF Net Debt/ Equity (RHS)

Source: Edelweiss research

Profitability remains subdued though RIL’s RoE and RoCE under similarly high-risk circumstances had failed to materialise during the 2002–11 period when increased PBVs and PER reflected high expectations from KG-D6 gas monetisation. Such valuations eventually caved in as the opportunity did not materlise.

At present, we attribute similarly high risk to Jio Platforms, akin to upstream exploration. There is a high risk of cash burn without the assurance of success. Notably, this is unlike a typical manufacturing business from which at least a modest cash flow is expected after project completion.

That said, RIL’s interest coverage ratio will improve from FY21 as debt has greatly decreased.

54 Edelweiss Securities Limited Reliance Industries

Chart 33: RoE shall rise as projects commence… Chart 34: …but WACC rise on zero debt offsets RoCE gains 11.0 13.0 14.5

10.1 12.2 13.0

11.5 9.2 11.4

(%) (%) (%) 10.0 8.3 10.6

8.5 7.4 9.8

7.0 6.5 9.0

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

FY17 FY11 FY13 FY15 FY19

FY21E FY22E FY23E FY24E FY25E

FY23E FY21E FY25E ROE ROCE WACC (RHS)

Source: Edelweiss research

55 Edelweiss Securities Limited Oil, Gas and Services

Annexure I: RIL’s debt-free status after monetisation

We believe RIL would comfortably achieve zero net debt by FY22 following its rights issue and stake monetisation in several businesses.

Table 1: RIL raises INR2.13tn in equity via RJio divestments and rights issue Divestments in recent past % stake Partner Status USD Bn INR Bn Comments VLEC (Very large ethane carriers) 50 Mitsui Complete 0.7 47 Tower InvIT Not disclosed Brookfield Binding agreement 3.6 250 RIL will receive INR 110bn against NCD's RIL likely to receive INR 450bn initially Fiber InvIT NA NA NA 17.1 1200 against NCD's; OCPS may be redeemed later Petro retail 49 BP Binding agreement 1.0 76 Oil to chemicals assets 20 Aramco Under due diligence 15.0 1050 RIL to receive INR 290bn against OCPS; 10.0 Facebook Binding agreement 5.8 436 balance INR 150bn retained by Jio 1.15 Silver Lake Binding agreement 0.8 57 RIL will receive 90%, 10% retained by Jio 2.32 Vista Equity Binding agreement 1.5 114 Entirely received by RIL 1.34 General Atlantic Binding agreement 0.9 66 90-95% retained by RIL 2.32 KKR Binding agreement 1.5 114 90-95% retained by RIL 1.85 Mubadala Binding agreement 1.2 91 90-95% retained by RIL Silver Lake increased their 0.93 stake Binding agreement 0.6 45 RIL will receive 90%, 10% retained by Jio Jio Platforms Abu Dhabi Investment 1.16 Authority Binding agreement 0.8 57 90-95% retained by RIL 0.93 TPG Binding agreement 0.6 45 90-95% retained by RIL 0.39 L Catterton Binding agreement 0.3 19 90-95% retained by RIL Saudi Arabia 2.3 Wealth Fund Binding agreement 1.5 114 90-95% retained by RIL 0.4 Intel Capital Binding agreement 0.3 19 90-95% retained by RIL 0.2 Qualcomm Binding agreement 0.1 7 90-95% retained by RIL 7.7 Google Binding agreement 4.5 337 90-95% retained by RIL Rights Issue 6.7 Existing owners In process 7.1 530 25% raised in FY21; balance in FY22 Total 64.7 4674 Source: Edelweiss research Assuming exchange rate at INR 75/USD

Comfortably placed to achieve zero reported net debt Adding the creditor capex of INR500bn and spectrum liability of INR200bn, we reckon an adjusted net debt figure of about INR2.57tn. RIL recently raised INR2.13tn through an INR0.53tn rights issue and INR1.52tn through the sale of Jio Platforms shares. In addition to free cash flows, we believe that RIL shall comfortably turn net cash by FY22E.

56 Edelweiss Securities Limited Reliance Industries

Chart 1: Even on an adjusted basis, RIL is set to achieve zero net debt by FY22E 2,700 2576 1521

2,100

1,500 ZERO net debt INR220bn of Net Cash achieved by FY22 531 900

Net Debt/ Cash (INR bn) (INR Cash Debt/ Net 76 450 300 - 220

(300) Net debt (FY20) 33% Jio stake sale Rights Issue till Fuel retail Free cash flow Net debt/ Cash FY22 (FY22) Source: Edelweiss research

57 Edelweiss Securities Limited Oil, Gas and Services

Annexure – II: RJIO key acquisitions

RJIO healthcare acquisitions KareXpert

KareXpert uses big data and IoT along with health analytics to offer benefits to providers and patients using predictive analytics. Reliance is likely to strengthen JioHealthHub, its health and fitness hub via investments in KaraXpert. The company provides a variety of services to patients including Smart Hospital, Smart Clinic, Smart Doctor, Smart Pathlab, Smart Radiology and Smart Ambulance. Apart from patients, its large customers include large hospitals and the Department of Health and Family Welfare of multiple states.

