RESULT UPDATE

RELIANCE INDUSTRIES Upcoming asset monetisation to trigger significant value

India Equity Research| Oil, Gas and Services

In a key development, Reliance Industries (RIL) announced the transfer EDELWEISS 4D RATINGS and eventual sale of its tower and fibre assets, which should lead to Absolute Rating BUY lower leverage and trigger value creation. For Q3FY19, the company Rating Relative to Sector Outperform reported 8.8% YoY jump in consolidated PAT to INR102.5bn (5.9% above Risk Rating Relative to Sector Medium INR96.8bn estimate). EBITDA rose 21.2% YoY led by another stellar Sector Relative to Market Equalweight petchem performance and sustained traction in consumer businesses. Key highlights: 1) petchem EBIT surged 42.9% YoY, in line with our estimate, due to healthy volume growth driven by the new gas cracker & MARKET DATA (R: RELI.BO, B: RIL IN) strong polyester margin; 2) refining EBIT beat of 17% was led by lower- CMP : INR 1134 than-estimated opex with GRM in line at USD8.8/bbl; 3) while retail Target Price : INR 1415 52-week range (INR) : 1,329 / 871 revenue soared 89% YoY, EBITDA tripled YoY; and 4) Reliance Jio (RJIO) reported strong subscriber addition (up 11% QoQ). 5) Other income Share in issue (mn) : 6,338.6 M cap (INR bn/USD mn) : 7,191 / 101,256 doubled QoQ due to sale of securities. Maintain ‘BUY’ with Avg. Daily Vol.BSE/NSE(‘000) : 8,531.9 INR1,415/share target price as we roll over to June 2020 earnings.

SHARE HOLDING PATTERN (%) Major value unlocking on the cards Current Q2FY19 Q1FY19 With the transfer and eventual sale of tower and fibre assets expected by March 2019, Promoters * 46.2 46.2 46.2 we expect value creation as: 1) past demergers (RIL-RCOM in 2005, Adani Enterprises MF's, FI's & BK’s 11.6 11.6 11.3 in 2018 and Arvind group companies) have created over 40% value; 2) it is likely that FII's 23.8 23.8 23.9 RIL has lined up strategic buyers for eventual monetisation; and 3) a sale would lead to Others 18.4 18.4 18.6 ~33% dip in debt with over INR1tn debt locked up in these assets. * Promoters pledged shares : NIL (% of share in issue) Consumer and petchem shine; lower opex offsets lower GRM

Lower opex led to refining EBIT declining by just 5% despite 7% fall in GRM. With ROGC PRICE PERFORMANCE (%) and ethane imports exceeding 100% utilisation, petchem margin remained stable. EW O & G Stock Nifty Retail margin expanded to 4.7% led by strong LFL growth of ~20% and robust store Index additions. RJIO’s revenue market share rose to 36.7% with another 28.7mn net 1 month 0.0 2.3 2.7 subscriber additions and stable ARPU at INR130. In a welcome move, capex declined 3 months 0.9 5.5 2.4 QoQ to INR270bn and is expected to continue on this trajectory in the future. 12 months 17.1 1.3 (18.9)

Outlook and valuations: Triggers aplenty; retain ‘BUY’ A demerger of non-core telecom assets could prove to be a game changer—in one go, RIL deleverages sharply, while also monetising these assets potentially at a large premium to book value. With the petcoke gasifier on schedule for March 2019 and an imminent FTTH roll out, there are multiple triggers for an upside. We maintain ‘BUY’ with TP of INR 1415/share.

Financials (Consolidated) (INR bn)

Year to March Q3FY19 Q3FY18 YoY % Q2FY19 QoQ % FY18 FY19E FY20E Jal Irani

Net revenue 1,603 1,025 56.4 1,460 9.8 3,917 5,416 6,078 +91 22 6620 3087 EBITDA 211 156 35.6 207 2.2 642 811 1,071 [email protected]

Adjusted Profit 95 81 17.4 95 0.6 361 408 537 Vijayant Gupta Adjusted Diluted EPS 15.0 12.8 17.4 14.9 0.6 60.9 68.8 90.7 +91 22 4040 7402 [email protected] Diluted P/E (x) 18.9 16.7 12.7

EV/EBITDA (x) 13.1 11.6 8.5 ROAE (%) 12.8 13.0 15.1 January 17, 2019 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Oil, Gas and Services

Table 1: We expect PAT CAGR of 20%+ till FY23 (INR bn) FY16 FY17 FY18 FY19E FY20E FY21E FY22E FY23E Segmental EBITDA Petrochemical EBITDA 137 165 259 337 392 438 459 477 Refining EBITDA 267 286 290 256 323 390 386 363 India E&P EBITDA 29 28 29 39 65 91 126 161 Shale Gas EBITDA 15 13 24 31 32 34 36 38 Retail EBITDA 9 12 24 46 82 110 144 174 Telco EBITDA 0 0 67 153 227 311 369 411 Consolidated EBITDA 417 462 642 811 1,071 1,323 1,469 1,573 Consolidated net profit, RHS 300 299 361 408 537 679 768 826 Net profit (ex Telco) 300 299 354 377 489 606 683 737 PAT growth (YoY) 26% 0% 21% 13% 32% 26% 13% 7% PAT growth (CAGR over FY18) 13% 22% 23% 21% 23% EBITDA growth (CAGR over FY18) 24% 27% 26% 22% 24% Source: Edelweiss research

Chart 1: 3QFY19 EBIDTA growth drivers: Petchem surged, followed by RJIO and retail 22,628 1,416 427 38 1,074 19,059 2,581 1,113

3Q FY18 R&M Petchem Oil & Gas Retail Digital Others 3Q FY19 Services

Source: Company, Edelweiss research

RJIO: Another quarter of robust growth ARPU and subscriber additions

 RJIO reported revenues at 12% QoQ revenue growth led by 28mn subscriber addition with ARPU of INR130.0, in line with our estimate.

 The company added 28mn net subscribers (QoQ), taking the total subscriber base to 280.1mn. The pace of subscriber addition has slowed mildly. This may be due to the following reasons:

1) Change in Aadhar related enrolment for issue of sim cards.

2) Saturation of mobile broadband adoption in smartphone users.

 RJIO reported EBITDA margin of 39% (versus est: 38%), an improvement of 30bps QoQ.  PAT came in higher at INR8.3bn vs estimate of INR7.7bn, an increase of 22% QOQ.

2 Edelweiss Securities Limited Reliance Industries

 Wireless data traffic continued to rise and stood at 8.6bn GBs and voice traffic during the quarter stood at 63.4bn minutes.

 JioGigaFiber: Customers across 1,400 plus cities have evinced interest in availing JioGigaFiber services since the start of registrations.

Fibre and tower units to be demerged

 RJIO will hive off its tower and fiber assets in to a separate subsidiary with an aim of monetising these assets to reduce leverage on RJIO’s balance sheet. This is a strategic shift in the company’s plans as it had earlier indicated that it will not want to share its passive infrastructure with competitors due to strategic significance. The company has not shared the details of the transaction, but we believe significant portion of RJIO’s INR1,162bn fixed asset investments as on Sep’18 will be towards tower and fiber assets.

