Company Report (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 ’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 Platforms, formidable offline retail footprint under , 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, : +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. Company data and valuation summary Shubhangi Nigam [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

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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].

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ON THE FOREFRONT OF CONSUMER-FACING DIGITAL ECOSYSTEM IN INDIA RIL’s well-established connectivity layer under , 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

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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. and LYF smartphones (4G mobile devices)

Alibaba B2B is a trading platform, connecting Reliance Market and JioMart can evolve as a B2B commerce manufacturers from countries such as China, India, large B2B national supplier US and Thailand with international buyers.

JioMart enabled O2O connecting offline Ele.me (connects local shops to consumers), Didi Local commerce Didi Kuaidi (cab aggregator) customers with online B2C/B2B platforms Kuaidi (cab aggregator)

Alipay: online third-party payments platform, Payment and fintech JioMoney/JioPay Weixin Pay, QQ Wallet, LiCaiTong, WeSure, Weiliadai providing transaction and escrow services.

Cainiao Logistics - provides logistics support to all Logistics Grab (acquired in 2019) of Alibaba's operations

Social media and FB, Instagram, Whatsapp, JioChat, JioCall Influencing and personal content on Taobao QQ IM, Weixin and WeChat (Free service) messaging

Advanced Casual Games ACGs, Mobile games, Digital content JioMovies, JioTV, JioSaavn, JioNews Relevant digital content on B2C websites Massively Multiplayer Online Games MMOGs

Online advertising. (1) Media. Includes news, video Online advertising. Alimama is an online marketing and music properties, e.g. Tencent News app; platform that provides sellers on Alibaba Group's QQ.com and verticals; regional portals; QQ Music marketplaces a range of marketing and advertising Facebook and Instagram Platforms, JioAds Cross- etc. (2) Social and others. Includes social properties, Marketing services. Advertisers can choose between pay-for- device Marketing Technology Platform. app store, browser and ad networks, e.g. Qzone, QQ, performance and display marketing. These ads are Weixin Official Accounts, Weixin Moments, Mini the primary means through which Alibaba makes Programs, QQ Browser, Mobile Ad Network, money from Taobao. YingYongBao etc.

Aliyun Alibaba Cloud. Develops platforms for cloud JioCloud Store and Access your files from computing and data management, ensuring that Online infrastructure anywhere. JioBrowser Fast, Safe & Light weight Utilities & Infrastructure (Cloud services, Browser) Alibaba's e-commerce portals can handle its browser. JioSecurity Protect phone, secure data massive traffic and transaction volumes.

Network of ~12,000 stores with US$12 bn of Offline retail core revenues across grocery, consumer Hema Supermarket, Intime Retail, Suning Vipshop electronics and fashion & lifestyle

Source: Companies, Kotak Institutional Equities

We look at the growth profile of Tencent, which transformed itself from being the provider of only a messenger service to offering multiple products in the communications, social networking, gaming, media, fintech, cloud segments for users and enterprises (refer Appendix 1 for more details). In the subsequent sections, we evaluate RIL’s existing offline retail business and online B2C and B2B commerce opportunities and how we expect it to unfold over the next few years.

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Reliance Industries Oil, Gas & Consumable Fuels

We ascribe fair value of US$62 bn for RIL’s retail segment

We compute fair value of US$62 bn for retail business attributable to RIL for its 94.38% stake, while ascribing (1) US$48 bn to existing offline retail segment at 25X EBITDA of core retail business and 10X EBITDA on fuel and recharges based on our September 2022 estimates and (2) US$17 bn to digital commerce opportunity based on probability-weighted scenario analysis of the industry evolution by FY2030, discounted back to September 2021. We see further potential upside from incremental revenue-generating opportunities as RIL capitalizes on its leadership in the retail ecosystem.

RIL’s digital commerce business comprises JioMart’s online B2C business and the kirana digitization program. We believe the digitized kiranas will be key enablers of RR’s online business and hence, we see limited merit in valuing the B2B distribution business separately. We acknowledge that valuation of digital commerce businesses remains subjective for now; that said, we remain confident that the vast under-penetration of organized retail, the huge user base garnered by Jio, execution capabilities of RIL group and domestic-centric policies in India can together drive significant scale-up of these new businesses in a quick time.

Valuing existing offline retail at US$48 bn

We value RR’s offline core retail business segment at US$45 bn based on 25X EV/EBITDA multiple on September 2022 estimates, in line with our DCF-implied target multiple for Avenue Supermarts. We include incremental value of US$3 bn for fuel and recharges segment, valuing it at 10X EV/EBITDA multiple on September 2022 estimates.

Exhibit 3: Retail companies command higher valuation multiples given large untapped opportunity Peer valuation of retail companies in India, March fiscal year-ends, 2020-22E

EV/EBITDA (X) EV/Revenue (X) 2020 2021E 2022E 2020 2021E 2022E Food and grocery retailers Avenue Supermarts Ltd 71.4 71.9 41.7 6.1 5.5 3.9 Future Retail Ltd 8.4 5.9 5.2 0.5 0.4 0.4 Average 39.9 38.9 23.5 3.3 3.0 2.1 Apparel, footwear, jewelry retailers Aditya Birla Fashion & Retail 9.0 11.7 7.0 1.2 1.4 1.1 Bata 44.8 34.9 22.1 8.8 7.6 4.9 Future Lifestyle Fashions Lt 4.0 4.0 3.0 0.6 0.6 0.4 Shoppers Stop Ltd 7.0 11.0 8.0 1.0 1.2 1.0 TCNS Clothing Co Ltd 13.9 18.7 9.7 2.3 2.6 1.9 Trent Ltd 40.0 55.0 33.0 6.5 7.3 5.0 Titan 36.0 53.0 30.3 4.2 5.1 3.7 Vmart Retail Ltd 16.0 25.0 15.0 2.1 2.1 1.3 Average 21.3 26.7 16.0 3.3 3.5 2.4

Notes: (a) KIE estimates used for Avenue Supermarts, ABFRL and TCNS Clothing.

Source: Bloomberg, Kotak Institutional Equities estimates

Valuing digital commerce business at equity valuation of US$17 bn

In our attempt to value RR’s e-commerce business, we create three plausible scenarios by envisaging, (1) duopoly market with top-2 players commanding 80% market share, (2) an oligopolistic market with three large players including RR commanding 80% market share and (3) a hyper-competitive and fragmented market with several large players. We assign 40% probability each to the first two scenarios and 20% probability to the third scenario.

Based on our FY2030 e-commerce industry GMV estimate of US$225 bn and reasonable assumptions on market share and margins for RR in the respective scenarios, we compute probability-weighted equity value of US$17 bn, discounted back to September 2021.

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Oil, Gas & Consumable Fuels Reliance Industries

Exhibit 4: We compute US$17 bn of equity value based on probability-weighted valuation scenario for RR’s digital commerce segment Valuation scenario for digital commerce business, March fiscal year-end, 2030 (US$ bn)

Scenario A - Duopoly Scenario B - Oligopoly Scenario C - Intense competition Top-2 players command 80% in the e- Top-3 players commanding 80% All the players continue fighting for Description commerce market market share market share Gross Merchandise Value 225 225 225 (GMV, US$ bn) Market share of RR's e- 40 30 20 commerce segment (%) GMV of RR's e-commerce 90 67 45 segment (US$ bn) Discounting continues to attract new Explanation Limited discounting by top-2 players Limited discounting by top-3 players customers and retain old ones Operating profit / EBITDA 8.0 7.0 (10.0) margin (%) EBITDA of RR's e-commerce 7.2 4.7 (4.5) segment (US$ bn) EV/EBITDA valuation multiple 12.0 12.0 NA (X) Stable cash flow generating business Unstable cash flows and hence a low Continues to burn cash; accumulated Explanation will command a high valuation multiple valuation multiple EBITDA loss included in CAC EV of RR's e-commerce 86.3 56.6 — segment (US$ bn) Initial investment in customer 18.0 20.2 22.5 acquisition costs (US$ bn) Equity value of RR's e- 68.3 36.4 (22.5) commerce segment (US$ bn) Equity value discounted to 31.2 16.6 (10.3) Sep-2021 (US$ bn) Probability 0.4 0.4 0.2 Probability-weighted equity 17.1 value (US$ bn)

Source: Kotak Institutional Equities estimates

With RR having only begun its digital commerce business (JioMart’s online grocery delivery business and the kirana B2B distribution business), we believe value creation from this business will happen only over the medium term (next decade or so). Our optimism for this business segment for RR stems from various factors—(1) initial-phase development of e- commerce market has already happened in India, (2) Jio has already brought a large population online (nearly 400 mn subscribers); low buyer penetration implies large growth opportunity, (3) RR’s large physical store presence and associated infrastructure provides it with competitive advantage and (4) regulatory advantage of having the ability to store and sell own inventory as opposed to restrictions on majority foreign-owned competitors (Amazon and ). Overall, we think RR is best positioned amongst its peers as it has a presence across the entire value chain of offline B2C retail, B2B retail and kirana network which can all feed the online business.

We concede that e-commerce business model in India is marked by high competitive intensity, which may keep customer acquisition costs elevated for some time. We also acknowledge that RIL is presently one of the several players in the Indian e-commerce market and ramp-up of digital commerce foray will not be without challenges. We further see that while supply-side constraints have been addressed by retailers, demand aggregation remains a challenge and typically results in high customer acquisition costs. It is here that RIL’s partnership with WhatsApp may hold it in good stead. In this context, we believe a probability-weighted model is a reasonable way to value RR’s digital commerce business.

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Reliance Industries Oil, Gas & Consumable Fuels

Raise fair value to Rs2,150 factoring in the digital commerce opportunity

We raise our SoTP-based fair value of RIL to Rs2,150 from Rs1,750 earlier, ascribing higher value to existing core retail business at 25X EV/EBITDA multiple versus 20X earlier, incrementally factoring in Rs1.3 tn (~US$17 bn) of fair value from the digital commerce business, which we expect the company to realize in the medium term and rolling forward to September 2021. We have also updated our model for recent transactions related to Jio Platform and rights issue and details from subsidiary annual reports; we have not incorporated digital commerce business in our estimates for retail business for now.

Exhibit 5: Our SoTP valuation of Reliance is Rs2,150 per share Sum-of-the-parts valuation, September 2021E (Rs)

EBITDA EV/EBITDA EV Valuation (Rs bn) (X) (Rs bn) (US$ bn) (Rs/share) Energy 4,774 63 752 Petrochemicals 322 7.5 2,419 32 381 Refining and marketing 259 7.5 1,944 26 306 Upstream 46 9.0 412 5 65 Digital services 4,489 59 707 Base case 519 10.0 5,190 69 817 Telecom option value 654 9 103 Minority interest (1,355) (18) (213) Retail 4,708 62 741 Core retail 137 25.0 3,424 45 539 Fuel and recharges 24 10.0 240 3 38 Digital commerce 1,299 17 205 Minority interest (256) (3) (40) Total enterprise value 13,971 185 2,201 Real estate projects / others 126 2 20 Outstanding receipts from rights issue 398 5 63 Consolidated net debt 844 11 133 Fair value 13,651 181 2,150

Notes: (a) We use 6.349 bn shares including rights issue but excluding 412.8 mn treasury shares.