Fig. 1: KareExpert connects doctors, clinics and hospitals

Source: Company

C-Square C-Square offers multiple solutions to distributors, distributed chains of retail stores, standalone retailers and online businesses. It currently logs more than 10,00,000 daily transactions and has active users exceeding 35,000.

The company’s products include: i) SFA 360 degrees, which assists drug marketing companies to optimise flow of information from various stakeholders; ii) Go4+, which allows organisations to manage their C&Fs from a central place; iii) PharmAssist, which is a process management solution for distributors; and iv) EcoGreen and PharmSoft for distributed retail chains and standalone retailers, respectively. This acquisition is likely to aid RIL’s digital commerce initiatives and strengthen its logistics services in both B2B and B2C segment. Currently, most of the pharma stores use a general software, which is used across industries.

58 Edelweiss Securities Limited Reliance Industries

Acquisitions in education business Reliance has also invested in two educational technology (EdTech) startups: Emibe and Edcast. Embibe has developed an AI-based education platform that uses data analytics to deliver personalised learning outcomes for each student. Edcast—like Embibe—uses an AI- powered platform. Its AI-powered cloud focuses on both educators and institutions to deliver their content across the world. With both these acquisitions, Reliance aims at growing the education sector in India while complementing its digital and technology businesses.

Emibe In order to increase its portfolio capabilities, Embibe recently made two acquisitions: Funtoot and MockBank. Both of these operate in different segments. While Funtoot has developed online learning products for K12 education, MockBank develops the same in the government jobs segment. Embibe also acquired 100Marks to bolster its presence in the engineering and medical exams segment.

Fig. 2: Embibe: AI-based education platform

Source: Company

Edacst

EdCast’s AI-powered cloud focuses on both educators and institutions for content delivery. Its platforms are used by several large global companies including the likes of HP, Dell, ANZ Bank, Schenider, Jefferson, Nasscom, and NSE. The company raised over USD100mn in seven rounds from reputed investors including SoftBank Capita, Stanford University, and State Street Global Advisors.

It also recently announced an alliance with TCS to jointly offer and implement Edcast’s Knowledge Cloud and learning experience solutions with Global 2000 and Fortune 500 companies. Microsoft Cortex, which is currently in the beta phase, is one of the competitor products adapted by several companies.

59 Edelweiss Securities Limited Oil, Gas and Services

Fig. 3: EdCast’s AI-powered cloud

Source: Company

Network business acquisitions Radisys

Radisys enables communications service providers to drive disruption with new open architecture business models and meet the demands of the fourth Industrial Revolution with 50connected devices. It provides service providers and telecom vendors disruptive open centric software, hardware and service capabilities that enable the migration to next generation network topologies. Apart from Reliance Jio, Radisys’s key clients include Deutsche Telekom, TIM, Verizon, Century Link, Verizon, Nokia, Telstra and Philips.

Reliance acquired Radisys for ~USD75mn in June 2018 (INR5.1bn) in cash to further its push into IoT and 5G. The acquisition complements RJIO’s work towards software centric disaggregated networks and platforms, enhancing the value for customers across the consumer and enterprise segments.

Radisys has been selected as a key independent software vendor for optimizing 5G software on the Qualcomm 5G platform. As 5G gains ground in upcoming years, service providers are likely to deploy edge computing on their networks to support multiple 5G smart enterprise and IoT applications that require very low latency. The use of such platform from Radisys enables service providers to break vendor lock-in and reduce the overall cost of deployment. It has also recently launched its app-less-AI 3 in 1 (video, voice, text) bot, Engage Video Assistant (EVA) for digital customer interactions. Going ahead, this can improve the digital experience while achieving cost-effective stability and agility at the same time.

60 Edelweiss Securities Limited Reliance Industries

Airspan Networks

Airspan is a leading 4G/5G RAN hardware and software vendor, as well as a fixed wireless network densification solutions provider with an expansive portfolio of indoor and outdoor products. Established originally in 1992 as a product division of DSC Communications, Airspan became a standalone company in 1998 and now has more than 1,000 customers in over 100 countries.

