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Company Report Reliance Industries (RIL) BUY Oil, Gas & Consumable Fuels July 15, 2020 THEME Sector view: Attractive The virtuous cycle. RIL’s leadership in connectivity and retail businesses and recent CMP (`): 1,917 strategic partnership with Facebook will enable it to further expand its presence in India’s digital ecosystem, which can create significant value in the long run. We expect Fair Value (`): 2,150 the foray in digital commerce business to be the next big driver of RIL stock, with the BSE-30: 36,033 valuation of legacy O2C and digital services segments broadly established in a reasonable range for now. We retain BUY rating on the stock, raising our SoTP-based Fair Value to Rs2,150 and valuing the overall retail business at an EV of US$62 bn. On the forefront of digital ecosystem in India targeting 4Cs of the business model RIL’s well-established connectivity business under Jio Platforms, formidable offline retail footprint under Reliance Retail, proposed foray in the digital commerce segment under JioMart INSIDE and recent strategic partnership with Facebook, have propelled it to the forefront of consumer- RIL has established facing digital ecosystem opportunity in India. We believe RIL’s ever-expanding portfolio of leadership in offline retail products and services to target the 4Cs of the digital ecosystem—connectivity, commerce, .................. .pg12 content and currency—will enable it to leverage the sizeable traffic across its consumer-facing verticals, generate new revenue streams and create significant value in the long run. Fast growing multi- We now ascribe US$62 bn of EV to the offline retail footprint and digital commerce foray category retailer with a Our analysis of the overall retail business opportunity in this report suggests that Reliance formidable footprint Retail can potentially double its revenues to over US$26 bn from core segments in next four .................. .pg16 years, while achieving an incremental GMV of US$12 bn from its foray in India’s e-commerce market, which is all set to treble to US$100 bn by FY2025. We ascribe US$62 bn of EV to RIL’s Aspirations to tap India’s retail business, (1) ascribing 25X EV/EBITDA multiple to core retail segment versus 20X earlier e-commerce and (2) factoring incremental contribution of US$17 bn (~Rs1.3 tn) from the digital commerce opportunity..pg22 business based on probability-weighted scenarios that may evolve for e-commerce in India by FY2030. (1) RIL’s proven track record of execution, (2) large customer base of Jio and retail segments, (3) strategic tie-up with WhatsApp, (4) unmatched portfolio of private labels and exclusive brand tie-ups, (5) India’s domestic-centric policies and (6) possible inorganic ventures, will enable the company to overcome the head-start achieved by other e-commerce players. Tarun Lakhotia Reiterate BUY with revised FV of Rs2,150, noting several catalysts in the medium term [email protected] We reiterate BUY on RIL, while raising our SoTP-based FV to Rs2,150 from Rs1,750 earlier, Mumbai: +91-22-4336-0875 ascribing higher value to the retail business and rolling forward to September 2021; our Garima Mishra estimates remain largely unchanged as we incorporate the recent transactions and FY2020 AR. [email protected] Progress on digital commerce business, monetization of incremental ecosystem opportunities, Mumbai: +91-22-4336-0862 increase in telecom tariffs and recovery in O2C business environment are the key catalysts to Hemang Khanna watch out for. Potential closure of transactions related to O2C and fiber-InvIT, and further [email protected] Mumbai: +91-22-4336-0876 strategic partnerships in digital services and retail business can be positive triggers as well. Shubhangi Nigam Company data and valuation summary [email protected] Reliance Industries Mumbai: +91-22-4336-1375 Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 1,948-867 EPS (Rs) 66.7 69.8 93.3 Mcap (bn) (Rs/US$) 11,363/150.7 EPS growth (%) 1.2 4.6 33.7 ADTV-3M (mn) (Rs/US$) 35,427/470 P/E (X) 28.7 27.5 20.5 Shareholding pattern (%) P/B (X) 2.5 2.3 2.0 Promoters 48.9 EV/EBITDA (X) 16.7 13.9 9.5 FIIs 25.9 RoE (%) 9.4 8.6 10.7 MFs/BFIs 5.3/6.2 Div. yield (%) 0.3 0.4 0.4 Kotak Institutional Equities Price performance (%) 1M 3M 12M Sales (Rs bn) 5,967 5,093 6,453 Research Absolute 21 63 51 EBITDA (Rs bn) 831 893 1,204 Important disclosures appear at the Rel. to BSE-30 13 39 62 Net profits (Rs bn) 396 414 593 back For Private Circulation Only. In the US, this document may only be distributed to QIBs (qualified institutional buyers) as defined under rule 144A of the Securities Act of 1933. This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions. Oil, Gas & Consumable Fuels Reliance Industries TABLE OF CONTENTS On the forefront of consumer-facing digital ecosystem in India .............. 