Source: Kotak Institutional Equities estimates

Exhibit 6: We ascribe option value of Rs654 bn (US$9 bn) for telecom business Calculation of option value for Jio in a two-private player market structure (Rs bn)

Incremental revenues assuming Jio garners 50% share of VIL 268 Incremental EBITDA at 60% margins 161 EV/EBITDA (X) 10.0 Incremental EV 1,608 Incremental capex to support higher market share (300) Net equity value accretion 1,308 Option value assuming 50% probability 654

Source: Kotak Institutional Equities estimates

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Oil, Gas & Consumable Fuels Reliance Industries

Exhibit 7: Financial model of Reliance Retail, March fiscal year-ends, 2016-25E (Rs bn)

2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E Profit model Revenues (gross) 209 333 622 1,166 1,465 1,691 2,232 2,628 2,966 3,326 Core retail 189 255 362 735 928 946 1,307 1,559 1,770 2,000 Jio and fuel 22 83 330 570 702 866 1,091 1,256 1,406 1,560 EBITDA 9 12 25 62 97 93 143 179 212 249 Core retail 9 11 22 52 83 75 121 153 183 217 Jio and fuel (0) 1 4 10 14 18 22 26 29 32 EBIT 5 8 21 55 83 74 116 146 175 208 Net income 3 5 13 33 57 54 83 105 128 155 Contribution to RIL's EPS (Rs) 0 1 2 5 9 9 12 16 19 23 Balance sheet Net-worth 55 69 92 128 184 238 321 426 554 709 Net debt 11 (3) 32 120 28 179 200 183 125 33 Invested capital 67 66 124 248 212 417 522 609 679 743 Operating metrics (%) Revenue growth 20.0 59.3 86.7 87.4 25.6 15.4 32.0 17.7 12.8 12.2 Core retail 34.9 42.3 102.9 26.2 1.9 38.2 19.3 13.5 13.0 Jio and fuel 277.6 296.9 73.1 23.0 23.4 26.0 15.2 11.9 11.0 EBITDA margins 4.3 3.5 4.1 5.3 6.6 5.5 6.4 6.8 7.1 7.5 Core retail 4.2 6.0 7.0 8.9 7.9 9.2 9.8 10.4 10.9 Jio and fuel 1.3 1.1 1.8 2.0 2.1 2.0 2.0 2.0 2.0 EBIT margins 2.4 2.4 3.3 4.8 5.6 4.4 5.2 5.6 5.9 6.3 RoAE 5.2 8.5 16.5 30.0 36.6 25.5 29.8 28.1 26.1 24.6 RoACE 5.0 7.8 14.2 19.4 26.7 17.4 18.4 19.2 20.2 21.8

Source: Company, Kotak Institutional Equities estimates

Exhibit 8: Financial model of Reliance Jio, March fiscal year-ends, 2018-25E (Rs bn)

2018 2019 2020 2021E 2022E 2023E 2024E 2025E Assumptions Wireless subscriber base at end-period (mn) 187 307 388 432 452 471 489 509 Wireless subscriber market share (%) 17 28 34 37 38 38 39 40 Wireless ARPU (Rs/month) 102 131 130 147 165 178 186 195 Broadband subscriber base at end-period (mn) 1 1 4 7 11 15 18 Broadband ARPU (Rs/month) — — 702 720 730 740 747 Overall EBITDA margins (%) 33 39 40 46 49 51 53 55 Profit model Revenues 202 388 543 739 920 1,063 1,189 1,318 EBITDA 67 151 216 340 452 541 630 723 Net income 7 30 56 158 234 307 387 474 Contribution to RIL's EPS (Rs) 1 5 10 20 28 36 46 56 Balance sheet Net-worth 1,029 404 1,710 1,868 2,101 2,408 2,795 3,269 Effective net debt 1,400 1,456 495 475 237 (122) (546) (1,045) Invested capital 2,278 1,760 2,144 2,408 2,544 2,645 2,770 2,914 Cash flow Operating cash flow (20) 50 99 261 358 433 500 565 Working capital (29) (75) (37) 16 15 12 10 11 Capital expenditure (358) (438) (518) (240) (220) (242) (168) (189) Free cash flow (407) (464) (455) 37 153 203 342 387 Returns (%) RoAE 0.8 4.1 5.3 8.8 11.8 13.6 14.9 15.6 RoACE 0.9 2.6 5.2 8.0 11.0 13.7 16.6 19.6 CRoCI 2.5 6.9 8.4 11.6 14.3 16.6 19.0 21.3 Adjusted CRoCI 2.5 6.9 8.8 12.0 15.1 18.7 24.5 33.2

Source: Company, Kotak Institutional Equities estimates

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Reliance Industries Oil, Gas & Consumable Fuels

Exhibit 9: We expect consumer-facing businesses to drive robust growth in EBITDA over the next few years Consolidated segment-wise break-up of EBITDA, March fiscal year-ends, 2016-23E (Rs bn)

2016 2017 2018 2019 2020 2021E 2022E 2023E EBITDA Petrochemicals 137 165 243 379 309 260 320 325 Refining and marketing 268 286 306 261 245 186 249 269 Oil and gas 69 13 17 16 4 5 30 62 Organized retail 9 12 25 62 97 93 143 179 Digital services — (0) 68 153 225 355 472 566 Others (65) (13) (17) (32) (48) (6) (9) (12) Total 417 462 642 839 831 893 1,204 1,389

Source: Company, Kotak Institutional Equities estimates

Exhibit 10: RIL's earnings are leveraged to several business drivers Sensitivity of consolidated EBITDA, EPS and SoTP to key assumptions, March fiscal year-end, 2022

EBITDA EPS SoTP valuation Change (Rs bn) (%) (Rs bn) (%) (Rs/share) (%) Refining margins +US$1/bbl 39 3% 4.6 5% 46 2% Refining operating cost+US$0.5/bbl (20) -2% (2.3) -2% (23) -1% Petchem margins +US$25/ton 39 3% 4.6 5% 46 2% Retail EBITDA margins +50 bps 11 1% 1.3 1% 44 2% Jio wireless ARPU +Rs10/month 40 3% 4.7 5% 63 3% Jio wireless subscriber +25 mn 28 2% 3.3 4% 45 2% Exchange rate Rs1/US$ 11 1% 1.3 1% 13 1% Base case 1,204 93 2,150

Source: Kotak Institutional Equities estimates

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Oil, Gas & Consumable Fuels Reliance Industries

Exhibit 11: Consolidated profit model, balance sheet and cash flow statement for RIL, March fiscal year-ends, 2016-23E (Rs bn)

2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs bn) Net sales 2,740 3,054 3,917 5,671 5,967 5,093 6,453 6,963 EBITDA 417 462 642 839 831 893 1,204 1,389 Other income 75 94 89 81 140 196 205 224 Finance cost (37) (38) (81) (165) (220) (216) (195) (173) DD&A expense (116) (116) (167) (209) (222) (272) (332) (387) Pretax profits 339 401 483 546 528 601 882 1,053 Minority interest/share of associates 2 (0) 1 (1) (4) (43) (64) (83) Extraordinary items 46 — 11 5 (2) — — — Effective tax (89) (102) (133) (154) (128) (144) (226) (270) Net profits 299 299 361 396 394 414 593 699 Adjusted net profits 253 299 350 391 396 414 593 699 Adjusted EPS (Rs) 43 51 59 66 67 70 93 110

Balance sheet (Rs bn) Total equity 2,316 2,637 2,935 3,871 4,533 5,040 5,993 6,643 Deferred tax liability 205 212 245 451 512 544 592 642 Minority interest 34 29 35 83 80 1,299 1,363 1,446 Total borrowings 1,807 1,966 2,188 2,875 2,914 2,450 1,937 1,930 Other liabilities 1,629 2,224 2,709 2,696 3,590 3,428 3,456 3,327 Total liabilities and equity 5,990 7,068 8,113 9,976 11,630 12,761 13,341 13,988 Cash 110 30 43 75 309 1,119 1,324 1,708 Loans and advances 29 37 50 74 224 224 224 224 Other assets 917 1,032 1,341 1,814 2,014 2,001 2,201 2,320 Total fixed assets 4,094 5,185 5,851 5,658 6,315 6,650 6,824 6,968 Investments 840 784 829 2,355 2,768 2,768 2,768 2,768 Total assets 5,990 7,068 8,113 9,976 11,630 12,761 13,341 13,988 Effective net debt 1,663 2,237 2,349 2,335 2,487 1,023 111 (469) Free cash flow (Rs bn) Operating cash flow, excl. working capital 211 212 353 475 504 556 829 995 Working capital 78 155 185 (251) 192 42 21 (58) Capital expenditure (469) (781) (740) (936) (765) (788) (697) (719) Other income 37 15 23 16 22 196 205 224 Free cash flow (143) (400) (178) (697) (47) 5 358 441

Ratios (%) Debt/equity 78.0 74.6 74.5 74.3 64.3 48.6 32.3 29.1 Net debt/equity 71.8 84.8 80.0 60.3 54.9 20.3 1.9 (7.1) RoAE 11.2 12.1 12.6 11.5 9.4 8.6 10.7 11.1 RoACE 6.8 6.9 7.7 7.8 7.2 7.0 8.1 8.7 Adjusted RoACE 12.3 13.3 12.3 11.8 9.9 8.3 10.7 11.9 CRoCI 6.6 6.2 7.4 7.5 7.3 7.9 9.6 10.5 Adjusted CRoCI 11.8 12.2 10.2 12.4 10.3 11.3 14.2 15.9

Source: Company, Kotak Institutional Equities estimates

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SETTING THE STAGE TO COMMAND LEADERSHIP IN THE COMMERCE BUSINESS RIL’s accelerated expansion in the offline retail business over the past few years followed by its recent foray into digital commerce via JioMart sets the stage for it to command leadership in the entire retail value chain. The strategic commercial partnership with Facebook/WhatsApp can enable it to reach out to customers with user-friendly interfaces to enable online shopping, payments and cross-sell other digital services, while domestic-centric policies may allow it to overcome the head-start achieved by other e-commerce players.

Long runway of growth for organized retailers in India

India’s retail market is highly unorganized and while penetration of organized retail has been on the rise, several categories such as food and grocery and apparel offer a long runway of growth to organized retailers.

