India Equity Research Oil & Gas July 24, 2021

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RESULT UPDATE

KEY DATA Rating HOLD Stepping on the gas Sector relative Neutral Price (INR) 2,106 12 month price target (INR) 2,175 Reliance Industries (RIL) posted Q1FY22 EBITDA of INR257bn (up 38% Market cap (INR bn/USD bn) 13,794/185.2 YoY, flat QoQ) broadly in line with our estimate, and PAT of INR147bn Free float/Foreign ownership (%) 50.9/24.2 What’s Changed (up 46% YoY, down 1.1% QoQ). While O2C beat our expectations, Target Price  Rating/Risk Rating ⚊ Retail is a big miss. Jio Platforms’ performance is modest while ahead- of-schedule ramp-up in KG-D6 gas production is a big accelerator. QUICK TAKE We reckon the upstream business is poised to drive INR100bn growth Above In line Below in EBITDA by FY23E while refining margins are likely to recover. RIL’s Profit   Margins   latest INR750bn path-breaking “New Energy” investment plan towards Revenue green hydrogen and fuel cells should enable O2C to become carbon-   Growth neutral by 2035. Maintain ‘HOLD’ as a rollover to Q2FY23E edges up Overall   TP by 3% to INR2,175 at 9.7x EV/EBITDA . FINANCIALS (INR mn) Polymers drive O2C beat; KG-D6 gas ramp-up ahead of schedule Year to March FY20A FY21E FY22E FY23E O2C EBITDA surged 48% YoY, and improved 7.2% QoQ. As PP, PE and PVC prices Revenue 59,67430 46,69240 66,98817 79,72388 remain strong, downstream margins stood high with product deltas near or above EBITDA 8,82,170 8,07,370 11,14389 13,82304 Adjusted profit 3,93,540 4,91,280 5,28,842 6,79,723 five-year averages. Polymer domestic demand grew 28% YoY with sustained demand Diluted EPS (INR) 62.1 76.2 78.2 100.5 from essential sectors, e.g. food and FMCG packaging, and e-commerce packaging. EPS growth (%) (7.1) 22.8 2.6 28.5 Refining throughput remains flat YoY/QoQ led by utilisation of 106.5% on channel RoAE (%) 10.4 8.5 8.8 9.2 restocking. KG-D6 satellite cluster gas production commenced in Apr-21, two P/E (x) 33.9 27.6 26.9 20.9 months ahead of plan. Combined production from the R-cluster and Satellite cluster EV/EBITDA (x) 17.8 19.7 14.9 9.7 Dividend yield (%) 0.3 0.3 0.4 0.7 is ~18mmscmd. MJ fields will start from Q3FY23. Retail a big miss; subscribers additions offset muted RJio ARPU PRICE PERFORMANCE While Retail’s EBITDA rose 80% YoY (-46% QoQ), adjusted for the INR5.5bn

2,325 54,000 investment income, it grew 29% YoY (-55% QoQ). Only 61% of stores are operational 2,225 50,400 (94% in Q4FY21, 50% in 1QFY21) and footfalls plunged to 46% (88% in Q4FY21, 43% 2,125 46,800 in 1QFY21). Electronics & lifestyle clocked strong traction. JioMart has been 2,025 43,200 extended to 218 cities with ~415 total integrated stores. While RJio’s digital services 1,925 39,600 1,825 36,000 EBITDA rose 32% YoY (+3.6% QoQ), its ARPU slid 1.4% to INR138 (flat QoQ). Net Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 subscriber additions stood at 15mn (total 440mn). Meanwhile, RJio is adequately RIL IN Equity Sensex prepared to roll out the 5G network as spectrum becomes available.

Outlook: Diluted Retail, RJio PAT attributable to RIL; retain ‘HOLD’ Explore: Following a 33% stake sale, RJio’s PAT attributable to RIL rose 24% YoY for RJio versus standalone RJio growth of 39% YoY. Similarly, a 10% stake sale in Retail diluted standalone growth of 123% YoY to 100% YoY attributable to RIL. RJio and Retail contributed 26% to RIL’s PAT. Reiterate ‘HOLD/SN’ with a 3% TP hike to INR2,175.