 We believe sharing of infrastructure is positive for the telecom industry as it will reduce the time to market for other players, while lowering overall capex requirements. We believe this step will significantly reduce capital employed in the RJIO business, boosting the return ratios. While RJIO may get a material premium to its current book value, the upside may be capped as: 1) the industry has excess capacity; 2) RJIO’s towers will have lower tenancy ratio than competition; 3) potential to meaningfully increase tenancy ratio is unlikely as Bharti Airtel and Vodafone Idea have already given first right of refusal to existing tower companies. The company will provide more clarity in Q4FY19.

Key takeaways ARPU and subscriber addition

 Subscriber addition was impacted by Supreme Court’s decision cancelling Aadhaar- based authentication. This led to disruption for 15-20 days mostly in November. Pace of subscriber addition is now back to normal.

 RJIO has gained 70% market share in the smartphone segment.

 Marginal decline in ARPU was due to introduction of Monsoon Hungama offer; smartphone ARPU were broadly stable.

 MNP adoption is picking up.

Jio Apps

 Strong traction with JioTV and other entertainment apps.

 Has upgraded MyJio app to include commerce elements.

 Launch of integrated JioSaavn music app during the quarter; highest engagement among any music app in India.

 Strong data consumption is across customer segments and geographies.

 >70% of network data is video.

 Loyalty programme is also being rolled out.

 Has enhanced content on JioCinema app.

3 Edelweiss Securities Limited Oil, Gas and Services

Network

 Should reach 99% population coverage in next three-four months; reaching many towns for the first time, which is contributing positively to the subscriber base.

 Network opex is increasing due to rise in coverage; operating leverage will start kicking in on network expansion completion.

 Post completion of 99% population coverage, capex will be targeted largely towards capacity improvement through infill sights, small cell, WiFi, etc.

 RJIO’s Q3FY19 capex at INR140bn.

FTTH and Jio Home Automation services

 Very close to full launch of FTTH services; will be offering full suite of services such as Voice Assistant, Home Automation, Security, Elderly/ Kids Care, Smart Safety.

 Will be looking to reach 50mn subscribers.

 Waiting for CCI approval before meaningfully start engaging with Den and Hathway.

We believe, RJIO’s increasing traction in subscriber addition, usage matrix and relatively stable ARPU indicate that customers are seeing good value in RJIO’s offerings. Given its focus on subscriber addition, it may look at maintaining current pricing, which is helping gain subscriber market share. However, it will look at increasing prices in the medium term as it seeks to achieve goal of ~50% EBITDA margins and ~15% RoCE.

We believe, partnership with MSO/LCO will accelerate the pace of subscriber addition for JioGigaFiber. However, we wait for more clarity on ownership and operational structure of the last mile infrastructure for the same before concluding as in the earlier cycle of digitisation, tussle between LCO and MSO led to DTH operators gaining market share as the quality of infrastructure and service to customers was sub-par. We maintain our constructive stance on RJIO.

Chart 2: Robust addition—RJIO added 27.8mn subscribers in Q3FY19 300 280 252 240 215 187 180 160 139

(mm) 123 120 109

60

0 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19

Source: Company, Edelweiss research

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Table 2: RJIO—Q3FY19 financial snapshot Q3FY19 Q2FY19 % QoQ Revenue from Operations 103,830 92,400 12.4 Network Operating expense 31,900 26,040 22.5 Access charges (net) 10,050 10,460 (3.9) Employee benefits expenses 4,260 4,060 4.9 Selling and distribution expenses 2,960 2,900 2.1 Other expenses 2,780 3,390 (18.0) Operating expenses other than spectrum 51,950 46,850 10.9 License fee / Spectrum charges 11,360 9,830 15.6 EBITDA 40,520 35,720 13.4 EBITDA margin (%) 39 39 1.0 Depreciation 16,840 15,310 10.0 EBIT 23,680 20,410 16.0 Less: Interest cost 10,910 9,960 9.5 Add: Other income 10 10 0.0 Profit / (loss) before tax 12,780 10,460 22.2 Current tax 2,760 3,650 (24.4) Deferred tax 1,710 Less: Provision for tax 4,470 3,650 22.5 Net Profit / (Loss) 8,310 6,810 22.0 Source: Company

Ample growth potential for RJIO There is robust growth in the number of Jio subscribers with 400mn subscribers by the end of 2019. This big subscriber base for cross-selling will add to Jio’s home broadband and enterprise. Also, we expect launch of some innovative products like Jio Cable (using phone to watch channels and movies on TV), car connect (Jio Motive) and VoWiFi (improve indoor coverage) which will increase data usage.

We expect fiber rollout in India to increase significantly as: 1) the government continues to invest in building network to bridge the digital divide & strengthen the country’s defence network; 2) mobile operators invest in improving backhaul to cater to burgeoning data demand; and 3) broadband service providers aggressively expand fiber installations to cater to high speed data by using FTTH/FTTB.

5 Edelweiss Securities Limited Oil, Gas and Services

Chart 3: India’s internet penetration amongst lowest globally 800 100.0 94 93 88 83 80 79 640 66 80.0 53 480 50 60.0

34 (%) (mn) 320 40.0

160 20.0

0 0.0

USA

India

Brazil

China

Japan

Europe

Thailand

Malaysia

Indonesia South KoreaSouth Internet users (LHS) Penetration (RHS)

Source: Internetworldstats.com, Edelweiss research

Cisco VNI projects an increase of 2.4x in M2M connections, from 5.8bn in 2016 to 13.7bn by 2021, accounting for 1.75 M2M connections for each member of the global population. As there could be launch of some innovative products for consumers, it will drive more data usage.

Fig. 1: Rapid growth in global devices and connections

Source: Cisco VNI global IP traffic forecasts, 2016-2021

Higher data consumption due to increase in video consumption will drive bit rate for ultra- high-definition (UHD) video ~18Mbps more than 2.5x high-definition (HD) video bit rate and also 9x more than standard-definition (SD) video bit rate.

Digital services in India: A huge market RIL believes the digital service market in India offers great potential due to: 1) a rapid shift of voice revenue to data: RJIO expects data revenue to jump by INR1tn and voice market to plunge by INR1tn, while overall telecom industry revenue would reach INR3tn by FY21 (from INR2tn currently); 2) higher data ARPU: 400mn subscribers can spend over INR500 on

6 Edelweiss Securities Limited Reliance Industries

average per month and 400mn subscribers can spend over INR300 ARPU on digital services; and 3) capacity edge ensuing dominance: RJIO has 4.7x the capacity of the entire industry & quality offerings will aid it corner 50% revenue market share (INR1.5tn) & EBITDA margin of >50% (INR750bn).