Jio is partnering Airspan to deploy a network of small cells and small cell backhaul products to its LTE network. This provides better coverage and capacity for delivering high-speed broadband data, voice, and digital services across India. The two companies have partnered through an extensive design, development, integration, and deployment cycle in record time to create a cost-efficient indoor capacity tool for use today.

Fig. 4: Airspan Networks: Leading 4G/5G RAN hardware vendor

Source: Company

AirHop Communications

In 2015, RIL acquired Airhop Communications for a sum of USD0.5mn. The company develops radio access network (RAN) software that addresses the installation, operation and performance challenges of multi-layer deployments of small cells in 3G and 4G networks. The company offers products: eSon, eSonify and eSON360. In 2018, it helped power Reliance Jio’s JioSON via its eSON360 technology. This helped Jio automate its services and implement ‘self-healing’ technologies for its towers.

eSON360 powered Reliance Jio’s SON solution and enabled Jio to quickly expand its network in a cost-effective way while providing a high-quality customer experience to its fast- growing subscriber base. eSON360 is a highly scalable platform that leverages a state-of- the-art software architecture that is always responsive, resilient and elastic to the network environment, achieving a virtualised solution that fits in well with SDN/NFV frameworks.

61 Edelweiss Securities Limited Oil, Gas and Services

RJIO IoT and other acquisitions Netradyne

In June 2016, RIL invested USD16mn in Netradyne via compulsorily convertible preferred shares and further invested USD8mn in the company in September 2018. Following these two rounds of investment, Reliance owns 37.4% of Netradyne.

Netradyne is a US-based startup and it provides cutting-edge technology in AI, machine learning and edge computing to help reduce accidents by creating a new safe driving standard for commercial vehicles. It is the first vehicle technology provider to combine AI with video, onboard sensors and edge computing. Its customer base includes commercial fleets, rideshare companies, vans and pickup trucks, utility vehicles, last-mile delivery, freight and heavy-duty trucking.

Its products include Driveri, which captures and analyzes driving time providing the fleet with a comprehensive view of the driver compliance along with safety alerts. The device is mounted behind the rear-view mirror of vehicles, which captures video in a 360-degree format. Based on the data collected, it provides DriverStars, Alters, Trends and Notifications. It assists in distracted driving, intersections, speed and distance. The technology yields real- time insights and alerts, unlike legacy platforms that require video uploading on the cloud. Another major product is the HD Maps, which is revolutionising conventional mapping paradigm is the Dynamic 3DHD technology.

Fig. 5: Netradyne Driveri fleet management platform

Source: Company

According to the company, Driveri has improved stop sign compliance by 55% across its customer base. It has already analyzed 750mn miles and 2.5bn minutes of driver videos. The company is likely to play an integral part in providing datasets to the self-driving industry, which is likely to be one the major drivers for the company in the future. Hyundai Cradle, the Venture Arm of Automaker Hyundai have also invested in Netradyne, which will support in further development of autonomous driving features. The company has also received investments from Microsoft’s corporate venture arm, M12.

Sankhya Sutra Labs

SSL is a software simulation services company focused on providing these services to manufacturing and industrial companies such as automobile, aircraft manufacturing, oil & gas and semiconductor manufacturing. The investment in SSL will further enable the group’s digital indicatives that include enterprise high-grade computing analytical tools and solutions.

62 Edelweiss Securities Limited Reliance Industries

Haptik

Haptik is one of the world’s largest AI companies having facilitated over 3bn chat and voice interactions and reached more than 100mn consumers. It counts some of the largest brands such as Samsung, OYO, KFC, Bayer, Starhub and HP as its clients. The advanced conversational AI understands context and is designed to deliver a better RoI.

Over the years, Haptik has transformed itself from being a consumer app to a B2B enterprise. While the original B2C model saw decent success, the founders decided to create something powerful and hence its move to become an enterprise SaaS product, which allows businesses to solve their more pressing queries around customer support.

RJio’s arch rival Bharti Airtel also recently acquired a strategic stake in Voicezen, a startup based on conversational AI technologies. Vodafone Idea, an also-ran, has also announced the launch of VIC, an AI-powered digital customer service and support virtual assistance for customers.

Haptik acquired two new companies in 2019: Convrg and Buzz. Convrg is a US-based AI conversational platform that would help Haptik expand its presence in the US. The Buzzo acquisition allowed Haptik to offer a more innovative product.

Asteria Aerospace

A robotics and AI company, Asteria develops drone-based solutions to provide actionable intelligence from aerial data. They have capabilities across the stack of hardware, software and analytics. The company provides services to military, paramilitary, police forces and industrial clients.