Financial model Podcast Financials Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 15,44,390 8,82,530 75.0 14,95,750 3.3 EBITDA 2,57,940 1,86,830 38.1 2,57,830 0 Adjusted Profit 1,46,990 1,00,750 45.9 1,48,620 (1.1) Video Corporate access Diluted EPS (INR) 22.4 15.6 43.6 23.1 (2.7)

Jal Irani Shubham Mittal Iqbal Khan +91 (22) 6620 3087 +91 (22) 4063 5459 [email protected] [email protected] [email protected]

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

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Financial Statements

Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Total operating income 59,67,430 46,69,240 66,98,817 79,72,388 Share capital 63,392 64,450 67,616 67,616 Gross profit 19,15,030 17,42,230 18,98,843 23,91,298 Reserves 44,69,920 70,36,530 76,75,602 83,39,278 Employee costs 1,40,750 1,48,170 1,48,481 1,64,609 Shareholders funds 45,33,312 71,00,980 77,43,218 84,06,894 Other expenses 8,92,110 7,86,690 6,35,972 8,44,384 Minority interest 80,160 1,27,314 1,62,879 2,07,514 EBITDA 8,82,170 8,07,370 11,14,389 13,82,304 Borrowings 32,95,250 24,53,280 21,36,163 19,77,533 Depreciation 2,22,030 2,65,720 3,31,720 4,04,830 Trade payables 9,67,990 10,88,970 9,79,029 10,61,335 Less: Interest expense 2,20,270 2,11,890 1,87,816 1,95,772 Other liabs & prov 24,67,290 21,26,426 19,27,821 21,45,561 Add: Other income 1,39,560 1,63,270 1,49,852 1,82,715 Total liabilities 1,16,59,152 1,32,12,120 1,32,64,260 1,41,13,988 Profit before tax 5,79,430 4,93,030 7,44,706 9,64,417 Net block 43,59,200 45,10,660 45,94,108 46,11,348 Prov for tax 1,37,260 17,220 1,85,458 2,40,059 Intangible assets 9,67,380 9,01,920 15,88,674 15,78,139 Less: Other adj 0 0 0 0 Capital WIP 10,91,060 12,59,530 1,63,208 1,63,208 Reported profit 4,37,980 4,34,860 5,28,842 6,79,723 Total fixed assets 64,17,640 66,72,110 63,45,991 63,52,695 Less: Excp.item (net) 0 0 0 0 Non current inv 20,38,520 21,23,820 18,58,520 18,58,520 Adjusted profit 3,93,540 4,91,280 5,28,842 6,79,723 Cash/cash equivalent 10,38,350 16,98,430 23,89,242 30,25,418 Diluted shares o/s 6,339 6,445 6,762 6,762 Sundry debtors 1,96,560 1,90,140 2,10,459 2,31,576 Adjusted diluted EPS 62.1 76.2 78.2 100.5 Loans & advances 2,24,010 25,490 8,33,530 9,11,705 DPS (INR) 6.5 7.0 9.1 15.1 Other assets 17,44,072 25,02,130 18,06,479 19,14,035 Tax rate (%) 23.7 3.5 24.9 24.9 Total assets 1,16,59,152 1,32,12,120 1,32,64,260 1,41,13,988

Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Brent crude prices 60.9 44.8 62.0 65.0 Reported profit 4,37,980 4,34,860 5,28,842 6,79,723 ($/bbl) Add: Depreciation 2,22,030 2,65,720 3,31,720 4,04,830 GDP (%) 4.8 (6.0) 7.0 6.0 Interest (net of tax) 1,68,091 2,04,489 1,41,043 1,47,041 USD/ INR 70.7 75.0 73.0 72.0 Others (3,53,808) (4,89,557) 11,596 10,792 EBITDA margin (%) 14.8 17.3 16.6 17.3 Less: Changes in WC 5,06,678 (1,53,662) 5,18,540 72,809 Net profit margin (%) 6.6 10.5 7.9 8.5 Operating cash flow 9,80,970 2,61,850 15,31,741 13,15,196 Revenue growth (% YoY) 5.2 (21.8) 43.5 19.0 Less: Capex 7,65,170 10,58,370 9,54,890 4,11,534 EBITDA growth (% YoY) 5.1 (8.5) 38.0 24.0 Free cash flow 2,15,800 (7,96,520) 5,76,851 9,03,662 Adj. profit growth (%) (0.6) 24.8 7.6 28.5 Key Ratios Assumptions (%) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E RoE (%) 10.4 8.5 8.8 9.2 GDP (%) 4.8 (6.0) 7.0 6.0 RoCE (%) 10.6 8.0 9.5 11.2 Petchem EBITDA ($/ mt) 138 159 130 135 Inventory days 64 97 62 55 USD/ INR 70.7 75.0 73.0 72.0 Receivable days 15 15 11 10 Chemical prod (mmt) 31.6 32.5 33.4 36.3 Payable days 92 128 79 67 Retail area (mn sq ft) 28.7 31.6 34.7 39.9 Working cap (% sales) (12.2) (2.7) 5.9 4.6 No. of stores 11,784 12,962 14,259 15,685 Gross debt/equity (x) 0.7 0.3 0.3 0.2 Rjio subscribers (mn) 387.5 426.2 485.6 513.6 Net debt/equity (x) 0.5 0.1 0 (0.1) GRM ($/bbl) 8.9 6.2 7.7 9.0 Interest coverage (x) 3.0 2.6 4.2 5.0 Ref. throughput (mmt) 70.6 63.3 68.7 69.9 Valuation Drivers Valuation Metrics Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E EPS growth (%) (7.1) 22.8 2.6 28.5 Diluted P/E (x) 33.9 27.6 26.9 20.9 RoE (%) 10.4 8.5 8.8 9.2 Price/BV (x) 2.9 1.9 1.8 1.7 EBITDA growth (%) 5.1 (8.5) 38.0 24.0 EV/EBITDA (x) 17.8 19.7 14.9 9.7 Payout ratio (%) 11.0 12.1 13.5 17.5 Dividend yield (%) 0.3 0.3 0.4 0.7 Source: Company and Edelweiss estimates

2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

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Reported consolidated EBITDA performance % change % change Consol Segmental EBITDA (INR mn) Q1FY22 Q1FY21 Q4FY21 Edelweiss estimate Deviation (%) YoY QoQ O2C 1,22,310 82,480 48.3 1,14,070 7.2 1,17,932 3.7 Oil and Gas 7,970 403 NM 4,800 NM 13,171 NM Retail (reported) 19,530 10,830 80.3 36,230 (46.1) 26,651 (26.7) Digital services 92,680 70,050 32.3 89,450 3.6 88,199 5.1 Others 15,651 15,810 NM 13,625 NM -5,348 NM Total EBITDA (Reported) 2,57,940 1,86,830 38.1 2,57,830 0.0 2,40,523 7.2 Total EBITDA (Adjusted) 2,42,289 1,71,020 41.7 2,44,205 (0.8) 2,40,523 0.7 Source: Edelweiss Research Retail margin adjusted for investment income rose merely 30bps YoY While RRL’s net revenue jumped 19% YoY to INR336bn in Q1FY22 (INR282bn YoY), adjusted EBITDA margin, excluding the impact of investment income of INR5.5bn, increased merely 30bps YoY to 4.1%. Consolidated EBITDA performance after adjusting for investment income reported as part of Retail EBITDA % change % change Consol Segmental EBITDA (INR mn) Q1FY22 Q1FY21 Q4FY21 Edelweiss estimate Deviation (%) YoY QoQ O2C 1,22,310 81,660 49.8 1,14,070 7.2 1,17,932 3.7 Oil and Gas 7,970 -320 NM 4,800 NM 13,171 NM Retail (reported) 19,530 10,880 79.5 36,230 (46.1) 26,651 (26.7) Investment Income 5,510 5,340 3.6 Retail (adjusted) 14,020 10,880 28.9 30,890 (54.6) 26,651 (47.4) Digital services 92,680 70,050 32.3 89,450 3.6 88,199 5.1 Others 15,450 16,580 (6.8) 13,080 NM -5,348 NM Total EBITDA (Adjusted) 2,52,430 1,86,830 35.1 2,52,290 0.1 2,40,523 5.0 Total EBITDA (Reported) 2,57,940 1,86,830 38.1 2,57,630 0.1 2,40,523 7.2 Source: Edelweiss Research Hugely diluted Retail and RJio PAT attributable to RIL As RIL received a mammoth USD35bn cash infusion from equity sales, two major implications kick in: i) Retail: With a 10% stake sale, estimated growth in profits attributable to RIL narrowed to 100% YoY in Q1FY22 versus 123% YoY in the overall retail reported PAT. ii) RJIO: Similarly, estimated growth in profit attributable from RJio narrows down to 24% YoY (stake sale of 25% in Q1FY21) versus standalone reported growth of 39% YoY due to the 33% stake sale. Also, importantly, while consumer-facing businesses RJio and Retail optically contributed about 42% to RIL’s EBITDA in Q1FY22, actually they contributed only 26% to RIL’s overall consolidated PAT. Second, the quality of profit suffers as RIL’s investment income of INR5.5bn overshadows core earnings growth following cash infusions.