Table 3: Subscribers can afford valued-added digital services offered by RJIO UOM Smartphone Feature users phone users Devices in circulation Mn 263 496 Average SIM / user 1.19 1.28 ARPU per VLR SIM INR 277 134 Effective ARPU per user INR 329 172

Mobile users Subscribers in 2009 392mn ARPU in 2009 INR179 Equivalent ARPU in 2017 (adj. For nominal PCI INR530 Source: Company

7 Edelweiss Securities Limited Oil, Gas and Services

Table 4: RJIO—Statement of profit and loss FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 Subscribers (mn) 186.6 310.1 401.6 407.6 413.6 419.6 425.6 431.6 ARPU (INR) 130 133 131 147 167 183 196 207 Total revenues (INR mn) 201,579 395,074 561,248 712,481 822,481 916,473 991,969 1,064,834 YoY growth (%) 96.0 42.1 26.9 15.4 11.4 8.2 7.3

Operating Costs Network opex 49,209 116,253 179,169 227,448 262,563 292,568 316,669 339,930 % of revenue 24.4 29.4 31.9 31.9 31.9 31.9 31.9 31.9

License and WPC charges 17,674 42,497 60,859 77,236 89,158 99,347 107,531 115,430 % of revenue 8.8 10.8 10.8 10.8 10.8 10.8 10.8 10.8

Termination Cost 42,874 41,677 37,131 24,127 18,095 20,162 21,823 23,426 % of revenue 21.3 10.5 6.6 3.4 2.2 2.2 2.2 2.2

Employee costs 9,634 17,000 23,554 29,922 34,543 38,491 41,662 44,722 % of revenue 4.8 4.3 4.2 4.2 4.2 4.2 4.2 4.2

Subscribers acquisition and Servicing Expenses 7,969 11,736 16,520 20,993 24,236 27,006 29,231 31,378 % of revenue 4.0 3.0 2.9 2.9 2.9 2.9 2.9 2.9

Admin & Other exp 6,881 12,910 16,820 21,426 24,739 27,567 29,838 32,029 % of revenue 3.4 3.3 3.0 3.0 3.0 3.0 3.0 3.0 Total Costs 134,240 242,073 334,052 401,151 453,335 505,141 546,753 586,915

EBITDA (INR mn) 67,338 153,001 227,195 311,331 369,147 411,332 445,216 477,919 EBITDA Margin 33.4 38.7 40.5 43.7 44.9 44.9 44.9 44.9 Depreciation (INR mn) 35,765 65,937 96,102 129,000 157,131 184,220 209,299 235,321 Spectrum Depreciation on other assets Depreciation on incremental capex EBIT (INR mn) 31,573 87,065 131,094 182,331 212,016 227,111 235,916 242,598

Interest (INR mn) 20,486 40,616 58,604 74,264 85,739 95,537 103,407 111,003 on 4G spectrum 3,530 on 1800MHz (round 1 auction) 1,604 on 800 + 1800MHz (round 2 auction) 1,606 on 800 + 1800MHz + 2300 (round 3 auction) Interest on funds raised for capex @ 5% 13,747 PBT (INR mn) 11,087 46,449 72,490 108,067 126,278 131,574 132,510 131,595

Tax 3,862 15,328 23,922 35,662 41,672 43,419 43,728 43,426

PAT (INR mn) 7,225 31,121 48,568 72,405 84,606 88,155 88,781 88,169

Capex (INR mn) 501,957 337,500 187,500 187,500 273,372 287,471 128,956 138,428 Cumulative Capex 2,295,339 2,632,839 2,820,339 3,007,839 3,281,211 3,568,682 3,697,638 3,836,066 Source: Edelweiss research

8 Edelweiss Securities Limited Reliance Industries

Table 5: NPV analysis of RJIO DCF ANALYSIS FY18 FY19 FY20 FY21 FY22 FY23 FY24 EBIT*(1-t) 21,154 58,333 87,833 122,162 142,051 152,165 158,064 Depreciation (INR mn) ------Gross Cash Flow (INR mn) 21,154 58,333 87,833 122,162 142,051 152,165 158,064 Working Capital (INR mn) (461,890) (429,096) (428,414) (427,792) (427,340) (426,954) (426,643) Investment in WC (INR mn) (48,127) 32,794 683 622 452 386 310 Capex (INR mn) 501,957 337,500 187,500 187,500 273,372 287,471 128,956 FCFF (INR mn) (432,676) (311,960) (100,350) (65,960) (131,773) (135,693) 28,798 FCFF growth (%) PV FCF (432,676) (311,960) (91,403) (54,722) (99,576) (93,395) 18,054 NPV (INR mn) 2,221,134 FY19E Debt (INR mn) 1,433,384 NPV of equity (INR mn) 787,750 Cumulative Investments 2,000,000 EV/IC 1.1

DCF ANALYSIS FY25 FY26 FY27 FY28 FY29 FY30 Terminal Value EBIT*(1-t) 162,541 195,246 179,916 165,255 155,828 156,685 Depreciation (INR mn) - 284,155 291,923 300,164 308,907 318,182 Gross Cash Flow (INR mn) 162,541 479,401 471,839 465,419 464,734 474,868 Working Capital (INR mn) (426,344) (426,091) (425,809) (425,510) (425,192) (424,856) Investment in WC (INR mn) 299 253 282 299 317 337 Capex (INR mn) 138,428 146,440 155,359 164,820 174,857 185,506 FCFF (INR mn) 23,813 332,707 316,198 300,300 289,560 289,025 5,192,629 FCFF growth (%) PV FCF 13,598 173,045 149,795 129,579 113,805 103,467 1,858,888 NPV (INR mn) 2,221,134 FY19E Debt (INR mn) 1,433,384 NPV of equity (INR mn) 787,750 Cumulative Investments 2,000,000 EV/IC 1.1 Source: Edelweiss research

Retail: Margin expanded to 4.7% led by higher LFL growth Reliance Retail’s turnover/EBITDA improved 89%/178% YoY and 10%/20.7% QoQ. Revenue, ex-petroleum-and-connectivity, rose 134% YoY. EBITDA margin expanded 40bps YoY owing to greater cost control and operating leverage.

9 Edelweiss Securities Limited Oil, Gas and Services

Chart 4: Area under coverage rose 5.6% QoQ while revenue per sqft is up 3.8%QoQ 25 19,500

20 17,000

15 14,500

(Sqft) 10

12,000 (INR/sqft)

5 9,500

0 7,000

Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q3FY19 Q2FY19 Area under coverage (Sqft) Revenue per sqft (RHS)

Source: Company, Edelweiss research

Table 6: Retail turnover/EBITDA up 89%/177% YoY Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Revenue (INR mn) 56,460 66,660 80,790 86,880 103,320 115,710 146,460 187,980 241,830 258,900 324,360 355,770 EBITDA (INR mn) 2,210 2,400 2,640 3,330 3,520 3,980 4,440 6,040 10,860 12,060 13,920 16,800 Revenue growth (%) 17.9 41.9 58.7 43.8 83.0 73.6 81.3 116.4 134.1 123.7 121.5 89.3 EBITDA margins (%) 3.9 3.6 3.3 3.8 3.4 3.4 3.0 3.2 4.5 4.7 4.3 4.7 Source: Company, Edelweiss research