Exhibit 12: Food and grocery is the largest category but the least penetrated by organized retail Snapshot of India’s retail market, March fiscal year-ends, 2017-25E (US$ bn)

2020-25E CAGR 2017 2020E 2025E (%) Nominal GDP 2,464 3,555 6,265 12 Private consumption 1,454 2,062 3,634 12 Private consumption as proportion of GDP (%) 59 58 58 Merchandise retail 710 990 1,708 12 Merchandise retail as proportion of private consumption (%) 49 48 47 (0) Organized retail 67 119 256 17 Organized retail as proportion of retail (%) 9 12 15 5 Category-wise size of retail Food and grocery 474 659 1,126 11 Apparel and accessories 56 79 139 12 Jewelry and watches 55 77 136 12 Consumer electronics 42 59 104 12 Home and living 31 44 77 12 Others 23 32 57 12 Pharmacy and wellness 21 30 52 12 Foot apparel 8 10 18 12 Total 710 990 1,708 12 Category-wise contribution to overall retail (%) Food and grocery 67 67 66 Apparel and accessories 8 8 8 Jewelry and watches 8 8 8 Consumer electronics 6 6 6 Home and living 4 4 4 Others 3 3 3 Pharmacy and wellness 3 3 3 Foot apparel 1 1 1 Total 100 100 100 Penetration of organized retail (%) Food and grocery 3 4 Apparel and accessories 24 36 Jewelry and watches 28 35 Consumer electronics 27 34 Home and living 11 13 Others 13 15 Pharmacy and wellness 11 20 Foot apparel 27 34

Source: Technopak, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

Oil, Gas & Consumable Fuels Reliance Industries

RIL has established leadership in India’s offline retail business

Reliance Retail (RR) has gradually metamorphosed from a network of standalone stores into a behemoth achieving core retail revenues of US$13 bn in FY2020 underpinned by an offline presence of ~11,800 outlets across 7,000+ cities and towns. It has steadily cemented its leadership presence in India’s organized retail space by increasing its touch-points at a pace of 48% over FY2017-20 and adding retail trading area at a CAGR of 28%, which led to revenues growing at a robust CAGR of 54% in the given period. In India’s largely fragmented as well as unorganized merchandise retail landscape, RR now commands a market-share of ~1.4% (excluding recharges and fuel retail), and is the largest retailer in terms of presence as well as revenues.

Exhibit 13: Multi-category retailer with presence across key consumption baskets RR’s various retail categories with revenue and proportion contribution, March fiscal year-end, 2020

Reliance Retail

Food and grocery Fashion and lifestyle Consumer electronics Connectivity Petroleum retail (US$5 bn, 21%) (US$2 bn, 8%) (US$6 bn, 27%) (US$7 bn, 34%) (US$2 bn, 9%) F&G

Reliance Fresh Reliance Trends F&L CE

Reliance Smart Reliance Jewels Jio Point JR PR

Smart Point Trends Footwear RESQ

Business segment Reliance Market Project Eve RelianceDigital

Offline store format

JioMart AJIO.com Digital commerce portal

Brand Partnerships

Source: Company, Kotak Institutional Equities

Exhibit 14: RR is a leader in India’s fragmented retail market RR’s estimated market-share in key retail categories, March fiscal year-end, 2020

Reliance Retail Overall India market RR's market-share (US$ bn) (US$ bn) (%) Grocery retail 5 659 0.7 Fashion and lifestyle retail 2 166 1.1 Electronics retail 6 59 10.1 Total 12 884 1.4

Source: Company, Kotak Institutional Equities estimates

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Reliance Industries Oil, Gas & Consumable Fuels

Exhibit 15: Formidable presence across the country Segment-wise presence across the country

Source: Company, Kotak Institutional Equities

Online retail market in India expected to increase to US$225 bn by FY2030

We believe Indian online retail market GMV could treble from US$30 bn (in FY2020) to reach US$100 bn by FY2025 and increase further to US$225 bn by FY2030, providing a fair amount of growth runway for RR. This growth in online retail will be driven by rising internet penetration, improving buyer penetration and higher online spends per shopper as online merchandise assortment improves and the propensity to shop online (for reasons such as ease of purchase, return, payment) continues to improve.

Exhibit 16: We expect India to be a US$2.9 tn merchandise retail market by FY2030 Consumption and retail metrics of India, March fiscal year-ends, 2017-30E

CAGR (%) 2017 2020 2025E 2030E 2020-25E 2025-30E Nominal GDP 2,464 3,555 6,265 10,557 12 11 Private consumption 1,454 2,062 3,634 6,123 12 11 Private consumption as proportion of GDP (%) 59 58 58 58 Merchandise retail 710 990 1,708 2,878 12 11 Merchandise retail as proportion of private consumption (%) 49 48 47 47 Organized retail 67 119 256 547 17 16 Organized retail as proportion of retail (%) 9 12 15 19

Source: Technopak, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13

Oil, Gas & Consumable Fuels Reliance Industries

Exhibit 17: Number of online shoppers significantly lag internet users and can rise substantially Categorization of the Indian online user by use case, December calendar year-end, 2020E

Number of users (mn)

Product transactors 105

Service transactions 180

Video content 303

Chatting and social media 360

Internet users 625

- 100 200 300 400 500 600 700

Source: Flipkart, Bain & Company, Kotak Institutional Equities

Exhibit 18: Improving buyer penetration and spends will drive e-commerce market size to US$225 bn by FY2030 Estimated size of e-commerce market, March fiscal year-ends, 2015-30E

2020-25 CAGR 2025-30 CAGR 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2030E (%) (%) Population (mn) 1,257 1,269 1,281 1,293 1,305 1,318 1,330 1,343 1,354 1,367 1,380 1,422 0.9 0.6 Internet penetration (%) 24 27 33 38 49 55 60 64 67 70 73 78 Internet population (mn) 302 343 422 494 637 725 798 859 907 957 1,007 1,109 6.8 1.9 Number of online shoppers (mn) 30 40 50 69 96 120 144 168 196 226 258 372 16.5 7.6 Buyer penetration (%) 10 12 12 14 15 17 18 20 22 24 26 34 Online money spent (Rs) 8,015 11,307 12,437 14,303 16,448 18,093 19,903 21,893 24,082 26,490 29,139 45,247 10.0 9.2 Yoy increase in online spend (%) 148 41 10 15 15 10 10 10 10 10 10 9 Total e-commerce market size (Rs bn) 240 452 623 980 1,579 2,173 2,870 3,683 4,713 5,975 7,506 16,846 28 18 Total e-commerce market size (US$ bn) 4 7 9 15 23 31 38 49 63 80 100 225 26.7 17.5 Yoy growth (%) 76 34 64 49 36 25 28 28 27 26

Source: IAMAI, Census 2011, TRAI, Kotak Institutional Equities estimates

The Indian online retail landscape is dominated by online marketplaces such as Flipkart and Amazon India – both majority foreign-held and hence cannot carry out B2C retail operations. We believe this will be a key differentiator between RR’s model and the others – being an Indian entity, RR will have the flexibility to sell its own inventory, private labels and the like, unlike most extant players who can only be aggregators.

RIL is getting ready to tap O2O and B2B opportunities

Alongside Facebook’s strategic investment in Jio Platforms, Reliance Retail and WhatsApp have entered into a commercial partnership agreement to further accelerate Reliance Retail’s digital commerce business through its JioMart platform and to support digital transformation of small and medium-sized businesses using integration with WhatsApp.

We believe RR’s arrangement with WhatsApp can enable access to a huge untapped opportunity to play for a bigger share of the pie in India’s huge retail market, ~98% of which is still offline. This can give RR a higher pool of ‘transacting users’ as opposed to only ‘online users’ enabling superior user monetization in the future.

We reckon RR may look at multiple monetization streams—(1) O2O offering to end- customers serviced by a combination of local kirana networks and RR’s own offline presence, (2) commission-based revenues by transforming India’s retail distribution network by aggregating distribution requirements of large clusters of kirana stores and (3) transactional revenues by enabling transactions on ‘JioPay’.

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Reliance Industries Oil, Gas & Consumable Fuels

Apart from the offline business, RIL is attempting new models to further boost its presence in India’s fast growing organized retail space: it is partnering with small kirana stores by digitizing them through JioPoS offering and attempting to increase its distribution reach, and has also launched its online grocery portal, JioMart, which already has a presence in ~200 cities.

JioMart provides an interesting play by straddling both offline retail (the large but unorganized network of kirana stores that it seeks to integrate, as well as RIL’s offline stores) and online retail (WhatsApp enabled e-commerce which could potentially interlink with other plays such as AJIO).

In the following sections we focus separately on Reliance Retail’s offline and online operations, value proposition to the end-customers, new business initiatives and a framework to value the business in the medium term.

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Oil, Gas & Consumable Fuels Reliance Industries

FAST GROWING MULTI-CATEGORY RETAILER WITH A FORMIDABLE FOOTPRINT RR has posted strong 54% CAGR in revenues of its core retail operations over FY2017-20. This has been driven by a healthy pace of store additions (48% CAGR) as well as strong SSSG. We believe RR will continue to invest in its offline network to maintain its dominance as well as to complement its online offering. Leveraging its relationship with Jio’s other apps as well as WhatsApp, RR can transform into a multi-channel retail behemoth with a large O2O play.

RR’s existing offline business comprises two broad categories: core retail (comprising food and grocery, fashion & lifestyle and consumer electronics businesses) and others (comprising revenues from Jio recharges and fuel retail).

Existing retail revenues to more than double in four years

We model existing offline retail revenues to more than double in FY2020-24 growing by a robust 19% CAGR over the next four years, assuming similar growth trajectory for core retail and Jio and fuel segments. We expect margins of core retail business to expand by ~150 bps to 10.4% in FY2024 and that of other segments to remain stable around 2%, which will cumulatively enhance overall margins to 7.1% in FY2024 from 6.6% in FY2020. We have assumed weaker numbers for FY2021 factoring in anticipated impact on consumer discretionary spends amid ongoing lockdowns and bleak economic outlook.