3 Setting the stage to command leadership in the commerce business .... 11 Fast growing multi-category retailer with a formidable footprint .......... 16 Aspirations to tap India’s e-commerce opportunity ............................... 22 Strong private label push and brand partnerships are key assets ........... 31 Appendix 1........................................................................................... 35 Appendix 2........................................................................................... 36 Appendix 3........................................................................................... 38 The prices in this report are based on the market close of [July 14, 2020]. 2 KOTAK INSTITUTIONAL EQUITIES RESEARCH Reliance Industries Oil, Gas & Consumable Fuels ON THE FOREFRONT OF CONSUMER-FACING DIGITAL ECOSYSTEM IN INDIA RIL’s well-established connectivity layer under Jio Platforms, formidable offline retail footprint under Reliance Retail, proposed outlay in the digital commerce business and recent strategic partnership with Facebook, have propelled it to the forefront of consumer-facing digital ecosystem opportunity in India. We believe RIL’s ever-expanding offering of products and services amid the backdrop of India’s domestic-centric policies will enable it to leverage the sizeable traffic across its consumer-facing verticals and generate new revenue streams in the long run. We reiterate our BUY rating on the stock, while raising our fair value to Rs2,150 factoring in the digital commerce opportunity, which we expect the company to realize in the medium term. Setting the stage to replicate established O2C legacy in consumer businesses RIL's approach to consumer-facing businesses is evidently inspired by its well-established legacy in O2C business—(1) identify large opportunity, (2) execute at industry-leading scale, (3) expand across the value chain, (4) use low-cost capital and (5) leverage favorable policies. Starting from a textile business, RIL integrated backwards in the entire value chain to create one of the world’s largest and most complex O2C businesses. We now see RIL setting the stage to replicate the same strategy in the consumer-facing business, underpinned by (1) world’s largest mobile LTE network, (2) a pan-India broadband fiber network, (3) formidable offline retail footprint, (4) growing bouquet of content/commerce applications and (5) several related offerings including but not limited to devices, OS, cloud- based services, AR/VR, AI/ML and IoT. Exhibit 1: RIL’s ever-expanding presence across the consumer-facing digital ecosystem in India Existing and planned forays in the digital ecosystem Source: Companies, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Oil, Gas & Consumable Fuels Reliance Industries RIL targeting the 4Cs of the digital ecosystem business model Well-established digital ecosystem companies across the world have exhibited a few common traits and strategies—(1) a robust scalable technology backbone connecting a large base of consumers on a best-in-class digital interface, that acts as a hook, (2) offering of incremental layers to fulfill the customers’ requirements of products, services or content within their own ecosystem or through an open marketplace, (3) providing transactional capability through an integrated payments mechanism and (4) generating revenues and profits through a combination of advertising, commissions and subscription. We believe RIL has chartered its path in a similar way to service the entire spectrum of the digital ecosystem in India—(1) connectivity through mobile/fiber-to-the-home/enterprise services, (2) commerce through offline retail, online foray and digitizing large unorganized segment, (3) content through its bouquet of media and entertainment apps and related business verticals and (4) currency through transaction capabilities. RIL’s recent strategic tie- up with Facebook/WhatsApp may enable it to enhance its powerful digital ecosystem offering by connecting to customers through integrated user-friendly interfaces to meet most, if not all, of their requirements in the digital world. Exhibit 2: Jio Platforms + Reliance Retail can evolve into large revenue generating companies akin to their Chinese counterparts Comparison of product offerings of Jio Platforms + Reliance Retail with Alibaba and Tencent Reliance Retail + Jio Platforms Alibaba group Tencent (1) Retail own brands: Fresh, Smart, Market, Ajio Taobao is B2C/C2C focused, enabling small etc. (2) Textile own brands (3) In-Store brands: businesses and individuals to open online stores. Partnered with JD.com in 2014. JD.com features B2C commerce John Players, Snactac, avaasa (Ethnic Tmall offers a wide selection of branded products prominently on WeChat. Indianwear), GoodLife (Full range grocery brand) oriented towards China's growing middle class.
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