EasyGov

EasyGov aims to provide easy and quick access to welfare schemes and services devised by the government. It is essentially a cloud solution to enable citizens to access government schemes on their own. The company had earlier received angel round funding led by Social Alpha, a Tata Trusts initiative, and Rajat Anandan.

Reliance had entered into an agreement for cash consideration not exceeding INR180mn and further investment not exceeding INR500mn.This translates to a 76% stake on a fully diluted basis The acquisition is likely to help Jio increase its presence in the rural region.

Nowfloats

Nowfloats enables small and medium businesses to get an online presence by using SMS. The algorithm ensures highest discoverability through intelligent SEO. Nowfloats offers two products: Boost and Kitsune. Boost is used for smaller and medium-sized businesses and allows them to set up, manage and grow online across multiple channels and social networks. Kitsune is for larger enterprises and is an open source framework that makes legacy apps 3x faster and infinitely scalable on any infrastructure. The overall business involves local content discovery platform, online business management suite, website promotion, and marketing solutions. This acquisition is expected to strengthen Reliance’s digital and commerce initiatives.

63 Edelweiss Securities Limited Oil, Gas and Services

Reverie

The Reverie language platform delivers both static and dynamic content from apps and portals in multiple languages in real time. It develops end-to-end voice technology stack for delivering a complete multilingual user experience with the mission of bringing Indian languages on a par with English. Reliance will work with Reverie to integrate its services with the group’s different digital consumer platforms.

The company has three objectives for the next three years: reach 500mn users over the next few years, become the market leader in Indian language technologies, and be the Indian company that defines and implements Indian language technology standards. In the past, it raised funding from companies such as Qualcomm Ventures and Aspada. It counts companies like Ola, Practo, and BHIM as its clients. According to a Redseer Consulting report, India has over 530mn active internet users, out of which 210mn prefer vernacular languages that is seen as a USD300bn opportunity. Reverie’s competitors include Mayflower Language Services, Trans Infopreneur and CMM Languages.

64 Edelweiss Securities Limited Reliance Industries

Company Description RIL is the largest private player in the refining, petrochemical, E&P, digital and organized retail sectors in India. While RIL’s refining complex in Jamnagar is the largest in the world and among the most complex, it is also among the largest integrated petrochemical producers globally. Its consumer business (JIO and Retail), which has picked up the scale in the last 4-5 years will contribute 50% of the total EBITDA by FY25 which is currently dominated by Oil to Chemical business. RIL has a weight of 13% in BSE Sensex and is the only Indian company which has crossed USD150bn in valuations.

Investment Theme RIL’s strength lies in its ability to build businesses of global scale and execute complex, time- critical, and capital-intensive projects which will prove advantageous as it embarks on large investments in all segments. We expect its consumer business (Digital and Retail) to contribute ~50% of EBITDA from FY25 given its strong expansion and customer base. We are now giving rich valuations to JIO and Retail seeing its huge potential, though remain positive on their core O2C business (both refining and chemicals). We believe refining margins in Asia will rise due to a “paradigm shift in regional refining dynamics” from West to East, which will favor a complex refiner like Reliance. Global utilization rates have bottomed out in chemicals. RIL is almost done with its capex cycle, investing in world-scale projects like petcoke gasification, off-gas crackers and telecoms, which are expected to drive future growth in months to come has started commissioning and remaining projects of KG-D6 will start soon.

Key Risks Slow down in global demand or larger than expected capacity additions could impact RIL’s refining and chemical margins. Delays in government approvals for India E&P or weak domestic gas prices could hamper progress in upstream.

Weak natural gas prices could lower the profitability of upstream assets. Rupee appreciation may impact negatively as RIL is positively leveraged to the depreciating currency. About half of RIL business is in unrelated diversifications, especially telecoms & related, which would attract a conglomerate discount.

Our reverse DCF calculation suggests that (especially) for Jio Platforms and Retail the market is baking-in very high earnings growth expectation sustaining over the next 10 years, which by any measure is a tall ask.

Deleveraging to zero-debt has swung the needle to the other extreme, raising RIL’s WACC to match cost of equity (CoE). The sharp rise in WACC precipitates a negative economic spread for RIL even after we assume robust earnings growth.