Exhibit 19: We expect offline retail business revenues to double in four years Financial model of Reliance Retail, March fiscal year-ends, 2016-25E (Rs bn)

2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E Profit model Revenues (gross) 209 333 622 1,166 1,465 1,691 2,232 2,628 2,966 3,326 Core retail 189 255 362 735 928 946 1,307 1,559 1,770 2,000 Jio and fuel 22 83 330 570 702 866 1,091 1,256 1,406 1,560 EBITDA 9 12 25 62 97 93 143 179 212 249 Core retail 9 11 22 52 83 75 121 153 183 217 Jio and fuel (0) 1 4 10 14 18 22 26 29 32 EBIT 5 8 21 55 83 74 116 146 175 208 Net income 3 5 13 33 57 54 83 105 128 155 Contribution to RIL's EPS (Rs) 0 1 2 5 9 9 12 16 19 23 Balance sheet Net-worth 55 69 92 128 184 238 321 426 554 709 Net debt 11 (3) 32 120 28 179 200 183 125 33 Invested capital 67 66 124 248 212 417 522 609 679 743 Operating metrics (%) Revenue growth 20.0 59.3 86.7 87.4 25.6 15.4 32.0 17.7 12.8 12.2 Core retail 34.9 42.3 102.9 26.2 1.9 38.2 19.3 13.5 13.0 Jio and fuel 277.6 296.9 73.1 23.0 23.4 26.0 15.2 11.9 11.0 EBITDA margins 4.3 3.5 4.1 5.3 6.6 5.5 6.4 6.8 7.1 7.5 Core retail 4.2 6.0 7.0 8.9 7.9 9.2 9.8 10.4 10.9 Jio and fuel 1.3 1.1 1.8 2.0 2.1 2.0 2.0 2.0 2.0 EBIT margins 2.4 2.4 3.3 4.8 5.6 4.4 5.2 5.6 5.9 6.3 RoAE 5.2 8.5 16.5 30.0 36.6 25.5 29.8 28.1 26.1 24.6 RoACE 5.0 7.8 14.2 19.4 26.7 17.4 18.4 19.2 20.2 21.8

Source: Company, Kotak Institutional Equities estimates

Robust growth in offline retail driven by store additions and rising throughput

RR’s core retail revenues (excluding fuel and telecom) have increased at an impressive ~54% CAGR over FY2017-20. Reported profitability (EBITDA) from the same has also increased at a CAGR of 74% over the same period. RR is present across key verticals such as food and grocery, general merchandise, apparel and footwear, jewelry, electronics and toys. Besides, RR also operates several stores in partnership with several international brands.

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Reliance Industries Oil, Gas & Consumable Fuels

Exhibit 20: RR's healthy revenue growth has been driven by increase in store count and throughput Details of RR's category-wise store count and revenues, March fiscal year-ends, 2017-20

2017-20 CAGR 2017 2018 2019 2020 (%) Store count (#) Grocery 447 537 605 797 21 Consumer electronics 266 287 357 400 15 Jio Points 1,645 5,381 7,684 8,201 71 Fashion and lifestyle 1,258 1,368 1,769 2,386 24 Total 3,616 7,573 10,415 11,784 48 Total excluding Jio points 1,971 2,192 2,731 3,583 22 Segment-wise revenues (Rs bn) Grocery 108 140 234 346 47 Consumer electronics 95 152 392 446 67 Fashion and lifestyle 51 71 110 136 39 Total core revenues 254 363 735 928 54 Break-up of core retail revenues (%) Grocery 43 39 32 37 Consumer electronics 38 42 53 48 Fashion and lifestyle 20 20 15 15

Source: Company, Kotak Institutional Equities

Store addition data reveals that RR has been most aggressive in adding stores in the fashion and lifestyle formats. RR has consciously developed multiple formats to serve a diverse set of customers.

Exhibit 21: RR operates multiple formats under its key segments of grocery, apparel and electronics Snapshot of RR’s various store formats

Grocery Neighbourhood store offering fresh produce, grocery and other daily need items Reliance Smart Supermarket store dealing in fresh foods, staples, home & personal care items, apparel and general merchandise Reliance Market Cash and carry chain serving B2B customers Smaller version of Reliance Smart serving everyday needs of customers in the grocery and pharmacy categories. Smart Point Also offers assisted e-commerce. Apparel Trends Flagship chain catering to value focused customer. Large variety of own brands. Reliance Footprint Offers wide range of products across footwear, luggage, handbags & accessories Reliance Jewels Retailer of fine and precious jewelry Project Eve Experiential store catering to women's apparel needs Online portal offering curated fashion from over 500 national and international brands. Also retails its own Ajio private label. Consumer electronics Reliance Digital Big box electronics retailer stocking 200+ national and international brands Jio store Smaller stores focused on offering mobility & communication devices and bouquet of Jio services Reliance Resq Dedicated service arm offering end-to-end product lifecycle support

Source: Company, Kotak Institutional Equities

RR’s core retail revenues also include sales of Jio-related devices such as JioPhone on which the company possibly earns a small margin. Sale of these devices has driven a large increase in revenues from electronics retail from FY2019 onwards.

RR has not consistently shared format-wise margins; however recent margin disclosures reveal that RR’s margins compare favorably with its better performing peers such as Avenue Supermarts in grocery, Trent in apparel retail and Croma in electronics retail.

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Oil, Gas & Consumable Fuels Reliance Industries

Exhibit 22: Margin expansion across formats has driven a strong increase in EBITDA Segment-wise margin profile of Reliance Retail, March fiscal year-ends, 2017-20

2017-20 CAGR 2017 2018 2019 2020 (%) Segment-wise revenues (Rs bn) Grocery 108 140 234 346 47 Consumer electronics 95 152 392 446 67 Fashion and lifestyle 51 71 110 136 39 Total core revenues 254 363 735 928 54 Segment-wise EBITDA (Rs bn) Grocery 11 23 Consumer electronics 19 28 Fashion and lifestyle 22 32 Total EBITDA 11 22 52 83 98 Segment-wise EBITDA margins (%) Grocery 4.9 6.5 Consumer electronics 4.7 6.2 Fashion and lifestyle 19.9 23.9 Overall 4.2 6.0 7.0 8.9

Source: Company, Kotak Institutional Equities

While certain metrics such as format-wise retail trading area are not available, we try and benchmark RR’s various formats with relevant peers.

Food and grocery – large growth runway

RIL’s food and grocery business comprise of its Reliance Market, Reliance Smart, and Reliance Fresh formats. RR had 765 stores altogether under these formats as of March 2020. Reliance Smart is the large hypermarket format retailing food and grocery, FMCG products and general merchandise. Reliance Fresh is the smaller fresh food and grocery format. Margins for different grocers vary on account of store ownership: Dmart, for instance, owns its stores and hence pays very little rent. RR predominantly operates on a rental model and hence margins are comparable more with peers such as Future Retail, Star Bazaar (Trent Hypermarket) and Spencer’s.

The comparison below shows that RIL’s grocery retail business is notching decent margins, despite the segment being intensely competitive. Management has attributed the margin expansion in FY2020 to improved SSSG as well as positive impact from Ind-AS 116 adoption.

Exhibit 23: RR is one of the few profitable food and grocery retailers in India Operating metrics of Indian food and grocery retailers, March fiscal year-ends, 2019-20 (Rs mn)

Trent Avenue Supermarts Future Retail Reliance Retail Spencer's Retail Hypermarket 2019 2020 2018 2019 2019 2020 2019 2020 2018 2019 No. of stores (#) 176 214 285 292 605 765 156 160 35 39 Revenues (Rs mn) 200,045 248,702 184,793 201,649 233,713 346,010 21,872 23,733 9,396 10,005 EBITDA (Rs mn) 16,333 21,283 8,371 10,369 11,370 22,530 139 793 (1,035) (802) EBITDA margin (%) 8% 9% 5% 5% 5% 7% 1% 3% -11% -8%

Source: Companies, Kotak Institutional Equities

We believe RIL’s offline food and grocery retail network will play a critical role in enabling the company’s recent online offering JioMart.

Apparel – Reliance Trends rapidly gaining scale

Reliance Trends is RR’s flagship apparel retail format, with 1,400+ stores currently. Besides Trends, RR has various other retail formats to cater to a wide set of customers.

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Reliance Industries Oil, Gas & Consumable Fuels

Exhibit 24: RR has apparel formats spanning all customer segments Various apparel retail formats of RR

Apparel segment Reliance format Luxury International partner brands, Ajio Gold Mid-segment Ajio, &S, Project Eve, Reliance Jewels Value fashion Trends, Trends Woman, Trends Man, Trends Footwear, Payless, Vision Express Value Reliance Market, SMART

Source: Company, Kotak Institutional Equities

Indian retailers have been adding the maximum number of stores in the urban mass market family format stores such as Pantaloons (ABFRL) and Westside/Zudio (Trent). These stores have registered impressive SSSG in FY2019-20 boosted by improved merchandising, sharper price-quality proposition as well as focus on private label (60% for Pantaloons and 90% for Westside). From a store count perspective, Reliance Trends is the largest and fastest growing chain in the value fashion category.

Exhibit 25: Reliance Trends is one of the fastest growing affordable fashion retail chain Net store additions of Indian apparel retailers, March fiscal year-ends, 2015-20

2015 2016 2017 2018 2019 2020 Store count ABFRL-Lifestyle brands 1,735 1,877 1,761 1,813 1,980 2,253 ABFRL-Pantaloons 134 163 209 275 308 342 FBB 46 51 54 61 94 95 FLFL 358 369 372 332 339 354 Reliance Trends 271 344 458 670 1,400 Trent-Westside 85 93 111 125 150 173 Vmart 108 123 141 171 214 266 Net store additions ABFRL-Lifestyle brands 194 142 (116) 52 167 273 ABFRL-Pantaloons 27 29 46 66 33 34 FBB — 5 3 7 33 1 FLFL 31 11 3 (40) 7 15 Reliance Trends — — 73 114 212 730 Trent-Westside 5 8 18 14 25 23 Vmart 19 15 18 30 43 52

Notes: (a) FY2020 results of FLFL and Future Retail are yet to be published and hence store count is as of 9MFY20.

Source: Companies, Kotak Institutional Equities

RR has surprised us with consistently high margin metrics for its fashion and lifestyle segment (which includes apparel, luxury brands, jewelry businesses). A comparison with peers also indicates that RR’s segment margins are significantly superior to its peers. This may be a function of better store economics of Reliance Trends particularly in Tier II/III cities and higher throughput. The jump in FY2020 EBITDA margin was in part due to Ind-AS 116 implementation.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19

Oil, Gas & Consumable Fuels Reliance Industries

Exhibit 26: RR has reported robust operating metrics for its Fashion and Lifestyle segment Operating metrics of Indian apparel and jewelry retailers, March fiscal year-ends, 2019-20 (Rs mn)

Future Lifestyle and Reliance Retail Fashion Pantaloons (ABFRL) (Fashion and Lifestyle) Shoppers' Stop Tanishq (Titan) Westside (Trent) 2018 2019 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 No. of stores (#) 372 332 308 342 1,769 2,400 264 293 287 327 150 170 Revenues (Rs mn) 42,192 53,774 31,940 35,135 109,675 135,520 34,813 33,810 160,296 167,382 25,317 31,777 EBITDA (Rs mn) 3,885 4,632 2,310 2,220 21,830 32,420 2,533 5,494 21,472 24,177 2,365 5,632 EBITDA margin (%) 9% 9% 7% 6% 20% 24% 7% 16% 13% 14% 9% 18% Notes: (a) Financials for FY2019 are pre IndAS-116 and are not comparable with FY2020; Pantaloons EBITDA for FY2019 and FY2020 is pre IndAS-116.