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Highly diluted net profit attributable to RIL

Change Change Profits attributable to RIL (INR million) Q1FY22 Q1FY21 Q4FY21 YoY % Q0Q% RJIO (Standalone) 35,010 25,200 39% 33,600 4% RIL stake (%) 67% 75% 67% RJIO (Profits attributed to RIL) 23,467 18,976 24% 22,522 4% Retail (Reported) 9,620 4,310 123% 22,470 -57% RIL stake (%) 85% 95% 85% Retail (Reported Profits attributed to RIL) 8,182 4,101 100% 19,111 -57% O2C & Others 91,081 1,09,253 -17% 90,637 0% Total profits attributable to RIL (Reported) 1,22,730 1,32,330 -7% 1,32,270 -7% Source: Edelweiss Research

Stake sale has resulted in dilution of attributable PAT from RJio/Retail

100% 3 9 12 7 14 14 20 19 80% 17 17

60%

40% 83

71 71 69 74 Reliance PAT mix mix % PATReliance 20%

0% Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22

O2C & Others Rjio Retail

Source: Edelweiss Research

Q1FY22 EBITDA growth drivers—O2C surges

363 7,567 8,700 14,650 2,57,940 39,830 1,86,830

1QFY21 O2C Oil & Gas Retail Digital Others 1QFY22 Services

Source: Edelweiss Research

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Segmental EBITDA forecast breakdown: CAGR of 24% through FY25E

(INR bn) FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E FY25E Segmental EBITDA Petrochemical EBITDA 137 165 259 376 309 252 316 353 395 440 Refining EBITDA 267 286 290 230 240 132 194 220 235 252 Oil and Gas EBITDA 17 4 10 15 7 4 55 102 154 176 Retail EBITDA 9 12 24 60 97 98 128 176 242 306 Telcom/Digital EBITDA 67 151 216 340 393 504 573 658 Consolidated EBITDA 417 462 642 839 882 807 1,114 1,382 1,626 1,857 Consol PAT (ex minority interest) 301 300 361 393 388 445 493 635 774 905 Net profit (ex Telco) 301 300 353 364 331 325 334 433 542 629 PAT growth (YoY) 20% 9% -1% 15% 11% 29% 22% 17% PAT growth (CAGR over FY21) 11% 19% 20% 19% EBITDA growth (CAGR over FY21) 35% 31% 28% 24% Source: Edelweiss Research

Segmental PAT forecast breakdown: We expect PAT CAGR of 22% through FY25E

(INR bn) FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E FY25E Segmental PAT Refining, petchem, gas 277 314 336 352 309 319 363 453 532 596 Telecom/Digital 0 0 7 30 57 120 159 202 232 276 Retail 3 5 13 33 58 62 77 108 150 191 Consolidated PAT 300 299 361 396 394 435 529 680 826 967 PAT growth (YoY) 21% 10% -1% 10% 22% 29% 22% 17% PAT growth (CAGR over FY21) 22% 25% 24% 22% Source: Edelweiss Research On track to achieve zero net debt We believe RIL will comfortably achieve zero net debt by FY22 following its rights issue and stake monetisation in several businesses, even after accounting for creditor capex and spectrum liabilities. Adding the creditor capex of INR500bn and spectrum liability of INR200bn, we reckon an adjusted net debt figure of about INR2.57tn. Along with free cash flows, we believe RIL will comfortably turn net cash by FY22E.