65 Edelweiss Securities Limited Oil, Gas and Services

Financial Statements Key Assumptions Income statement (INR mn) Year to March FY19 FY20 FY21E FY22E Year to March FY19 FY20 FY21E FY22E Macro Net revenue 5,671,350 5,967,430 4,862,215 6,508,306 GDP(Y-o-Y %) 6.1 4.8 (4.0) 7.0 Materials costs 3,944,870 4,052,400 3,187,822 4,190,319 Inflation (Avg) 3.4 4.3 3.5 4.0 Gross profit 1,726,480 1,915,030 1,674,392 2,317,986 Repo rate (exit rate) 6.3 4.4 3.0 4.0 Operating expenses 887,300 1,032,860 759,078 978,106 USD/INR (Avg) 70.0 70.7 75.0 73.0 EBITDA 839,180 882,170 915,314 1,339,880 Sector Depreciation 209,340 222,030 275,410 349,360 Upstream EBIT 629,840 660,140 639,904 990,520 Brent Crude (USD/bbl) 70.2 60.9 42.0 50.0 Less: Interest Expense 164,950 220,270 259,675 192,556 Gas price (USD/mmbtu) 3.2 3.5 3.0 3.0 Add: Other income 86,350.00 139,560.00 228,408.58 146,266.04 Company Profit Before Tax 551,240 579,430 608,638 944,230 Petchem Less: Provision for Tax 153,900 137,260 147,546 246,934 Edel cracking mgn USD/mt 842.1 525.9 494.0 528.6 Less: Minority Interest 2,490 5,260 43,701 35,231 PP margins (USD/mt) 191.9 184.0 187.6 191.4 Associate profit share 1,030 1,070 1,070 1,070 PXL margins (USD/mt) 453.4 254.6 240.0 244.8 Reported Profit 395,880 437,980 418,460 663,136 PTA margins (USD/mt) 211.1 189.7 193.5 197.3 Exceptional Items - 44,440 - - MEG margins (USD/mt) 68.5 30.6 50.0 50.0 Adjusted Profit 395,880 393,540 418,460 663,136 Chem prodn (mmt) 31.1 31.6 30.8 35.2 Shares o /s (mn) 5,926 6,339 6,445 6,762 Chem EBITDA (USD/mt) 173 138 98 146 Adjusted Basic EPS 66.8 62.1 64.9 98.1 Refining Diluted shares o/s (mn) 5,926 6,339 6,762 6,762 Refining thrput (mmt) 68.3 70.6 63.3 68.7 Adjusted Diluted EPS 66.8 62.1 61.9 98.1 GRM (USD/bbl) 9.2 8.9 8.5 11.5 Adjusted Cash EPS 108.4 105.1 113.4 157.3 India E&P Dividend per share (DPS) 6.5 6.5 6.6 12.5 Gr.gas prdn KGD6(mmscmd) 2.0 1.7 7.5 14.3 Dividend Payout Ratio (%) 11.4 11.0 11.8 14.8 Telecom

Subscribers (mn) 306.7 387.5 453.5 497.5 Common size metrics Average Revenue # unit ARPU (INR) 131.2 126.9 148.5 179.9 Year to March FY19 FY20 FY21E FY22E Telecom EBITDA growth (%) 124.2 42.9 45.6 41.2 Materials costs 69.6 67.9 65.6 64.4 Retail Staff costs 2.2 2.4 2.6 2.3 Area (mn sq ft) 22.0 28.7 31.6 37.9 S G & A expenses 13.4 14.9 13.0 12.8 Number of stores 10,415 11,784 12,962 15,555 Operating expenses 15.6 17.3 15.6 15.0 EBITDA growth (%) 146 60 (7) 49 Depreciation 3.7 3.7 5.7 5.4 Financial Assumptions Interest Expense 2.9 3.7 5.3 3.0 Net Debt (INR bn) (assumptions) 2,433 2,257 713 (667) EBITDA margins 14.8 14.8 18.8 20.6 Avg. Interest rate (%) 8.3 11.3 11.3 11.3 Net Profit margins 7.0 6.7 9.5 10.7 Capex (INR bn) 936 765 452 352

Growth ratios (%) Year to March FY19 FY20 FY21E FY22E Revenues 44.8 5.2 (18.5) 33.9 EBITDA 30.8 5.1 3.8 46.4 PBT 11.7 5.1 5.0 55.1 Adjusted Profit 9.7 (0.6) 6.3 58.5 EPS 9.7 (7.1) (0.3) 58.5

66 Edelweiss Securities Limited Reliance Industries

Balance sheet (INR mn) Cash flow metrics As on 31st March FY19 FY20 FY21E FY22E Year to March FY19 FY20 FY21E FY22E Share capital 59,259 63,392 64,447 67,616 Operating cash flow 463,570 980,970 729,299 1,463,372 Reserves & Surplus 3,811,860 4,469,920 6,683,505 7,726,765 Financing cash flow 559,060 (25,410) (583,831) 119,301 Shareholders' funds 3,871,119 4,533,312 6,747,951 7,794,381 Investing cash flow (990,060) (757,170) (43,581) (205,633) Minority Interest 82,800 80,160 123,861 159,092 Net cash Flow 32,570 198,390 101,888 1,377,039 Long term borrowings 2,369,130 2,357,390 764,963 817,803 Capex (936,260) (765,170) (451,989) (351,899) Short term borrowings 848,210 937,860 837,860 782,860 Dividend paid (48,593) (48,593) (44,529) (84,389) Total Borrowings 3,217,340 3,295,250 1,602,823 1,600,663