Source: Companies, Kotak Institutional Equities s

Other formats in the lifestyle segment include Reliance Gems and Reliance Footwear. RR also has partnership with brands such as M&S, Mothercare, and luxury brands such as Armani, Michael Kors and Steve Madden.

E-commerce players ramping up their offline investments; RR in driver’s seat

Large global e-commerce companies may have emerged first as online-only platforms, however, they have also been investing into offline assets, highlighting the importance of having presence across channels. RIL, with its large offline network has a first-mover advantage and can capitalize on this network as it seeks to expand its online offering.

E-commerce players such as Amazon and Flipkart are working on their offline retail strategies in India. Globally, similar strategies are being followed by Amazon and Alibaba to fine-tune their O2O (online-to-offline) strategy.

Amazon India – picking up stakes in Indian retailers

Amazon India has picked up stakes in three offline retailers, , More Retail and Shoppers Stop. We believe Amazon has done this with a view to improve its offline supply chain and to get exclusive access to products of these chains to offer online. Further, Amazon also wants to utilize the offline footprint of these stores to push its own private labels: AmazonBasics — products include ACs, HDMI cables, batteries and cables, home necessities, and general merchandise and apparel labels—Prowl and Just F. Amazon may use these stores to retail its grocery brands as well.

Apart from this, recently launched ‘Local Shops on Amazon’ initiative is to enable offline stores to do more business through their platform. It has already signed up over 5,000 offline shops, including large retailers such as Tata’s Croma, as sellers on its platform. Offline stores will be allowed to ship orders themselves, ship it through third-party logistics or even through Amazon’s fulfillment channel.

Smart Stores launched by Amazon Pay allows customers to scan QR codes to explore products within offline stores and pay for them using various payment instruments. It will provide own credit facility under the ‘buy now, pay later’ scheme. Smart Stores will also expose product listings on the app, allowing customers to see their details and reviews.

Flipkart: partnering with local stores to ramp up its grocery sales

Flipkart has partnered with 37,000 kirana stores to leverage their network and help them turn around as convenience stores. Flipkart has also recently partnered with retail chains like Spencer’s and Vishal Mega Mart to enable hyperlocal deliveries of groceries and essentials in various cities.

It has partnered with Authentic Brands to license and distribute fashion brand Nautica in India. As a part of the agreement, Flipkart will manage Nautica’s online and offline businesses in the country through a network of franchisees. Nautica currently has more than 40 retail stores in India.

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Reliance Industries Oil, Gas & Consumable Fuels

Alibaba: rapidly developing its offline network in China

Alibaba has a majority stake in brick-and-mortar retailer Intime. It has also invested in Hema, a 150-unit grocery chain in 21 Chinese cities. Hema seamlessly integrates physical store conveniences with digital tools, Hema has been called ‘the most futuristic retailer’ in the world. Hema offers free 30-minute deliveries of fresh produces within a radius of 3 kilometers from stores. Hema is the only Chinese supermarket chain operating both online and offline channels; it virtually dominates Chinese online grocery scene. Its business has been gaining steam during the Covid-19 crisis, with its sales more than tripling.

Alibaba Group also has acquired 36% of Sun Art Retail Group, which operate nearly 400 hypermarkets under the Auchan and RT-Mart banners. Per the agreement, Alibaba would share its Digital commerce technology and insights of consumer trends with RT Mart to expedite its digitization, sync its online and offline operations, improve its in-store layout and increase efficiencies in the grocer’s inventory management.

As part the digital makeover, RT-Mart gains access to Alibaba’s customer insights, supply- chain management, retail technologies and electronic payments via Alipay.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21

Oil, Gas & Consumable Fuels Reliance Industries

ASPIRATIONS TO TAP INDIA’S E-COMMERCE OPPORTUNITY Reliance Retail is all set to tap India’s burgeoning e-commerce opportunity by leveraging its widespread offline presence across consumption categories and benefiting from domestic-centric policies, which may allow it to overcome the headstart by other e-commerce players. The company’s approach to target the lowest common-denominator for consumer, food and grocery, through its JioMart platform, and its recent strategic tie-up with WhatsApp, may allow it to expand the universe of online transactors in India. This coupled with enhancement and expansion of existing online offerings such as AJIO and RelianceDigital may propel it to the pole position in e-commerce business as well in the medium term.

From grocery to other categories: RIL can amass US$12 bn GMV by FY2025

RIL already has the online apparel property AJIO, which has evolved into a fashion marketplace retailing Reliance Trend’s private label, RR’s partner luxury brands as well as third-party brands. With RIL already targeting apparel and grocery, the two large components of retail (76% of overall retail in FY2020), we believe it can steadily foray into other categories such as jewelry, home and living, consumer electronics and others. It already has offline formats offering this merchandise and hence it would be only a matter of time before it readies its comprehensive online merchandise offering.

A steady foray into digital commerce backed by its own merchandise, partnership with a variety of brands, pan-India network and widespread customer reach via WhatsApp and other popular apps, and regulations favoring Indian companies can drive RIL to steadily ramp up its share in the Indian digital commerce market. We believe it can achieve digital commerce GMV of US$12 bn by FY2025, implying a 12% share in the e-commerce market.

Exhibit 27: RIL can achieve digital commerce GMV of US$12 bn by FY2025 RIL's estimated online GMV, March fiscal year-ends, 2020-25E (US$ bn)

2020 2021E 2022E 2023E 2024E 2025E Estimated e-commerce market size (US$ bn) 31 38 49 63 80 100 Incremental annual GMV (US$ bn) 8 11 14 17 20 Base case RIL's share in incremental GMV (%) 2 8 15 22 28 RIL's cumulative GMV (US$ bn) 0 1 3 7 12

Source: Kotak Institutional Equities estimates

Grocery to be JioMart’s biggest bet; to steadily ramp-up other segments

We believe online commerce provides RIL the opportunity to monetize its Jio customer better, especially since it already has a large offline presence and a variety of merchandise is being sold via Reliance Retail’s store network. RR already has e-commerce websites called AJIO.com for sale of apparel and RelianceDigital.in for sale of electronics products.

The recent large-scale launch of JioMart gives it footprint in grocery as well. Grocery is particularly attractive as it is currently highly unorganized and RR has the opportunity to seize a sizeable first-mover advantage. Note that other e-commerce players such as Amazon and Flipkart have been relatively late entrants to this category and we believe their operations in the food and grocery category are not very sizeable yet.

RR has been tactical in focusing on the food and grocery segment via JioMart, instead of traditional large e-commerce categories. We believe this may be deliberate as: (1) large initial focus on electronics has led to a plateauing of user base of other competitors such as Amazon and Flipkart and is now forcing them to look towards grocery, and (2) unlike Amazon and Flipkart, JioMart’s access to 380 mn+ telecom subscribers and its tie-up with WhatsApp can allow it to sell grocery to a much larger customer base.

As highlighted above, food and grocery is the largest retail category in India, and also the highest frequency purchase item. It is also highly fragmented and unorganized, and thus presents an opportunity for large retailers to garner a share in the business. Further, as

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Reliance Industries Oil, Gas & Consumable Fuels

incomes increase, spends in this category can continue to increase at least the rate of growth of real GDP. We believe it is this market size and customer reach that RIL intends to tap into.

RR may benefit from regulations favoring domestic retailers

Unlike its other foreign owned peers, RIL does not have to contend with restrictions of multi- brand retail in its B2C business. Regulations have tended to become stricter for foreign- owned e-commerce players, as local sellers have protested against large, company-owned sellers being active on marketplaces, effectively accusing marketplaces of buying and selling products.

A case in point is that of Flipkart, which was recently denied permission by the DPIIT (Department for Promotion of Industry and Internal Trade) to undertake a food retail business in India citing violation of marketplace model. Per DPIIT, a foreign-owned marketplace cannot be a seller on its own platform. However, rival Amazon already operates in the space through subsidiary Amazon Retail India (ARIPL); this may also be reviewed by DPIIT.

In April 2020, the government tweaked FDI policy, banning fresh investments from China through the automatic route. Chinese e-commerce companies such as Alibaba are large investors in Indian startups like BigBasket. The change in policy makes it mandatory for all Chinese investors to seek government approval before investing in Indian firms, which may affect further funding rounds in startups by Chinese investors.

Exhibit 28: Government has restricted foreign investment in inventory led e-commerce and multi-brand retail Details of permitted foreign investment in Indian retail

Foreign investment cap (%) Government approval Comments Sale of products (other than food) 100 Automatic Retail sale via e-commerce is allowed. manufactured in India by the manufacturer Sale of food products manufactured in 100 Government approval Retail sale via e-commerce is allowed. India Wholesale/cash and carry trader can also undertake single brand retail trading. Such traders will be mandated to maintain separate books of accounts for Cash and carry/wholesale trading 100 Automatic these two arms of the business and duly audited by the statutory auditors. including B2B e-commerce Government regulations have to be separately complied with by the respective business arms. Such companies would engage only in B2B e-commerce and not in retail trading, B2B e-commerce 100 Automatic thus implying that existing restrictions on FDI in domestic trading would be applicable to ecommerce as well. Marketplace model of e-commerce means providing of an IT platform by an e- Market place model of e-commerce 100 Automatic commerce entity on a digital & electronic network to act as a facilitator between buyer and seller. An e-commerce entity will not permit more than 25% of the sales value generated on its marketplace from one vendor or their group companies. Inventory model of e-commerce Not allowed Foreign investment is not permitted in inventory-based model of e-commerce. For foreign investment beyond 51%, sourcing of 30% of the value of goods purchased be done from India preferably from MSMEs, in all sectors. The Automatic up to 49%; quantum of domestic sourcing will be self-certified by the company, to be Single brand product retail trading 100 government approval subsequently checked by statutory auditors. The procurement requirement is to beyond this be met in the first instance as an average five years total value of goods purchased beginning April 1 of the year of the commencement of the business. Thereafter it shall be met on an annual basis.

Multi brand retail trading 51 Government approval Minimum amount to be brought in as foreign investment is US$100 mn. At least 50% of the total foreign investment brought in the first tranche of US$100 mn shall be invested in 'back-end infrastructure' within three years.

Source: DPIIT, Kotak Institutional Equities

The presence of a large offline network will give RR an edge that its other competitors such as BigBasket and Grofers do not have. RR can benefit from an established supply chain (sourcing, warehousing, store inventory), something which its competitors will take a while to establish when entering into new cities.