Table 7: Penetration of organised retail extremely low FY16 FY20 Categories (%) Retail market Organized retail Org. As a % of Retail market Organized retail Org. As a % of size (USD bn) market size overall retail size (USD bn) market size overall retail (USD bn) (USD bn) Food & Groceries 413 13 3.1 634 31 4.9 Apparel & Accessories 49 11 22.4 74 24 32.4 Jewellery & watches 47 13 27.7 77 23 29.9 Consumer Electronics 35 9 25.7 63 20 31.7 Home & Living 27 3 10.0 42 5 11.9 Pharmacy & wellness 18 2 10.0 28 3 10.7 Footwear 7 3 42.9 12 5 41.7 Others 20 2 10.0 30 4 13.3 Total 616 56 9.0 960 115 12.0 Source: Avenue Supermarkets prospectus

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Chart 5: Reliance Retail is increasingly focusing on higher-margin digital offerings 100 15.0 15.0 16.0 24.7 22.0 80 31.0 33.0 34.0 34.0 15.0 18.0 11.0 41.0 10.5 13.0 60 12.0 12.0 9.0 10.0 37.0 34.0 14.0 9.0 9.0 7.0 8.0 (%) 34.2 41.0 52.0 40 10.0 31.0 27.0 33.0 31.0 15.0 20 32.0 33.0 30.5 24.0 22.0 20.0 17.0 19.0 17.0 17.0

0

Q3FY18 Q4FY18 Q2FY19 Q3FY19 Q2FY18 Q1FY19

Q2FY17 Q3FY17 Q4FY17 Q1FY18 Grocery & Others Consumer Electronics Fashion & Lifestyle Petro retail Connectivity Source: Company

Table 8: We conservatively assign a 1.7x blended FY20E EV/Sales for RIL retail FY20 (INR bn) Mcap Net debt EV Sales EBITDA EBIT EBIT margin EV/Sales EV/EBITDA (%) (x) (x) DMART 865.9 -8.5 857 240.7 21.4 19.1 8.0 3.6 40.0 ABFRL 156.9 11.2 168 93.2 9.6 6.9 7.4 1.8 17.5 Arvind 24.9 27.1 52 135.0 14.0 11.1 8.2 0.4 3.7 Future Retail 230.6 3.0 234 244.9 13.4 13.2 5.4 1.0 17.5 Future Lifestyle 75.7 9.5 85 71.5 6.9 5.0 7.0 1.2 12.3 Trent 116.6 0.3 117 31.9 3.9 3.3 10.4 3.7 30.2 Shoppers Stop 45.8 -0.3 45 47.9 4.0 2.0 4.1 0.9 11.5 V-Mart 40.0 -1.4 39 16.6 1.8 2.0 11.9 2.3 21.6 Titan 854.1 -16.1 838 229.9 25.3 25.8 11.2 3.6 33.1 Average 7.7 2.0 21.4 Source: Company, Bloomberg

Retail: Omni-channel strategy Online retailers are shifting offline to resort to the digital medium to target consumers. In this current era, omni-channel strategy is the way ahead with online and offline presence.

There is robust growth in an extensive omni-channel strategy with almost 10,000 Reliance Retail stores having 5,000 Jio stores which are used to generate sales and deliver products to consumers. Going ahead, omni-channel strategy with blended online and offline channels will provide seamless experience to consumers.

Shoppers Stop has invested INR400mn in its omni-channel strategy and expects ~10-15% revenue via online sales. Pantaloon is a major player which is looking for the online presence as a big move in the industry.

The apparels market in India was pegged at INR3,201bn in FY16 and is estimated to clock 10.9% CAGR over FY16-20. Organised apparel segment is expected to post 21.9% CAGR over FY16-20 aided by shift of demand from unorganised to organised players. The F&G market in India was estimated at INR26,845bn in FY16 and expected to post 11.3% CAGR over FY16-20 with organised segment to post 24.3% CAGR over FY16-20. The domestic jewellery &

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watches industry was pegged at INR3,042bn in FY16 and is estimated to register 13.4% CAGR over FY16-20 with organised jewellery to clock 16.1% CAGR over FY16-20. Going ahead, Omni channel strategy with blended online and offline channels will provide seamless experience to the consumers.

Chart 6: Breakup of India retail market 67.00 70.0 56.0 42.0

(%) 28.0

14.0 8.00 8.00 6.00 4.00 3.00 3.00 1.00

0.0

Others

Apparel

Footwear

wellness

Consumer

electronics

Pharmacy & Pharmacy

Home & living & Home

Food & grocery& Food Jwellery & watchesJwellery& Breakup of India Retail Source: Company, Edelweiss research

Refining: EBIT beat led by lower opex; GRM in line RIL posted refining EBIT of INR49.5bn (down 19% QoQ, 4% YoY). GRM at USD8.8/bbl is in line with our estimate.

Key highlights

 GRM came in at USD8.8/bbl (estimate: USD8.8/bbl) compared with US9.5/bbl in Q2FY19 and USD11.6/bbl in Q3FY18.

 Throughput of 18.0MMT (17.7MMT in Q2FY19 and 17.7MMT in Q3FY18) implies utilisation of 116%.

 GRM premium over Singapore benchmark stood at USD4.5/bbl versus USD3.4/bbl in Q2FY19.

 Gasoline and naphtha cracks weakened due to capacity ramp-up, mainly in Asia, and lower LPG prices. Middle distillate cracks remained firm as inventories depleted to a five-year low. The AL-AH spread remained stable at USD2.2/bbl in Q3FY19, which along with FCC restart led to a widening of spread versus Singapore GRM.

 Export volumes of refined products rose to 10.8MMT from 10.1MMT in Q2FY19. Domestic demand for light and middle distillates remains robust.

 Units of petcoke gasification at DTA have stabilised, although commissioning is expected only by March 2019.

 In anticipation of the International Maritime Organisation (IMO) regulations in 2020, forward cracks of diesel/FO stand at USD20/-USD10/bbl versus current spread of USD15/-USD6/bbl. We expect the IMO regulation to provide a leg-up to refining margins in FY20/FY21.