Long Term Liabilities 315,150 315,150 315,150 315,150 Profitability and efficiency ratios Def. Tax Liability (net) 499,231 541,230 577,870 629,091 Year to March FY19 FY20 FY21E FY22E Sources of funds 7,985,640 8,765,102 9,367,656 10,498,377 ROAE (%) 11.5 9.3 8.0 9.4 Gross Block 4,384,390 5,860,270 6,341,319 6,702,238 ROACE (%) 7.6 8.0 7.9 9.5 Net Block 3,021,150 4,359,200 4,564,839 4,576,398 Inventory Days 58 62 76 58 Intangible Assets 962,590 967,380 1,026,560 1,017,540 Debtors Days 15 15 14 11 CWIP (incl. intangible) 1,794,630 1,091,060 200,564 170,479 Payable Days 100 92 93 63 Total Fixed Assets 5,778,370 6,417,640 5,791,963 5,764,418 Cash Conversion Cycle (26) (15) (3) 6 Non current investments 1,645,490 2,038,520 1,858,520 1,858,520 Current Ratio 1.3 1.1 2.4 2.6 Cash and Equivalents 784,510 1,038,350 890,238 2,267,277 Gross Debt/EBITDA 3.8 3.7 1.8 1.2 Inventories 675,610 739,030 622,489 751,889 Gross Debt/Equity 0.8 0.7 0.2 0.2 Sundry Debtors 300,890 196,560 174,644 202,946 Adjusted Debt/Equity 0.8 0.7 0.2 0.2 Loans & Advances 73,580 224,010 454,262 596,445 Net Debt/Equity 0.6 0.5 0.1 (0.1) Other Current Assets 765,610 1,005,042 1,001,000 1,017,416 Interest Coverage Ratio 3.8 3.0 2.5 5.1 Current Assets (ex cash) 1,635,730 2,164,642 2,072,435 2,388,736

Trade payable 1,083,090 967,990 649,242 805,956 Operating ratios Other Current Liab 775,370 1,926,060 596,258 974,619 Year to March FY19 FY20 FY21E FY22E Total Current Liab 1,858,460 2,894,050 1,245,501 1,780,575 Total Asset Turnover 0.8 0.7 0.5 0.7 Net Curr Assets-ex cash (222,730) (729,408) 826,934 608,161 Fixed Asset Turnover 1.4 1.3 0.9 1.2 Uses of funds 7,985,640 8,765,102 9,367,656 10,498,377 Equity Turnover 1.6 1.4 0.8 0.9 BVPS (INR) 653.2 715.1 998.0 1,152.7

Valuation parameters

Free cash flow (INR mn) Year to March FY19 FY20 FY21E FY22E Year to March FY19 FY20 FY21E FY22E Adj. Diluted EPS (INR) 66.8 62.1 61.9 98.1 Reported Profit 395,880 437,980 418,460 663,136 Y-o-Y growth (%) 9.7 (7.1) (0.3) 58.5 Add: Depreciation 209,340 222,030 275,410 349,360 Adjusted Cash EPS (INR) 108.4 105.1 113.4 157.3 Interest (Net of Tax) 118,898 168,091 196,724 142,199 Diluted P/E (x) 32.2 34.6 34.7 21.9 Others 256,102 (353,808) (61,071) 24,589 P/B (x) 3.3 3.0 2.2 1.9 Less: Changes in WC 516,650 (506,678) 100,225 (284,088) EV / Sales (x) 2.7 2.7 3.5 2.6 Operating cash flow 463,570 980,970 729,299 1,463,372 EV / EBITDA (x) 18.2 18.1 18.4 12.6 Less: Capex 936,260 765,170 451,989 351,899 Dividend Yield (%) 0.3 0.3 0.3 0.6 Free Cash Flow (472,690) 215,800 277,310 1,111,473 EV 15,250,604 15,959,571 16,867,738 16,867,738

Peer comparison valuation Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%) Name (USD mn) FY21E FY22E FY21E FY22E FY21E FY22E Reliance Industries 1,89,072 34.7 21.9 18.4 12.6 8.0 9.4 Bharat Petroleum Corporation 12,999 13.1 7.1 9.8 7.3 15.7 24.5 Hindustan Petroleum Corporation 4,651 17.1 5.3 9.2 5.9 6.9 21.6 Indian Oil Corporation 11,675 6.9 3.2 6.1 3.9 10.9 20.7 Median - 15.1 6.2 9.5 6.6 9.5 21.2 AVERAGE - 18.0 9.4 10.3 6.9 10.4 19.0 Source: Edelweiss research