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Exhibit 29: BigBasket and Grofers command a small share of the grocery market Standalone financials of BigBasket and Grofers, March fiscal year-ends, 2015-19 (Rs mn)

2014 2015 2016 2017 2018 2019 Revenues BigBasket 751 1,837 5,275 10,905 15,832 27,526 Grofers — — 80 132 298 701 EBITDA BigBasket (23) (77) (941) (1,778) (3,070) (5,580) Grofers — — (2,279) (2,809) (2,661) (4,484) PBT BigBasket (23) (76) (1,034) (1,918) (3,103) (5,627) Grofers — — (2,251) (2,683) (2,583) (4,480) Notes: (a) Grofers reports gross commission as revenue as it does not own inventory. Its revenue figures are thus not comparable with those of BigBasket.

Source: Tofler, MCA, Kotak Institutional Equities

Industry discussions reveal that the two specialist grocery delivery companies clocked ~US$1.5-2 bn of GMV in FY2020, implying a minuscule 0.2-0.3% share of online grocery in the overall food and grocery pie. This is also much lower than higher shares that e- commerce has managed to achieve in certain other categories such as electronics and apparel. We believe grocery has been a much tougher nut to crack for most companies given: (1) inherently low margins in the business, (2) low ATV (average transaction value) compared to categories such as apparel and electronics, (3) demand for quick turnaround times and deliveries, (4) high number of SKUs demanded per order, and (5) high competition from offline channel.

JioMart: B2C model may undergo several iterations

JioMart has commenced its online grocery delivery business on a pan-India basis by connecting local kirana shops to customers. JioMart’s model involves forming a local network of kirana stores so as to have their entire inventory online, allocating incoming orders to stores based on product availability and proximity, and facilitating delivery to the customer by its own network. The grocery shop shares a certain margin with JioMart for every order originated by JioMart. Per RIL, JioMart intends to act as a centralized procurement and delivery platform between manufacturers and merchant partners. JioMart will enable digitization of merchants through Jio PoS at the backend and JioMart app at the front-end.

The local store aggregation model has not met with much success in the past as local stores may not carry very large assortment of products resulting in a mismatch between product shown on JioMart’s website and actual product delivered to the customer. Control of customer experience will thus be key for JioMart to succeed in the business. We believe these can be addressed by: (1) control of the back-end of these stores by JioMart, (2) very localized inventory view offered by JioMart on its website, and (3) efficient delivery logistics (either by store or JioMart).

RIL’s opportunity size in this business extends to Indian food and grocery retail market, estimated at US$660 bn for FY2020. Grocery is a low margin category and hence revenue opportunity will be smaller at 7-10% of GMV opportunity at US$46-66 bn.

JioMart’s kirana digitization strategy to supplement digital commerce

We believe RR’s JioMart seeks to not only become a meaningful grocery retailer by providing customers the convenience of shopping online, it also seeks a slice of the large B2B market, which hitherto has been driven by traditional distributors. While the proportion of modern trade has been on the rise, we believe RIL would want to integrate its Reliance Market offering with its network of kirana stores, thereby disintermediating the existing value chain (company – distributor – wholesaler – stockist – retailer). We believe this business can be an

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important feeder to the digital commerce business and can significantly aid supply aggregation in a fragmented market.

RR’s intent to launch its distribution service on a large scale can help it amass sizeable revenues. RR will need to establish a virtuous cycle by offering consistently low-priced products to shops, the widest variety while at the same time negotiating for best prices with FMCG companies and other large producers. As discussed above, RR has several private labels in its grocery retail business. It can push these private labels on a large scale through this channel and ultimately to customers ordering products online. This business is currently in a trial phase and we expect it to be gradually ramped up, in sync with JioMart online.

JioMart: B2B operations launched but execution will be key

After piloting its operations in parts of Mumbai, RIL commenced operations of JioMart, its online groceries delivery portal. Besides B2C operations, RR has also sought to build a network of small stores by offering them a PoS device for refundable deposit of Rs4,000- 5,000, with the idea of: (1) connecting these stores with its own B2B supply chain, (2) getting these chains to use JioPay on the PoS machine, and (3) garnering precious data on revenue potential of the shop, SKUs sold, etc. It can offer stores benefits such as cheaper procurement price of products (vs traditional distributors), lower turnaround times leading to higher fill rates (aided by enhanced data availability via PoS), and additional customers via WhatsApp pay.

The social commerce interface combining WhatsApp pay and JioPay can create a vast fintech space – potentially representing ways for: (1) providing working capital loans to shop owners with little or no credit history, and (2) potentially earning margins on transactions originating on JioPay. Note JioPay could be a currency of transaction not only in the Reliance-PoS enabled kirana shops, but all across the RIL ecosystem and can be used by vendors and customers alike. Most importantly, these kiranas can act as supply aggregators and delivery agents for the nascent JioMart online business.

We conducted interviews with shop owners who had been given the Reliance PoS systems. Some findings: (1) the PoS did not provide massive appeal to shop owners as it mandatorily required bar-coding of inventory; this is something shop owners find it difficult to comply with given they don’t have manpower to do this, (2) the benefits of purchasing merchandise from RR wasn’t clear as too much variety wasn’t available, (3) companies such as HUL had commenced with their own direct distribution programs and some kiranas were purchasing directly from the company, and (4) some incremental orders were being received from RIL and the company was providing some additional discounts – however, the pattern of these discounts wasn’t consistent .

For now, we reckon RIL will have to make its proposition to shop owners stronger for these shop owners to switch to an end-to-end RIL powered supply chain.

We note that apart from RIL, there are others also who are trying to modernize the kiranas and seeking to integrate their supply chain by taking over their B2B needs. We believe Metro Cash and Carry has evolved a model that has proven beneficial for kirana owners by catering to their twin needs of modernization as well as back-end supply chain integration with Metro’s network. Some key highlights of the model include: (1) there is need for back-end supplies for kiranas to be consolidated, as currently kiranas interact with 150-200 vendors with limited price transparency, (2) there is need to hand-hold kiranas and make them aware of new retail practices, especially in the face of competition from large e-commerce players, and (3) kiranas need to be provided with devices and software that are easy to use and may ultimately provide with some cost saving. Refer to appendix-1 for more details on takeaways from a webinar with Arvind Mediratta, MD of Metro Cash and Carry, that we attended.

Our interaction with a few stores who have opted for Metro’s Smart Kirana program reveal that these shop owners have benefited significantly from the Smart Kirana program. Their revenues have increased by 20-40% as a result of the remodeling, and the lower priced goods sourced from Metro have enabled them to have competitive pricing.

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We believe RIL would need to come up with some such model in order to gain kirana’s trust as well as their business. We do believe kiranas are looking to consolidate their supplier base as well as bring down their cost of procurement; these both are aspects that RIL can take up in their B2B program.

Regulatory regime may also favor kirana modernization

Media reports have stated that the Commerce Ministry is drafting a new e-commerce policy, which will incentivize kiranas to integrate their operations with existing e-commerce platforms. It is not clear as to what these incentives may be, but they may be in the form of a one-time grant or interest subvention on investments put up by kiranas towards digitization. Overall, this push by the government may also be beneficial for RR, which intends to connect millions of such vendors to its own network.

B2C can be extended into O2O, and can play on synergies between RIL’s offline and online offering

O2O generally refers to ‘online to offline’, implying that online services can be used to generate in-store revenues. Reverse O2O refers to offline to online, implying that a physical point-of-sale can generate online revenues. There are several benefits of O2O, important among these being enabling a customer to research online and purchase offline; or browse offline and purchase online. Both are important as buy rate in offline retail can be very high (as high as 30-70% per some estimates), significantly higher than 1-3% on online platforms.

Benefits of O2O to the platform operator can be immense: (1) it can significantly increase a user’s engagement within the ecosystem: for instance, a grocery buyer on WhatsApp can be a customer of Reliance Trends, Reliance Jio telecom services, Jio Movies etc., and (2) the more significantly engaged a user is, the more the platform can understand the user’s behavior through data analytics.

RIL has acquired stakes in several start-ups over the past few years to strengthen its O2O platform, offer support of voice assistants to customers, software services to SMEs as well as logistic network.

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Exhibit 30: RIL on a spree of acquisitions in past two years to bolster digital space offerings Details of acquired company

Year Company acquired Comment 2019 NowFloats Nowfloats offers SaaS solutions to small and medium enterprises (SMEs) that enable them to get a digital presence. Robotics and artificial intelligence company. Asteria develops drone-based solutions to provide intelligence from aerial data 2019 Asteria Aerospace for military and industrial applications. RIL bought the stake for Rs3 bn as it aims to push for online-to-offline (O2O) commerce giving it an 87.6% stake in the startup. Fynd provides a technology platform and solutions to merchants to manage their inventory and sales across multiple 2019 Fynd demand channels for consumers, including e-commerce platforms. It sources products across categories such as clothing, footwear, jewellery from nearby outlets and brings them online. 2019 Embibe AI based education platform that uses data analytics to deliver personalized learning outcome AI-based solution for real-time customer experience analytics. The deployment will help Jio in getting predictive analytics to 2019 Guavas automate network troubleshooting. C-Square provides software solutions with specific focus on pharma sector for various stakeholders including C&F, 2019 C-Square distributors, retailers, online ecommerce, sales force automation, etc. The aforesaid investment will further enable Reliance group’s digital commerce initiatives and solutions. Reverie provides a voice suite (called Gopal) in 12 Indian languages like Hindi, Telugu, Tamil, Bengali, Marathi, Gujarati, Indian English, etc. which can be integrated with both and Interactive Voice Response (IVR) solutions which companies can 2019 Reverie use to engage with non-English speaking customers. Reverie will work towards integration of its Indic language localization services with RIL’s digital consumer platforms. Tesseract has launched three hardware and two software products in the MR, AR, and VR spaces. Tesseract has developed the 2019 Tesseract Jio HoloBoard as a native mixed reality (MR) headset for JioFiber users. is one of the world's largest conversational AI platforms that lets customers chat with their voice assistants to complete 2019 Haptik daily tasks such as online shopping, travel bookings, food delivery among others. It is to compete against Amazon' Alexa and Google 2019 SankhyaSutra Labs SankhyaSutra Labs offers high-performance computing software simulation services.

Grab offers services ranging from on-demand, reverse deliveries, first mile, and last-mile logistics. The investment will support 2019 Grab A Grub Reliance Group’s “digital commerce initiatives and strengthen its logistics services, catering to both B2B and B2C segments. The deal would help the company boost its e-commerce model to take on its rival Amazon India and Flipkart in the country.