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Chart 7: RIL’s premium to Singapore GRMs at USD4.5 /bbl (USD3.4/bbl in Q2FY19) 75.0 20.0

60.0 16.0

45.0 12.0

(INR bn) (INR 30.0 8.0 (USD/bbl)

15.0 4.0

0.0 0.0

Q3FY12 Q1FY13 Q3FY13 Q1FY15 Q3FY15 Q1FY16 Q3FY16 Q3FY17 Q1FY18 Q3FY18 Q1FY19 Q1FY14 Q3FY14 Q1FY17 Q3FY19 Refining EBIT RIL GRMs (USD/bbl) Singapore GRMs (USD/bbl)

Chart 8: Refinery throughput rose to 18.0MMT and capacity utilisation to 116.1% 22.0 120.0

18.8 105.0

15.6 90.0 (%)

12.4 75.0 (mn tonnes) (mn 9.2 60.0

6.0 45.0

Q3FY12 Q1FY13 Q3FY13 Q1FY14 Q3FY14 Q3FY15 Q1FY16 Q1FY17 Q3FY17 Q3FY18 Q1FY19 Q3FY19 Q1FY15 Q3FY16 Q1FY18

Refinery throughput Capacity utilisation (RHS)

Chart 9: Naphtha cracks fell, FO improved QoQ Chart 10: Gasoil cracks improved while gasoline fell QoQ 8.0 24.0

1.6 19.6

(4.8) 15.2

(11.2)

(USD/bbl) 10.8 (USD/bbl)

(17.6) 6.4

(24.0) 2.0

Q3FY15 Q1FY19 Q3FY13 Q1FY14 Q3FY14 Q1FY15 Q1FY16 Q3FY16 Q1FY17 Q3FY17 Q1FY18 Q3FY18 Q3FY19

Q1FY13 Q3FY14 Q3FY19 Q3FY12 Q3FY13 Q1FY14 Q1FY15 Q3FY15 Q1FY16 Q3FY16 Q1FY17 Q3FY17 Q1FY18 Q3FY18 Q1FY19 Naphtha cracks Fuel oil Gasoline cracks Diesel cracks Source: Company, Edelweiss research

13 Edelweiss Securities Limited Oil, Gas and Services

Complex refiners to benefit from IMO regulations: Dr. Fesharaki We had the privilege of hosting Dr. Fereidun Fesharaki, founder of Facts Global Energy (FGE) and global expert in oil economics. He was of the opinion that complex refiners like RIL are likely to benefit from upcoming changes in refining.

IMO regulations likely to benefit complex refiners: IMO regulations in 2020 stipulate a mandatory shift to cleaner fuels such as diesel. The impending spike in diesel demand will prop up diesel cracks by USD10–15/bbl and consequently refining margins. Dr. Fesharaki expects complex refiners like RIL to be the key beneficiaries.

RIL to be one of the biggest beneficiaries: Given high complexity of Indian refiners in general and RIL in particular, companies with complex capacities will have greatest flexibility to adapt to and leverage the upcoming dynamics in oil and refining.

FGE expects strong compliance to IMO’s sulphur regulations, which come into force w.e.f. 2020. The regulations are likely to result in a big shift in bunker fuel use, thereby cutting 3.0mbpd of HSFO. Refiners will be incentivised to shift towards middle distillates as shippers globally will look to alternatives like diesel to comply with the fuel norms.

IMO is also likely to result in wider differentials between heavy and light grades as heavy grades suffer from potential displacement of HSFO demand. The wider differential will further benefit complex refiners like RIL, which have the capability to process these grades into high-value-added products.

Chart 11: FGE expects a big shift in bunker fuel usage 6.0

0.4 4.8 0.2 0.3 0.3 1.5 3.6 2.1 2.9 2.7 2.4 (Mmbpd) 0.6 0.2 3.2 0.1 0.6 1.2 1.8 1.5 1 0.0 0.2 0.2 2017 2020 2025 2030 HSFO Scrubbed HSFO LSFO Gasoil LNG

Source: Edelweiss research

14 Edelweiss Securities Limited Reliance Industries

Table 9: IMO impact—HSFO demand displacement to greatly widen Brent/Dubai differential Product Slate US$/bbl 2017 2018 2019E 2020E 19.5% Gasoline 12.0 6.0 10.0 14.0 37.4% Diesel 13.2 15.0 18.0 23.0 15.6% HSFO (5.4) (6.5) (12.0) (27.0) 13.5% Jet/Kero 13.3 14.0 15.0 16.0 4.1% LPG (25.2) (26.0) (22.0) (19.0) 6.5% Naphtha 0.2 (5.0) 0.4 0.5 Singapore GRM 7.2 5.1 8.0 8.5 Source: FGE

Fig. 2: IMO to boost Singapore refining benchmark

Source: FGE

15 Edelweiss Securities Limited Oil, Gas and Services

Fig. 3: Swap spreads have widened to over $330/tonne over the past year

Chart 12: Distillate-heavy refiners to benefit substantially from the trend 70% Indian refiners lie at the top end of the PTT spectrum with high distillate yield and greater flexibility on crude sourcing 60% S-Oil IOCL

REP BPCL RIL 50% SKI HPCL

40% TOT XOM

RDS MPC 30% ANDV

SNP ARAM Refining Capacity

Middle Distillate Distillate Middle Yield (%) 20% PTR

10% 0 3 6 9 12 15

Nelson Complexity Index Source: Company, Edelweiss research

16 Edelweiss Securities Limited Reliance Industries

Petrochemicals: Record performance driven by new projects The segment clocked a record EBIT of INR82.2bn (up 42.9% YoY, 1% QoQ) and a healthy EBIT margin of 17.6% (18.5% in Q2FY19 and 17.4% in Q3FY18). The strong performance was driven by favourable product differential across the integrated polyester chain as well as the successful ramp-up of new projects.

RIL’s polymer production shot up by 17% YoY in Q3FY19 to 1.5MMT with incremental volumes from ROGC and downstream units (PE and MEG). RIL continued to be the market leader in the Indian polymer market.

Maintenance operations at polyester plants led to 6% QoQ decline in production. Fibre intermediates production in Q3FY19 increased 21.6% to 2.8MMT as MEG plant resumed operations. RIL has successfully captured the upcycle in polyester industry with timely expansion across the chain. Furthermore, MEG production at the refinery off gas cracker (ROGC) complex is optimum.

With the ROGC and PX plants stabilising, petrochemical output achieved a peak volume of 9.7MT during the quarter. While cracker margins could see near-term pressure on commissioning of new units in the US, integration and cost efficiencies from recent projects should enable RIL to post healthy margins.

Chart 13: Strong petchem performance led by higher polyester cracks 80.0 1,400.0

66.0 1,120.0

52.0 840.0

(INR bn) (INR 38.0 560.0 (USD/MT)

24.0 280.0

10.0 0.0

Q1FY13 Q3FY13 Q3FY14 Q1FY15 Q3FY15 Q3FY16 Q1FY17 Q3FY17 Q3FY18 Q1FY19 Q3FY19 Q1FY14 Q1FY16 Q1FY18 Petrochemicals EBIT (INR bn) Polyester margins (USD/MT) Polymer margins (USD/MT) Cracker margins (USD/MT) Source: Company, Edelweiss research

17 Edelweiss Securities Limited Oil, Gas and Services

Chart 14: Petchem production rose 21.3% YoY, following stabilization in key projects 2,600

2,080

1,560

(MT) 1,040

520

0

Q3FY12 Q1FY13 Q3FY13 Q1FY14 Q3FY14 Q1FY15 Q3FY15 Q1FY16 Q3FY16 Q1FY17 Q3FY17 Q1FY18 Q3FY18 Q1FY19 Q3FY19 Polyester (PSF,PFY,PET) Intermediates (PX,PTA,MEG) Polymer (PP,PE,PVC)