67 Edelweiss Securities Limited Oil, Gas and Services

Additional Data Directors Data Mukesh D Ambani Chairman and Managing Director P M S Prasad Executive Director Pawan Kumar Kapil Executive Director Hital R Meswani Executive Director Nikhil R Meswani Executive Director Mansingh L Bhakta Independent Director Nita Ambani Non Executive Non Independent Director Raghunath A Mashelkar Independent Director Dharam Vir Kapur Independent Director Dipak C Jain Independent Director Yogendra P Trivedi Independent Director Ashok Misra Independent Director Adil Zainulbhai Independent Director Raminder S. Gujral Independent Director Shumeet Banerji Independent Director Arundhati Bhattacharya Independent Director K. V. Chowdary Non-Executive Director

Auditors - Chaturvedi & Shah, Deloitte Haskins & Sells LLP, Rajendra & Co *as per last annual report

Holding – Top10 Perc. Holding Perc. Holding Srichakra commercial 10.87 Karuna commercials l 8.02 Tattvam enterprises 8.02 Devarshi commercials 8.02 Life insurance corp 5.86 Capital group compan 4.23 Reliance services an 2.71 Fmr llc 2.32 Vanguard group 1.85 Samarjit enterprises 1.83

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year

68 Edelweiss Securities Limited RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk Bharat Petroleum Corporation BUY SO M GAIL (INDIA) BUY SP L Gujarat Gas BUY SO L Gujarat State Petronet BUY SO M Hindustan Petroleum Corporation BUY SP L Indian Oil Corporation BUY SO M Indraprastha Gas BUY SO M Mahanagar Gas Ltd BUY SO H ONGC BUY SO L Petronet LNG HOLD SP L Reliance Industries BUY SO M

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

69 Edelweiss Securities Limited Oil, Gas and Services

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]

Aditya Narain

Head of Research [email protected]

Coverage group(s) of stocks by primary analyst(s): Oil, Gas and Services Bharat Petroleum Corporation, GAIL (INDIA), Gujarat Gas, Gujarat State Petronet, Hindustan Petroleum Corporation, Indraprastha Gas, Indian Oil Corporation, Mahanagar Gas Ltd, ONGC, Petronet LNG, Reliance Industries

Recent Research

Date Company Title Price (INR) Recos

10-Jul-20 Oil & Gas Demand implosion: A crash in

store for the quarter;

Result Preview

08-Jul-20 Oil & Gas Gas outshines, yet again; ONGC pummelled; Result Review 30-Jun-20 ONGC Inventory impairment: The oil 81 Buy slick muddying performance ; Result Update

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period * 1stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn 743 Reduce depreciate more than 5% over a 12-month period Market Cap (INR) 156 62 11 594

One year price chart 446 2,250

(INR) 297 1,900 149 1,550

(INR)

- 1,200

14

14 14

14 14

14

14

14

14

14

14

14

-

- -

-

-

-

-

- -

- -

- 850

Jul

Jan

Jun

Oct

Apr

Sep Feb

Dec Aug

Nov

Mar May

500

19

19

19

20

19

20

19 20 20

20 20

19 20

-

- -

-

-

-

- - -

-

- -

-

Jul Jul

Jan

Jun

Oct

Apr

Sep Feb

Dec

Aug

Nov Mar May Reliance Industries

70 Edelweiss Securities Limited

Reliance Industries

DISCLAIMER Edelweiss Securities Limited (“ESL” or “Research Entity”) is regulated by the Securities and Exchange Board of India (“SEBI”) and is licensed to carry on the business of broking, depository services and related activities. The business of ESL and its Associates (list available on www.edelweissfin.com) are organized around five broad business groups – Credit including Housing and SME Finance, Commodities, Financial Markets, Asset Management and Life Insurance.

This Report has been prepared by Edelweiss Securities Limited in the capacity of a Research Analyst having SEBI Registration No.INH200000121 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 includes Financial Instruments and Currency Derivatives. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in Securities referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.

This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. 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 ESL and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. ESL reserves the right to make modifications and alterations to this statement as may be required from time to time. ESL or any of its associates / group companies shall 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. ESL is committed to providing independent and transparent recommendation to its clients. Neither ESL nor any of its associates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the copyright of ESL. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of ESL and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.