Zero net debt, even after creditor capex and spectrum liabilities

2,700 2576 1521

2,100

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

Net bn) (INR Cash Debt/ Net 76 377 300 300 - 230

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

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RELIANCE INDS.

Upstream KG-D6: Embarked on big growth opportunity in Apr-21

EBITDA came in at INR7.9bn (INR4.8bn in Q4FY21) as the second cluster field producing gas is in full swing ahead of deadlines. With ramp-up of gas production from R cluster and commencement of Satellite cluster field, the KG-D6 production has more than doubled compared with Q4FY21.

The combined production from these two fields is now > 18MMSCMD, well ahead of plan.

Domestic

KG-D6: Produced 33.14BCF of gas (RIL’s share) during 1QFY22 compared with nil production in 1QFY21.

CBM produced 2.70BCF during 1QFY22 compared with 3.05BCF in 1QFY21.

KG-D6 gas sales contracts: Following the completion of the third round of bidding, total volume of 18MMSCMD of gas has been successfully contracted in the domestic market.

Once all the KG-D6 gas fields are commissioned by FY23, it will contribute 30mmscmd at peak level (~15% of India’s domestic consumption) and generate EBITDA of INR100–120bn by FY25E (~5% of consolidated EBITDA). Its profit share will also increase handsomely from zero currently to 2–3% of consolidated PAT. R cluster has commenced operations and is producing ~4.5mmscmd of gas. Satellite cluster too has commenced operation from Apr-21, two months ahead of deadline. Total average production for Q1 remains strong at 16.6mmscmd. R cluster is commissioned and producing ~5mmscmd of gas

 All wells have been drilled, completed, tested and connected; sub-sea installation and testing works have been completed too. The remaining works on Control & Riser Platform are currently underway.

 Full commissioning will be done by CY21, but started production of 5mmscmd.

Satellite cluster is way ahead of timelines, producing ~13mmscmd at peak

 All five wells have been completed. The Drilling and Completion campaign is underway. The final installation campaign is on track and had commenced production in Apr-21, two months ahead of schedule.

 Combined production from these two fields is expected at >18MMSCMD, ~20% of India’s current gas production.

MJ field: Development by FY23 and will yield 12–14mmscmd

 The Drilling & Completion campaign is underway. First Offshore Installation campaign is on track for 1HFY22. Pre-commissioning and commissioning likely in Q3FY23.

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MJ development project progress

Source: Edelweiss Research, Company

Gas sales process in full swing

 Conducted three rounds of bidding, including two rounds of bidding for KG-D6 gas.

 Competitive bidding with participation from various industries; signed GSPA with 19 successful bidders.

 Gas price realization expected to be higher in FY22.

KGUDW1 development still in progress

Infrastructure-led exploration is planned in proven geological fairways.  All nine anchor piles installed.

 Buoy delivered and towed to the field; Installation in progress.

 All mooring lines pre-laid; installation (connection) in progress.

 FPSO and Subsea Production System on track

MJ: Subsea production system MJ: FPSO

Source: Edelweiss Research, RIL Source: Edelweiss Research, RIL

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MJ: Buoy installation

Source: Edelweiss Research, RIL

RIL’s total domestic gas production surged after many quarters of dip

7.5 15.0 6.0 12.0

4.5 9.0 (Kbopd)

3.0 6.0 (mmscmd)

1.5 3.0

0.0 0.0

Q1FY16 Q3FY16 Q1FY17 Q3FY17 Q1FY18 Q3FY18 Q1FY19 Q3FY19 Q1FY20 Q3FY20 Q1FY21 Q3FY21 Q1FY22 Oil production Gas production (RHS)

Source: Edelweiss Research

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Rjio: Modest quarter with strong wave in coming quarters Key Q4FY21 result takeaways  RJio’s results are broadly in line with our estimates. Revenue increased 3.7% QoQ versus our 5% QoQ expectation. ARPU was flat QoQ – INR138.4 in Q1FY22 (INR138.2in Q4FY21) versus our expectation of INR140.