Chart 15: RIL’s total domestic oil & gas production continues to trend down 50.0 14.4

40.0 10.8

30.0 7.2

20.0 (kbpd) (mmscmd) 3.6 10.0

0.0 0.0

Q113 Q313 Q114 Q314 Q116 Q316 Q117 Q317 Q118 Q318 Q119 Q115 Q315 Q319 RIL's total gas production RIL's total oil production - RHS

Source: Company, Edelweiss research

18 Edelweiss Securities Limited Reliance Industries

Table 10: Consolidated segmental performance Segmental revenues (INR mn) Q3FY19 Q3FY18 % change YoY Q2FY19 % change QoQ Petrochemical 462,460 337,260 37.1 437,450 5.7 Refining 1,117,380 758,650 47.3 987,600 13.1 Oil and Gas 11,820 16,310 (27.5) 13,220 (10.6) Organised retail 355,770 187,980 89.3 324,360 9.7 Digital services 123,020 81,360 51.2 109,420 12.4 Others 57,070 30,260 88.6 55,370 3.1 Gross turnover 2,127,520 1,411,820 50.7 1,927,420 10.4 Less: Inter segment transfers 414,160 312,770 32.4 364,510 13.6 Turnover 1,713,360 1,099,050 55.9 1,562,910 9.6 Less: GST recovered 110,370 74,050 49.0 102,730 (100.0) Net turnover 1,602,990 1,025,000 56.4 1,460,180 9.8 Segmental EBIT (INR mn) Petrochemical 82,210 57,530 42.9 81,200 1.2 Refining 50,550 61,650 (18.0) 53,220 (5.0) Oil and Gas (1,850) (2,910) NM (4,800) NM Organised retail 15,120 4,870 210.5 12,440 21.5 Digital services 23,620 14,400 NM 20,420 NM Others 3,760 2,840 32.4 3,140 19.7 Total EBIT 173,410 138,380 25.3 165,620 4.7 Segmental margins (EBIT margins % of sales) YoY bps change QoQ bps change Petrochemical 17.8 17.1 0.7 18.6 (0.8) Refining 4.5 8.1 (3.6) 5.4 (0.9) Oil and Gas (15.7) (17.8) 2.2 (36.3) 20.7 Organised retail 4.2 2.6 1.7 3.8 0.4 Digital services 19.2 17.7 1.5 18.7 0.5 Others 6.6 9.4 (2.8) 5.7 0.9 Source: Company, Edelweiss research

19 Edelweiss Securities Limited Oil, Gas and Services

Table 11: SoTP valuation: TP maintained at Rs 1,415/share Base value Base value Base value % Comments (USD bn) (INR bn) (INR/share) Refining (@ EV/EBITDA = 7x) 36.1 2,380 404 23% Global Refining peers trades at 7.2x. Assumed GRM of USD12/bbl, USD14/bbl in FY20/21. Petchem (@ EV/EBITDA = 7x) 42.8 2,823 479 27% Global petchem peers trades at 7.2x. Assumed EBITDA of USD226/mt, USD237 in FY20/21. (a) KG-D6 (DCF) 2.1 136 23 1% Includes D1/D3, MA, R-Series and Satellite fields, NPV from marketing margins (b) CBM (DCF) 1.0 68 11 1% India Upstream 3.1 204 35 2% Shale Gas 1.4 94 16 1% Retail (@ EV/Sales = 1.7x) 39.2 2,588 439 25% Implied EV/sales at 1.7x FY21E Telecom 33.7 2,221 377 22% Estimate Telecom NPV of INR2.7trn Value of operating assets 156 10,310 1,749 100%

Cons. Cash & Cash Eq. 13.8 913 155 10% Investments 7.9 524 89 6% Includes losses in others Gross Debt 38.5 2,538 430 28% Net debt 16.7 1,101 187 12%

SOTP 139.5 9,210 1,562 100% Less: Conglomerate discount @ 10% 147 SOTP 1,415 CMP 1,130 Return on CMP (%) 25% Source: Edelweiss research

Table 12: Breakup of retail valuation FY20, INR bn Revenue Multiple Value Retail 1,169 2.1 2,455 Jio 588 0.1 59 Petro 148 0.5 74 Combined Value 2,588 Shares 5,896 Value/share 439 Source: Edelweiss research

20 Edelweiss Securities Limited Reliance Industries

Financials snapshot (INR mn) Year to March Q3FY19 Q3FY18 YoY % Q2FY19 QoQ % FY18 FY19E FY20E Net revenues 1,000,960 732,560 36.6 961,670 4.1 3,916,770 5,416,188 6,077,751 Raw material costs 747,930 497,170 50.4 707,980 5.6 2,674,660 3,774,959 4,026,471 Gross profit 253,030 235,390 7.5 253,690 (0.3) 1,242,110 1,641,230 2,051,280 Employee expenses 14,560 11,420 27.5 14,930 (2.5) 95,230 234,072 335,733 Other expenses 93,400 86,530 7.9 89,840 4.0 505,120 596,372 644,835 EBITDA 145,070 137,440 5.6 148,920 (2.6) 641,760 810,786 1,070,712 Depreciation & amortisation 25,860 24,750 4.5 27,450 (5.8) 167,060 225,937 277,167 EBIT 119,210 112,690 5.8 121,470 (1.9) 474,700 584,849 793,545 Less: Interest Expense 24,050 10,940 119.8 24,170 (0.5) 80,520 119,054 145,606 Add: Other income 24,560 16,240 51.2 20,120 22.1 99,490 107,052 104,523 Profit before tax 119,720 117,990 1.5 117,420 2.0 493,670 572,847 752,462 Less: Provision for Tax 30,440 33,450 (9.0) 28,830 5.6 133,460 163,897 211,555 Reported Profit 89,280 84,540 5.6 88,590 0.8 360,750 407,875 537,286 Adjusted Profit 89,280 84,540 5.6 88,590 0.8 360,750 407,875 537,286 No. of Shares outstanding (mn) 6,338 6,338 0.0 6,338 0.0 5,926 5,926 5,926 Adjusted Diluted EPS 14.1 13.3 5.6 14.0 0.8 60.9 68.8 90.7 Diluted Price to Earnings Ratio (P/E) (x) 18.9 16.7 12.7 Enterprise Value / EBITDA (x) 13.1 11.6 8.5 Return on Average Equity (ROAE) (%) 12.8 13.0 15.1

As % of net revenues 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Gross profit 25.3 32.1 26.4 31.7 30.3 33.8 EBIDTA 14.5 18.8 15.5 16.4 15.0 17.6 Net profit 8.9 11.5 9.2 9.2 7.5 8.8 Tax rate 25.4 28.3 24.6 27.0 28.6 28.1

21 Edelweiss Securities Limited Oil, Gas and Services

Company Description RIL is the largest private player in the refining, petrochemical and E&P sectors in India. While RIL’s refining complex in Jamnagar is the largest in the world and among the most complex, it is also among the largest integrated petrochemical producers globally. Apart from E&P in India, RIL has made significant investments in US shale gas. In terms of EBIT, Refining contribute 60% and Petrochemicals 30%. RIL is also expanding its presence in the areas of consumer retailing and telecom. EBIT contribution from retail is 2% while telecom operations has been commercially launched in September 2016, which we believe will have 3 years of start-up losses at EBITDA level. RIL has a weight of 9.1% in BSE Sensex and 7.5% in S&P CNX Nifty.