2019 Easygov RIL announced an agreement to acquire shares in data solutions and software company Easygov for up to Rs180 mn. 2018 NetraDyne The US-based AI startup focuses on driver and fleet safety and uses artificial intelligence for the same With this acquisition, RIL was looking to accelerate its digital journey through active participation in an emerging and evolving 2018 Vakt Holdings blockchain-enabled technologies.

Source: Media releases, Kotak Institutional Equities

In China, Tencent’s Wechat has shown that Chinese online consumers can use a single app for varied uses such as social networking, instant messaging, e-commerce, payments as well as O2O services. The service has become comprehensive enough to host a wide variety of sellers and brands online such that a wide variety of choice is offered to the consumer without diluting experience.

For a retailer to be present everywhere, the offline play becomes critical. This is evident from the fact that global e-commerce players such as Amazon, Alibaba, etc. are all developing their offline presence.

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Inorganic opportunities could further cement leadership position

Per media reports, RIL is in advanced stages of discussion for acquisition of Kishore Biyani’s stake in retail and supply chain assets of Future Group. The transaction may first involve a merger of three Future Group entities (Future Retail (FRL), Future Lifestyle & Fashion (FLFL), Future Supply Chain (FSC)); RIL will then purchase a stake in the merged entity. FRL operates store formats such as (hypermarket), FBB (value fashion), Easyday (local grocery store) and Foodhall (premium food and grocery). It had a network of ~1,400 stores as of 9MFY20 with a retail trading area of 16.1 mn sq. ft. It has a presence in 414 cities, with its flagship Big Bazaar stores present in ~140 cities. FRL reported revenues of Rs157 bn in 9MFY20. This compares with RR’s FY2020 core revenues of Rs928 bn. FLFL is an apparel retailer and operates the Central (premium apparel large format store) and Brand Factory (apparel discount retailer) formats. Besides, FLFL also has partnerships with foreign brands and operates certain standalone stores (EBOs) for these brands (some of these brands include Clarks, Scullers, Urban Yoga, Lee Cooper and Indigo Nation). It had a network of ~355 stores (including EBOs) as of December 2019 and retail trading area of 7.5 mn sq. ft. FLFL reported revenues of Rs46.2 bn in 9MFY20. JioMart intends to supply grocery online as well as act as a distributor to retail shops. We believe this would require an integrated supply chain network to connect RIL Market and warehouses with local kiranas, and kiranas and local RR outlets with customers. Assets of Future Supply Chain and Future Retail’s Easyday network can help JioMart’s distribution and hyperlocal retail ambitions. RR’s core revenue run-rate can increase by ~30%, should this acquisition go through and can further bolster RR’s leadership position in offline retail

Acquisition of an existing online grocery retailer may also make strategic sense

As discussed above, online grocers such as BigBasket and Grofers amassed US$1.5-2 bn of GMV in FY2020. These companies have built a decent presence in the 20-30 cities they are present in and are aspiring to spread even wider. We believe these companies have created a niche in a difficult category by offering good quality products, large product assortments and timely delivery to customers. With competitors such as Amazon and Flipkart eyeing the large grocery space themselves, we believe it would be prudent for RR to acquire one of the existing online players in order to gain a time advantage over other competitors. It can also get a headstart and learn softer aspects such as customer experience, complaints redressal, which are key to running a successful grocery business in India.

Per last valuation rounds, BigBasket was valued at US$1.2 bn and Grofers at US$650 mn; these companies are not profitable yet and may make reasonable acquisition targets for RR.

Expansion into online will not be without challenges

Existing e-commerce players have made significant investments to acquire users

India’s e-commerce landscape has till now been ruled by primarily foreign-capital backed start-ups, with Amazon’s Indian entity joining the fray. Pure-play Indian corporate-backed e- commerce players are very few (the likes of Tata Cliq) and none of these have managed to make a mark on the digital commerce landscape.

Online retailers in India have invested significantly and incurred large losses to fuel change in customers’ buying behavior. These losses have been on account of significant customer acquisition costs in the form of deals and discounts offered to customers as well as other costs such as free delivery. As shown below, losses incurred by extant Indian e-commerce players have increased meaningfully in the past few years. Until it gains scale, RIL may also incur some losses as it seeks to increase its share in the online retail pie.

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Exhibit 31: E-commerce players have made significant investments into acquiring customers Details of financial performance of key e-commerce players (including group companies), March fiscal year- ends, 2015-19 (Rs mn)

2015 2016 2017 2018 2019 E-commerce Flipkart group Revenues 104,376 157,889 180,000 271,682 404,525 PBT (26,286) (44,770) (42,515) (49,823) (81,137) Amazon India Revenues 22,931 74,268 168,608 262,647 306,389 PBT (17,539) (37,306) (50,383) (66,557) (68,231) Paytm E-commerce Revenues — — 72 7,442 8,928 PBT — — (136) (18,056) (11,714) Snapdeal Revenues 7,664 11,589 9,038 4,361 8,138 PBT (13,192) (29,600) (14,740) (2,566) (1,884) Shopclues Revenues 773 1,780 1,800 2,713 2,041 PBT (1,014) (3,830) (3,471) (2,081) (686) Total Revenues 135,744 245,525 359,518 548,844 730,021 PBT (58,031) (115,505) (111,246) (139,084) (163,651)

Notes: (a) Total revenues of various companies are not comparable given varying proportions of B2B sales.

Source: MCA, Kotak Institutional Equities

The e-commerce companies invest heavily in customer acquisition costs, in the hope that once acquired the customer would consume a wide array of products and services from the same portal. For instance, a customer who has purchased a mobile phone from a portal, would purchase everything from grocery, apparel, books, etc. from the same. In addition, the customer would also consume other services such as video, flight booking, music, e- books, etc. from the same portal, thereby eventually helping the portal recover its initial customer acquisition cost and perhaps make money from the consumer.

We believe RR may benefit significantly from: (1) its partnership with WhatsApp, which already has 400 mn+ users in India; this user base can be targeted by RR to market its online offerings, and (2) Jio may bundle some of these apps within its master Jio app to all its 380 mn users, something which none of the other e-commerce players could have done. We also think that RR can piggyback on the heavy lifting that the larger marketplaces like Amazon and Flipkart have already done in terms of sensitizing consumers to benefits of online shopping.

Varied tastes and preferences of customers

Organized retail and the associated shopping experience is far less developed in India than in western world. Further, user tastes and preferences in India are also extremely diverse, making it contingent on online platforms to tie-up extensively with local stores, in order to provide a holistic offering to the consumer.

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Lack of clarity on data sharing between RR and Jio Platforms

JioMart can collect consumer data, but given RR and Jio Platforms are separate entities, we do not know how and to what extent this data will be shared between entities to make online and offline user experience sharper. Further, given that Facebook is now a partner of Jio Platforms, it is also not clear what kind of data sharing could take place between FB, WhatsApp, JioMart/AJIO and other apps of Jio Platforms. RIL would need to come up with some transparent data sharing mechanism between various entities in order to ensure maximum utilization of the said data. FB, in partnership with Shopify, has launched its own commerce services; while these have not launched in India, we are not sure if even these could compete with RR in the future.

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STRONG PRIVATE LABEL PUSH AND BRAND PARTNERSHIPS ARE KEY ASSETS RR has developed a plethora of private brands in its offline business across grocery, fashion and lifestyle and electronics. We believe these private labels can help its long-term merchandising strategy, fill in white spaces that may be there in the offerings of existing third-party brands as well as cultivate loyalty amongst both customers and B2B kirana partners. RR’s current pricing strategy indicates that it will strive to be a price leader in the various categories it is present in, in a bid to maximize overall turnover.

Fashion & Lifestyle: steadily ramping up brand portfolio across formats

Reliance Retail has a portfolio of 46 well-known exclusive international partner brands that span across the entire spectrum of luxury (Armani, Burberry etc.) to high-premium and high- street lifestyle. RR operates ~682 stores for these international brands. Many international brands from the portfolio have made India a significant market outside of their home countries and have the largest store presence in India than in any other country.

It has set up, built and ‘glocalized’ international brands such as Armani, Diesel, Brooks Brothers, Marks & Spencer, Muji, Mothercare etc. RR’s fashion platform AJIO also offers 1,400+ national and international brands.

Exhibit 32: Plethora of international partner brands in the luxury to premium segments RR’s brand portfolio in fashion retail segment, March fiscal year-ends, 2020

Source: Company, Kotak Institutional Equities

Reliance Trends, the flagship store concept of RR for fashion retail, predominantly sells own brand products, which constitute over 70% of its sales. Trends has developed a robust portfolio of over 20 own brands such as Avaasa, DNMX, Netplay etc. to cater to diverse tastes and preferences of customers. According to RIL’s FY2020 annual report, many of these brands have an annual turnover of ~Rs5 bn, making them comparable to many national and international brands operating in the market. Private labels fetch around 70-75% of RR’s fashion and lifestyle revenues

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Private label push in the food & grocery segment also gaining steam

In addition, RR has developed a wide range of own brand products across various categories such as staples, food FMCG, home & personal care and general merchandise. Best Farms, Good Life, Masti Oye, Kaffe, Enzo, Mopz, Expelz, among others are some of the brands that have been well received by consumers.

Private labels fetch around 14% of grocery revenues. E-commerce retailers like Amazon, Flipkart and grocery firms like BigBasket, Grofers are also increasingly focusing on such in- house brands as they offer better margins.

Exhibit 33: Multiple private label brands launched by the online and offline retailers List of private label brands of retailers

Dmart BigBasket Easyday Amazon Flipkart Grofers Premia BB Popular Golden Harvest Solimo Supermart Select G-Mother's Choice BB Royal Tasty Treat Presto Supermart Home G-Happy Home Fresho Nilgiris Vedaka Farmlife G-Happy Day BB Home Karmiq Essentials Billion G-Fresh Milk BB Royal Organic Desi Atta Basics MarQ O'range Sunkist Symbol Perfect Homes Clean Mate Fresh Cara Mia Kara

Source: Company websites, Kotak Institutional Equities

RR’s food and HPC private labels are placed in the lowest price bucket category mainly to attract price sensitive customers. These are possibly targeted to garner market share from the FMCG incumbents, especially in low involvement purchases like home cleaning essentials.

Exhibit 34: RIL’s private label brands spanning across categories in value retail Portfolio of private label brands of RR

Source: Company, Kotak Institutional Equities

During the Covid-related lockdown, when the established online grocery players like BigBasket, Grofers were struggling with explosive demand and disruptions in supply chain, the strategic launch of JioMart in 200 cities indicates the sourcing power that RR enjoys within the ecosystem.

RR has been selling its private label offerings through Reliance SMART, Market and Fresh stores until now. With JioMart joining the league, the online marketplace will provide better customer and demand visibility and push the company’s in-house grocery brands. Currently,

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JioMart’s product listings largely include its private label brands rather than extensive listing of known FMCG brands. As the website picks up traction, the catalogue might be extended to the other product categories that RR operates in such as fashion and electronics.