 EBITDA margin edged up 10bps QoQ to 47.9%, taking EBITDA to INR86.2bn (Our estimate – INR88.2bn).

 RJio maintained subscriber addition momentum – 14.3mn in Q1FY22 versus 15.3mn in Q4FY21 and 5.2mn in Q3FY21 – taking the total subscriber base to 440.6mn. Subscriber addition was higher than our 11mn estimate. The company has operationalised the spectrum acquired in the auction, which has enhanced network capacity, thereby improving the experience. This is also reflected in stronger data volume growth.

 Data usage per customer further increased to 15.6GB, from 13.3GB in Q4FY21. This KPI may also have an impact of FTTH subscriber contribution.

We attribute RJio’s increased subscriber addition to improved capacity due to operationalization of the spectrum acquired during the auction and increased churn from Vodafone Idea (VI).

We believe both factors are likely to aid subscriber addition for a few quarters. With the Supreme Court dismissing telcos’ plea on AGR re-computation, VI’s survival calls for higher tariff and fund raise in our view. This gives Bharti and RJio an opportunity to further consolidate their market shares.

Hence, we believe that in absence of tariff hike, Bharti and RJio will see accelerated market share gains, which will drive revenue growth.

Incrementally, RJio is focusing on indigenously developing 5G technology. At the analyst meet, the company mentioned that 5G standalone network has been installed at its data centres across the country and that it would be ready to roll out 5G once spectrum is available.

While we remain positive on further industry consolidation benefitting Bharti and RJio, early 5G deployment will remain a key risk, considering the investments involved in a 5G rollout.

We do believe that a meaningful rollout will happen from CY23 onwards, particularly considering an underdeveloped ecosystem for 5G.

For digital business, the company has not divulged any KPIs. Overall, we maintain our hypothesis that market is optimistic on RJio’s digital offerings, and there could be some disappointment considering the company has not been able to secure leadership in any vertical.

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RELIANCE INDS.

RJio continues to be operator of choice for 440mn subscribers

441 450 388 398 406 411 426 370 380 355 331 307 310 280

(mm) 252 240 187 215 160 170 139 123 109

100

Q4FY17 Q1FY22 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY18 Source: Edelweiss Research

RJio: Quarterly financial snapshot

INR mn Q1FY22 Q4FY21 % QoQ Q1FY21 % YoY

Revenue from Operations 1,79,940 1,73,580 3.7 1,65,570 8.7

Network Operating expense 59,730 57,540 3.8 52,250 14.3

Access charges (net) 1,700 1,790 (5.0) 13,930 (87.8)

Employee benefits expenses 3,380 3,450 (2.0) 3,180 6.3

Selling and distribution expenses 2,570 3,050 (15.7) 2,750 (6.5)

Other expenses 5,150 5,330 (3.4) 5,230 (1.5) Operating expenses other than spectrum 72,530 71,160 1.9 77,340 (6.2)

License fee / Spectrum charges 21,240 19,520 8.8 18,180 16.8

EBITDA 86,170 82,900 3.9 70,050 23.0

EBITDA margin (%) 48 48 0.3 42 13.2

Depreciation 31,150 30,150 3.3 27,380 13.8

EBIT 55,020 52,750 4.3 42,670 28.9

Less: Interest cost 8,210 8,000 2.6 11,680 (29.7)

Add: Other income 140 230 (39.1) 2,760 (94.9)

Profit / (loss) before tax 46,950 44,980 4.4 33,750 39.1

Current tax - - -

Deferred tax 11,940 11,380 4.9 8,550 39.6

Less: Provision for tax 11,940 11,380 4.9 8,550 39.6

Net Profit / (Loss) 35,010 33,600 4.2 25,200 38.9 Source: Edelweiss Research

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RELIANCE INDS.