Investment Theme RIL’s strength lies in its ability to build businesses of global scale and execute complex, time- critical, and capital-intensive projects which will prove advantageous as it embarks on large investments in all core segments.

We expect non-regulated segments (refining, chemicals and shale) to contribute ~90% of incremental EBITDA over the next few years.

We are positive on both refining and chemicals. We believe refining margins in Asia will rise due to a “paradigm shift in regional refining dynamics” from West to East, which will favor a complex refiner like Reliance. Global utilization rates have bottomed out in chemicals.

RIL is currently in a capex phase, investing in world-scale projects like petcoke gasification, off-gas crackers and telecoms, which are expected to drive future growth.

Key Risks Slow down in global demand or larger than expected capacity additions could impact RIL’s refining and chemical margins.

Delay in the commissioning of key upcoming core projects: petcoke gasification and off-gas cracker, could significantly impact our earnings model.

Delays in government approvals for India E&P or weak domestic gas prices could hamper progress in upstream.

Weak US natural gas prices could lower the profitability of shale gas assets, though it could be offset by the liquids-rich acreages which are currently highly profitable.

Rupee appreciation may impact negatively as RIL is positively leveraged to the depreciating currency.

About two-fifths of RIL’s capex is in unrelated diversifications, especially telecoms & related. We believe that the telecom business shall have a long ~5 year gestation, before it becomes profitable.

22 Edelweiss Securities Limited Reliance Industries

Financial Statements

Key assumption Income statement (INR mn) Year to March FY18 FY19E FY20E FY21E Year to March FY18 FY19E FY20E FY21E MACRO ASSUMPTIONS Net revenue 3,916,770 5,416,188 6,077,751 7,205,616 GDP(Y-o-Y %) 6.5 7.1 7.6 7.6 Materials costs 2,674,660 3,774,959 4,026,471 4,808,578 Inflation (Avg) 3.8 4.5 5.0 5.0 Gross profit 1,242,110 1,641,230 2,051,280 2,397,038 Repo rate (exit rate) 6.0 6.0 6.5 6.8 Operating expenses 600,350 830,444 980,568 1,073,791 USD/INR (Avg) 64.5 70.0 72.0 72.0 EBITDA 641,760 810,786 1,070,712 1,323,247 SECTOR ASSUMPTIONS Depreciation 167,060 225,937 277,167 327,034 OIL AND GAS PRICE EBIT 474,700 584,849 793,545 996,213 Brent crude prices ($/bbl) 57.6 69.0 65.0 75.0 Less: Interest Expense 80,520 119,054 145,606 158,481 India natural gas price (USD/mmbtu) 2.7 3.2 3.6 4.0 Add: Other income 99,490.00 107,052.36 104,523.18 109,438.06 Profit Before Tax 493,670 572,847 752,462 947,170 COMPANY ASSUMPTIONS Less: Provision for Tax 133,460 163,897 211,555 262,892 Refining Less: Minority Interest 50 1,075 3,621 5,527 GRM (USD/bbl) 11.6 9.8 11.5 13.3 Base GRM (USD/bbl) 11.6 9.8 10.8 11.3 Associate profit share 590 - - - Cumulative inc. from Petcoke Gasification 0.0 0.0 0.7 2.0 Reported Profit 360,750 407,875 537,286 678,751 Refining throughput (mmt) 69.8 69.8 69.8 69.8 Adjusted Profit 360,750 407,875 537,286 678,751 Shares o /s (mn) 5,926 5,926 5,926 5,926 Petrochemical Adjusted Basic EPS 60.9 68.8 90.7 114.5 Chemicals production (mmt) 23.9 25.6 26.3 27.1 Diluted shares o/s (mn) 5,926 5,926 5,926 5,926 Chemicals EBITDA (USD/mt) 168 188 207 225 Adjusted Diluted EPS 60.9 68.8 90.7 114.5

Petrochemical Production (mmt) Adjusted Cash EPS 94.5 108.3 140.0 173.2 Total Cracker production 0.2 0.2 0.2 0.2 Dividend per share (DPS) 6.0 6.3 7.6 8.4 Production from Off-gas cracker 1.1 1.1 1.1 1.1 Dividend Payout Ratio(%) 11.5 10.7 9.8 8.5 Propylene/Benzene prod. from Refinery 0.4 0.4 0.4 0.4

Polymer 0.7 0.7 0.7 0.7 Common size metrics Polyester intermediates 1.2 1.5 1.5 1.5 Year to March FY18 FY19E FY20E FY21E Polyester 1.0 1.1 1.1 1.1 Materials costs 68.3 69.7 66.2 66.7 Staff costs 2.4 4.3 5.5 5.8 Petchem Margins (USD/mt) Naphtha cracking margins 1,046 968 915 963 S G & A expenses 12.9 11.0 10.6 9.1 Additional margins from off-gas cracker 0 60 50 60 Operating expenses 15.3 15.3 16.1 14.9 Polypropylene margins (10) 30 31 31 Depreciation 4.3 4.2 4.6 4.5 Paraxylene margins 0 0 0 0 Interest Expense 2.1 2.2 2.4 2.2 PTA margins 304 310 317 323 EBITDA margins 16.4 15.0 17.6 18.4 MEG margins 298 304 310 316 Net Profit margins 9.2 7.6 8.9 9.5

Growth ratios (%) Year to March FY18 FY19E FY20E FY21E Revenues 28.3 38.3 12.2 18.6 EBITDA 38.9 26.3 32.1 23.6 PBT 23.0 16.0 31.4 25.9 Adjusted Profit 20.6 13.1 31.7 26.3 EPS 20.6 13.1 31.7 26.3

23 Edelweiss Securities Limited Oil, Gas and Services

Balance sheet (INR mn) Cash flow metrics As on 31st March FY18 FY19E FY20E FY21E Year to March FY18 FY19E FY20E FY21E Share capital 59,220 59,220 59,220 59,220 Operating cash flow 745,090 448,099 716,117 1,216,048 Reserves & Surplus 2,875,840 3,237,064 3,718,369 4,335,541 Financing cash flow (20,010) (77,847) (165,535) (281,409) Shareholders' funds 2,935,060 3,296,284 3,777,589 4,394,761 Investing cash flow (682,900) (980,845) (228,612) (351,788) Minority Interest 35,390 36,465 40,086 45,613 Net cash Flow 42,180 (610,593) 321,970 582,852 Long term borrowings 1,441,750 1,818,978 1,840,031 1,782,683 Capex (739,530) (1,087,897) (333,136) (461,226) Short term borrowings 745,880 744,029 759,029 755,029 Dividend paid (41,036) (46,651) (55,981) (61,579) Total Borrowings 2,187,630 2,563,008 2,599,060 2,537,712