ESL shall not be liable for any delay or any other interruption which may occur in presenting the data due to any reason including network (Internet) reasons or snags in the system, break down of the system or any other equipment, server breakdown, maintenance shutdown, breakdown of communication services or inability of the ESL to present the data. In no event shall ESL be liable for any damages, including without limitation direct or indirect, special, incidental, or consequential damages, losses or expenses arising in connection with the data presented by the ESL through this report.

We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report.

ESL and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the Securities, 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 subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. ESL may have proprietary long/short position in the above mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with ESL.

71 Edelweiss Securities Limited

Oil, Gas and Services

ESL or its associates may have received compensation from the subject company in the past 12 months. ESL or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. ESL or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or ESL’s associates may have financial interest in the subject company. ESL and/or its Group Companies, their Directors, affiliates and/or employees may have interests/ positions, financial or otherwise in the Securities/Currencies and other investment products mentioned in this report. ESL, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs and Currency Derivatives, whose values are affected by the currency of an underlying security, effectively assume currency risk. Research analyst has served as an officer, director or employee of subject Company: No ESL has financial interest in the subject companies: No ESL’s Associates may have actual / beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report. Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No ESL has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No Subject company may have been client during twelve months preceding the date of distribution of the research report. There were no instances of non-compliance by ESL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years except that ESL had submitted an offer of settlement with Securities and Exchange commission, USA (SEC) and the same has been accepted by SEC without admitting or denying the findings in relation to their charges of non registration as a broker dealer. A graph of daily closing prices of the securities is also available at www.nseindia.com Analyst Certification: The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

Additional Disclaimers

Disclaimer for U.S. Persons This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker- dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule 15a- 6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an agreement with a U.S. registered broker-dealer, Edelweiss Financial Services Inc. ("EFSI"). Transactions in securities discussed in this research report should be effected through Edelweiss Financial Services Inc.

72 Edelweiss Securities Limited

Reliance Industries

Disclaimer for U.K. Persons The contents of this research report have not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000 ("FSMA").

In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the “Order”); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”).

This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant persons. Any person who is not a relevant person should not act or rely on this research report or any of its contents. This research report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other person.

Disclaimer for Canadian Persons This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not associated persons of any Canadian registered adviser and/or dealer and, therefore, the analysts are not subject to supervision by a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario Securities Commission, other Canadian provincial securities regulators, the Investment Industry Regulatory Organization of Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research analysts' business or relationship with a subject company or trading of securities by a research analyst. This report is intended for distribution by ESL only to "Permitted Clients" (as defined in National Instrument 31-103 ("NI 31-103")) who are resident in the Province of Ontario, Canada (an "Ontario Permitted Client"). If the recipient of this report is not an Ontario Permitted Client, as specified above, then the recipient should not act upon this report and should return the report to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any Canadian person. ESL is relying on an exemption from the adviser and/or dealer registration requirements under NI 31-103 available to certain international advisers and/or dealers. Please be advised that (i) ESL is not registered in the Province of Ontario to trade in securities nor is it registered in the Province of Ontario to provide advice with respect to securities; (ii) ESL's head office or principal place of business is located in India; (iii) all or substantially all of ESL's assets may be situated outside of Canada; (iv) there may be difficulty enforcing legal rights against ESL because of the above; and (v) the name and address of the ESL's agent for service of process in the Province of Ontario is: Bamac Services Inc., 181 Bay Street, Suite 2100, Toronto, Ontario M5J 2T3 Canada.

Disclaimer for Singapore Persons In Singapore, this report is being distributed by Edelweiss Investment Advisors Private Limited ("EIAPL") (Co. Reg. No. 201016306H) which is a holder of a capital markets services license and an exempt financial adviser in Singapore and (ii) solely to persons who qualify as "institutional investors" or "accredited investors" as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore ("the SFA"). Pursuant to regulations 33, 34, 35 and 36 of the Financial Advisers Regulations ("FAR"), sections 25, 27 and 36 of the Financial Advisers Act, Chapter 110 of Singapore shall not apply to EIAPL when providing any financial advisory services to an accredited investor (as defined in regulation 36 of the FAR. Persons in Singapore should contact EIAPL in respect of any matter arising from, or in connection with this publication/communication. This report is not suitable for private investors.

Disclaimer for Hong Kong persons This report is distributed in Hong Kong by Edelweiss Securities (Hong Kong) Private Limited (ESHK), a licensed corporation (BOM -874) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) pursuant to Section 116(1) of the Securities and Futures Ordinance “SFO”. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The report also does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual recipients. The Indian Analyst(s) who compile this report is/are not located in Hong Kong and is/are not licensed to carry on regulated activities in Hong Kong and does not / do not hold themselves out as being able to do so.

Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved

Access the entire repository of Edelweiss Research on www.edelresearch.com

73 Edelweiss Securities Limited