With this strategy, RR is competing head on with online retailers such as Amazon, Flipkart and BigBasket, which have their own brands in the e-commerce segment, and also the likes of FMCG behemoths (HUL, ITC) in the offline segment with RR’s product offerings available at relatively cheaper price points.

Private labels will be key differentiators across all retail formats

In addition to providing better margins and better inventory control, private labels will enable RR to better compete with rivals such as Amazon and Flipkart, both of whom have also introduced heir private labels across various product categories.

Exhibit 35: RR’s private labels are cheaper than competing brands across most foo and HPC categories Price comparison of RR’s products with other brands

Prices (Rs) Product Quantity RR Brand RR HUL ITC Tata Others Cheapest Staples Wheat/Atta 10 kg Good Life 315 330 343 na 375 RR Chana Dal 500 gm Good Life 47 na na 60 50 RR Salt 1 kg Good Life 15 16 18 18 20 RR Mustard Oil 1 L Good Life 116 na na na 125 RR Soya chunks 1 kg Good Life 105 na na na 143 RR Snacks Bourbon 150 gm Snactac 20 na 27 na 30 RR Instant Noodles 300 gm Snactac 35 na 45 na 46 RR Oats 1 kg Snactac 95 na na na 150 RR Aloo Bhujia 150 gm Masti Oye 28 na na na 33 RR Instant Soup (Tomato) 60 gm Snactac 25 52 na na 55 RR Ketchup 950 gm Snactac 89 110 na na 89 RR Tea 250 gm Aarambh 80 62 na 55 50 Others Coffee 50 gm Kaffe 60 90 na 90 125 RR HPC Face Wash 100 ml Get Real 60 100 na na 98 RR Shower Gel 250 ml Get Real 75 120 64 na 150 ITC Detergent Powder 1 kg Sudz 65 53 na 55 55 HUL Dishwash gel 500 ml Scrubz 125 104 na na 100 Others Floor cleaner 1L Mopz 99 152 93 na 161 ITC Toilet cleaner 1L Expelz 99 na na na 151 RR Notes: (a) Prices retrieved on July 10, 2020.

Source: Company, Kotak Institutional Equities

Electronics: building presence across white goods and small electronics

Reliance Reconnect is RR’s brands in the electronics segment. As seen below, its products are very competitively priced. Further, we also observe that RR is present across large appliances (AC, refrigerators, TV, washing machines), small appliances (air cooler, kitchen appliances etc.) as well as other items such as smartphones and accessories.

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Exhibit 36: Reliance Reconnect is a price leader across key electronics categories Price comparison of Reliance Reconnect with competing brands in the electronics category

Product Prices (Rs) Product Prices (Rs) Mobile accessories Home Appliances Earphones Bluetooth Wireless Split Inverter AC 1T-3 star -Reliance Reconnect 899 -Reliance Reconnect 19,990 -Boat Rockerz 1,099 -Voltas 29,350 -Philips 1,299 -Blue Star 32,179 -JBL 1,499 -Carrier 32,259 -Skullcandy 1,537 - 37,790 Power Banks 20,000 mAh HD LED TV 32'' -Reliance Reconnect 1,299 -Reliance Reconnect 7,490 -Ambrane 1,499 -Sanyo 8,999 -Intex 1,597 -Micromax 9,299 -Redmi 1,599 -Samsung 12,490 -SYSKA 1,949 -Mi 12,499 Headsets Wireless Washing Machines 6.5kg/Fully Auto/Top Load -Reliance Reconnect 1,499 -Reliance Reconnect 13,490 -Philips 1,849 -Whirlpool 13,990 -JBL 1,999 -LG 14,990 -Motorola 2,200 -IFB 16,399 -Sony 4,099 -Samsung 16,799 Screen Guards Steam Iron 2000W -Reliance Reconnect 499 -Reliance Reconnect 899 -Others 50 -INALSA 1,533 -Usha 1,789 -Bajaj 1,820 -Philips 2,025

Source: Company, Kotak Institutional Equities

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APPENDIX 1 Chinese e-commerce companies have amassed large revenues over the past decade. Key drivers for the same have been an increase in internet penetration led by proliferation of smartphones, increase in consumption and purchasing power and lack of foreign internet companies. We take a look at how Tencent has evolved from a messaging company to a multi-product company, which has led to addition of new revenue streams.

Large online user base can be monetized in multiple ways

Tencent is the largest communications and social platform in China with 1.17 bn MAUs on its Weixin and Wechat platforms and 727 mn MAUs on its QQ messenger as of December 2019. Over a period of time it has evolved from only a messenger service to a provider of multiple products and services to its vast customer base. As a result, its revenues have increased steeply at a CAGR of 36% over CY2013-19.

Exhibit 37: Tencent has multiple ways of monetizing users on its platforms Various revenue streams of Tencent

Source: Company, Kotak Institutional Equities

Exhibit 38: Tencent has consistently added new revenue streams to its business by offering new services to its customer base Service-wise break-up of Tencent's revenues, December calendar year-ends (RMB bn)

Source: Company, Kotak Institutional Equities

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APPENDIX 2 We present below a few snapshots related to JioPos, JioMart and a simple integration with WhatsApp at the current juncture; we believe latter may change perhaps with an embedded offering in future.

Exhibit 39: JioPoS-lite

Source: Company, Kotak Institutional Equities

Exhibit 40: JioPoS device

Source: Company, Kotak Institutional Equities

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Reliance Industries Oil, Gas & Consumable Fuels

Exhibit 41: Co-branded kirana store under JioMart

Source: Company, Kotak Institutional Equities

Exhibit 42: JioMart’s existing interface with WhatsApp

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37

Oil, Gas & Consumable Fuels Reliance Industries

APPENDIX 3 We attended a webinar with Arvind Mediratta, MD of Metro Cash and Carry, who elucidated on the company’s efforts to modernize kiranas and offer them cost-effective product distribution services. We present key takeaways from the discussion below. We believe RR could emulate Metro’s kirana modernization strategy in order to increase its value proposition to kiranas.

Metro Cash and Carry: decent kirana partnership model

Metro has a sizeable cash and carry retail business in India, catering to small retailers primarily in southern India. We attended a webinar by Arvind Mediratta, CEO, Metro Cash and Carry; key takeaways below:

 Supply-side constraints for small shops. Small kiranas have to interact with 150-200+ suppliers to source stocks, and this process is difficult to manage. There is no transparency in prices and FMCG companies have preferential schemes/discounts for select few large retailers. The kiranas operate at thin margins of 12-15% so any kind of cost rationalization makes a big difference.

 Demand-side challenges on account of modern trade and e-commerce. E- commerce companies are resorting to predatory pricing on the back of huge fund raises. Kiranas can’t compete on such pricing. Customer needs are also continuously changing with increasing demand for organic and frozen products. Kiranas don’t have the technical knowhow to analyze customer behavior. Hence, are slow in adapting changing customer needs. Kiranas also lack preferred digital payment options, which became a hurdle, especially after demonetization. However, these kirana stores are champions of EDLC operations and highest delivery speed.

 Metro Cash and Carry’s value proposition to kiranas. Metro C&C is a wholesaler, pure B2B player. It wants to ensure kiranas stay relevant in the current context of digitization. Metro C&C has shifted gears from being only a goods supplier to a complete solutions provider. Metro provides better terms than distributors, has a vast product assortment, and also helps with credit facility, payments modes and cost-effective delivery solutions. It also wants to help kiranas from a demand perspective, to increase their sales, profits and better cash flows by helping them manage inventory days (typically 6-7 weeks; this level can be reduced if online solutions are provided).

 Smart mPOS installation. Metro has developed an ordering and assortment app for kirana owners to see and order products. Pricing is volume linked (tier pricing/slab pricing). All transactions are routed through this app. It helps in getting meaningful insights on kirana’s customers like purchase behavior, ATV and frequency. Kiranas can then come out with customized offers using targeted marketing and data analytics to improve sales and absolute profits. From the data, we can have an auto replenishment program and top SKUs can be identified. mPOS installations are ~30-40k with operations in 17 cities only. The company charges a monthly maintenance rate for mPOS.

 Store remodeling. Metro helps in converting kiranas into modern independent stores/supermarkets, which offers better customer experience. The company indicates sales increase by 50-60% due to this. Remodeling takes 24 hours in accordance to the customers in the kirana’s catchment. Metro helps with planograms, assortment and store layouts. Remodeling cost varies from Rs150k-300k. Payback is six months for store remodeling and 3-4 months for mPOS device.

 Kirana Success Centres. The company has customer consultants/experts to offer free advisory services to kiranas, starting from assortment, better pricing and customer analytics.

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Reliance Industries Oil, Gas & Consumable Fuels

 Technological challenges. Troubleshooting and customer service teams are always needed on ground as kirana owners aren’t enough tech-savvy. They ensure that kiranas are using mPOS regularly with ease for real-time data updates.

 Government push. Demonetization and GST provided an impetus to kiranas to enter in organized retail. South-based (AP, Karnataka) kirana owners are relatively more open to adapt technology in comparison to Gujarat, UP and Punjab, which have shown reluctance to migrate to GST.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39

Oil, Gas & Consumable Fuels Reliance Industries

"Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Tarun Lakhotia, Garima Mishra, Hemang Khanna."

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Reliance Industries Oil, Gas & Consumable Fuels

Kotak Institutional Equities Research coverage universe Distribution of ratings/investment banking relationships Percentage of companies covered by Kotak Institutional 70% Equities, within the specified category.

60% Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided 50% 45.3% investment banking services within the previous 12 months.

40% * The above categories are defined as follows: Buy = We expect this stock to deliver more than 15% returns over the next 12 months; Add = We expect this stock to deliver 5-15% returns 30% 23.6% over the next 12 months; Reduce = We expect this stock to 19.2% deliver -5-+5% returns over the next 12 months; Sell = We 20% expect this stock to deliver less than -5% returns over the next 11.8% 12 months. Our target prices are also on a 12-month horizon basis. These ratings are used illustratively to comply with 10% 4.4% applicable regulations. As of 30/06/2020 Kotak Institutional 0.5% 0.5% 1.5% Equities Investment Research had investment ratings on 203 0% equity securities. BUY ADD REDUCE SELL

Source: Kotak Institutional Equities As of June 30, 2020

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41

Disclosures

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our Fair Value estimates are also on a 12-month horizon basis.

Our Ratings System does not take into account short-term volatility in stock prices related to movements in the market. Hence, a particular Rating may not strictly be in accordance with the Rating System at all times.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and fair value, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and fair value, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or fair value. The previous investment rating and fair value, if any, are no longer in effect for this stock and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH

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