Long Term Liabilities 316,580 316,580 316,580 316,580 Profitability and efficiency ratios Def. Tax Liability (net) 245,430 253,370 268,438 288,866 Year to March FY18 FY19E FY20E FY21E Sources of funds 5,720,090 6,465,708 7,001,754 7,583,532 ROAE (%) 12.8 13.0 15.1 16.6 Gross Block 4,396,630 5,419,279 5,686,740 5,961,098 ROACE (%) 11.7 12.5 14.6 16.5 Net Block 3,160,310 3,957,022 3,947,316 3,894,639 Inventory Days 74 69 79 76 Intangible Assets 878,540 935,252 1,050,927 1,137,795 Debtors Days 12 12 12 12 CWIP (incl. intangible) 1,870,220 1,878,756 1,828,756 1,928,756 Payable Days 125 121 130 121 Total Fixed Assets 5,909,070 6,771,030 6,826,999 6,961,191 Cash Conversion Cycle (40) (39) (38) (33) Non current investments 252,590 252,590 432,550 432,550 Current Ratio 0.8 0.7 0.9 1.1 Cash and Equivalents 618,580 7,987 329,957 912,808 Gross Debt/EBITDA 3.4 3.2 2.4 1.9 Inventories 608,370 838,727 939,239 1,090,392 Gross Debt/Equity 0.7 0.8 0.7 0.6 Sundry Debtors 175,550 194,941 216,293 253,326 Adjusted Debt/Equity 0.7 0.8 0.7 0.6 Loans & Advances 49,950 119,113 123,005 174,555 Net Debt/Equity 0.5 0.8 0.6 0.4 Other Current Assets 498,620 486,040 495,419 505,267 Interest Coverage Ratio 5.9 4.9 5.4 6.3 Current Assets (ex cash) 1,332,490 1,458,861 1,593,995 1,843,580

Trade payable 1,068,610 1,428,367 1,440,367 1,737,156 Operating ratios Other Current Liab 1,324,030 596,393 741,380 829,442 Year to March FY18 FY19E FY20E FY21E Total Current Liab 2,392,640 2,024,761 2,181,747 2,566,598 Total Asset Turnover 0.7 0.9 0.9 1.0 Net Curr Assets-ex cash (1,060,150) (565,900) (587,751) (723,018) Fixed Asset Turnover 1.3 1.2 1.2 1.4 Uses of funds 5,720,090 6,465,708 7,001,754 7,583,532 Equity Turnover 1.4 1.7 1.7 1.7 BVPS (INR) 495.3 556.2 637.5 741.6

Valuation parameters

Free cash flow (INR mn) Year to March FY18 FY19E FY20E FY21E Year to March FY18 FY19E FY20E FY21E Adj. Diluted EPS (INR) 60.9 68.8 90.7 114.5 Reported Profit 360,750 407,875 537,286 678,751 Y-o-Y growth (%) 20.6 13.1 31.7 26.3 Add: Depreciation 167,060 225,937 277,167 327,034 Adjusted Cash EPS (INR) 94.5 108.3 140.0 173.2 Interest (Net of Tax) 58,752 84,992 104,669 114,494 Diluted P/E (x) 18.6 16.5 12.5 9.9 Others 26,318 (63,974) (44,897) (39,497) P/B (x) 2.3 2.0 1.8 1.5 Less: Changes in WC (132,210) 206,730 158,108 (135,266) EV / Sales (x) 2.1 1.7 1.5 1.2 Operating cash flow 745,090 448,099 716,117 1,216,048 EV / EBITDA (x) 13.0 11.5 8.4 6.3 Less: Capex 739,530 1,087,897 333,136 461,226 Dividend Yield (%) 0.5 0.6 0.7 0.7 Free Cash Flow 5,560 (639,798) 382,981 754,822 EV 8,419,340 9,406,386 9,124,090 8,485,417

Peer comparison valuation Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%) Name (USD mn) FY19E FY20E FY19E FY20E FY19E FY20E Reliance Industries 101,256 16.5 12.5 11.5 8.4 13.0 15.1 Bharat Petroleum Corporation 10,849 13.6 9.6 9.5 7.8 15.1 19.6 Hindustan Petroleum Corporation 5,236 6.9 5.2 7.9 6.9 20.0 23.5 Indian Oil Corporation 18,817 8.3 6.0 6.0 4.8 13.6 18.2 Median - 11.0 7.8 8.7 7.4 14.4 18.9 AVERAGE - 11.3 8.3 8.7 7.0 15.4 19.1 Source: Edelweiss research

24 Edelweiss Securities Limited Reliance Industries

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

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

Holding – Top10 Perc. Holding Perc. Holding Devarshi commercials 11.21 Srichakra commercial 10.87 Karuna commercials l 8.02 Life insurance corp 7.86 Tattvam enterprises 6.81 Capital group cos in 5.02 Reliance industries 4.06 Petroleum trust 3.8 Fmr llc 1.81 Vanguard group inc/t 1.77

*in last one year

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

No Data Available

*in last one year

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 27 Aug 2018 Sanjay U Mashruwala Sell 16000.00 13 Aug 2018 Sanjay U Mashruwala Sell 20000.00 06 Aug 2018 Deepak Datta Sell 17000.00 23 Jul 2018 Sanjay U Mashruwala Sell 28000.00 16 Jul 2018 Sanjay U Mashruwala Sell 60039.00

*in last one year

25 Edelweiss Securities Limited RATING & INTERPRETATION

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

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

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

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

Stock return < 1.25 x Sector return

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

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

RELATIVE RISK RATING

Ratings Criteria

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

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

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

Risk ratings are based on Edelweiss risk model

SECTOR RATING

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

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

26 Edelweiss Securities Limited Reliance Industries

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

Aditya Narain

Head of Research [email protected]

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

Recent Research

Date Company Title Price (INR) Recos

07 -Jan-19 Oil and Gas Demand slowdown to take a toll on earnings; Result Preview 27-Nov-18 Gujarat State Fusion of defensive play, 180 Buy Petronet growth and value; Company Update 14-Nov-18 Mahanagar Steady going; outlook 842 Buy Gas sanguine; Result Update

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

Buy Hold Reduce Total Rating Expected to

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

One year price chart 446 1,400

(INR) 297 1,280

149 1,160

- (INR) 1,040

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14

14

-

- -

-

-

-

-

- -

- - -

920

Jul

Jan

Jun

Oct

Apr

Sep Feb

Dec

Aug Nov

Mar May

800

18

18 18

18

18 18

18 19

18 18

18 18

18

-

-

-

-

-

-

- - - -

- -

-

Jul

Jan Jan

Jun

Oct

Apr

Feb Sep

Dec

Aug Nov

Mar May Reliance Industries

27 Edelweiss Securities Limited

Oil, Gas and Services

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28 Edelweiss Securities Limited Reliance Industries

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29 Edelweiss Securities Limited Oil, Gas and Services

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30 Edelweiss Securities Limited