RJio: -Statement of profit & loss FY20 FY21 FY22 FY23 FY24 FY25 Subscribers (mn) 387.5 426.2 485.6 513.6 538.6 563.6 ARPU (INR) 127 143 147 171 182 193 Total revenues (INR mn) 5,28,360 6,98,880 8,04,506 10,24,329 11,52,001 12,79,239 YoY growth (%) 36.0 32.3 15.1 27.3 12.5 11.0

Operating Costs Network opex 1,69,300 2,20,580 2,52,516 3,12,610 3,50,040 3,74,299 % of revenue 32.0 31.6 31.4 30.5 30.4 29.3

License and WPC charges 57,200 77,550 95,165 1,21,500 1,36,624 1,51,713 % of revenue 10.8 11.1 11.8 11.9 11.9 11.9

Termination Cost 43,150 46,310 8,570 11,268 12,672 14,072 % of revenue 8.2 6.6 1.1 1.1 1.1 1.1

Employee costs 14,630 13,370 15,871 23,560 26,496 29,422 % of revenue 2.8 1.9 2.0 2.3 2.3 2.3

Subscribers acquisition and Servicing Expenses 12,770 11,720 15,061 20,487 23,040 25,585 % of revenue 2.4 1.7 1.9 2.0 2.0 2.0

Admin & Other exp 15,640 20,220 23,887 30,645 30,030 26,566 % of revenue 3.0 2.9 3.0 3.0 2.6 2.1 Total Costs 3,12,690 3,89,750 4,11,071 5,20,069 5,78,903 6,21,657

EBITDA (INR mn) 2,15,670 3,09,130 3,93,435 5,04,260 5,73,098 6,57,581 EBITDA Margin 40.8 44.2 48.9 49.2 49.7 51.4 Depreciation (INR mn) 73,960 1,15,340 1,39,913 1,80,162 2,06,377 2,34,287 Spectrum 8,138 12,691 15,394 19,823 22,707 25,778 Depreciation on other assets 15,047 23,466 28,466 36,655 41,988 47,666 Depreciation on incremental capex 52,296 81,555 98,930 1,27,390 1,45,926 1,65,661 EBIT (INR mn) 1,41,710 1,93,790 2,53,522 3,24,097 3,66,721 4,23,295

Interest (INR mn) 66,170 38,400 42,320 56,070 59,067 56,667 on 4G spectrum on 1800MHz (round 1 auction) on 800 + 1800MHz (round 2 auction) on 800 + 1800MHz + 2300 (round 3 auction) Interest on funds raised for capex @ 5% 870 5,480 1,640 2,000 2,000 2,000 Add : Other income PBT (INR mn) 76,410 1,60,870 2,12,842 2,70,028 3,09,654 3,68,628

Tax 19,330 40,720 53,695 67,966 77,940 92,784

PAT (INR mn) 57,080 1,20,150 1,59,147 2,02,062 2,31,714 2,75,844

Capex (INR mn) 2,34,280 2,20,873 2,55,383 3,15,409.50 3,82,472.62 3,97,878.23 Cumulative Capex 19,91,280 22,12,153 24,67,536 27,82,945 31,65,418 35,63,296

Source: Edelweiss Research

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RELIANCE INDS.

RJio: -NPV analysis DCF ANALYSIS FY18 FY19 FY20 FY21 FY22 FY23 FY24 EBIT*(1-t) 23,626 65,084 1,06,042 1,45,013 1,89,710 2,42,522 2,74,417 Depreciation (INR mn) 35,765 63,984 73,960 1,15,340 1,39,913 1,80,162 2,06,377 Gross Cash Flow (INR mn) 59,391 1,29,068 1,80,002 2,60,353 3,29,623 4,22,684 4,80,794 Working Capital (INR mn) (4,61,890) (3,83,460) 46,740 12,590 15,896 16,800 17,324 Investment in WC (INR mn) (48,127) 78,430 4,30,200 (34,150) 3,306 903 525 Capex (INR mn) 5,01,957 (5,38,339) 2,34,280 2,20,873 8,55,383 3,15,410 3,82,473 FCFF (INR mn) (3,94,439) 5,88,977 (4,84,478) 73,630 (5,29,066) 1,06,372 97,797 FCFF growth (%) PV FCF (3,94,439) 5,88,977 (4,84,478) 66,036 (4,25,559) 76,736 63,274 NPV (INR mn) 44,22,633 FY22 Debt (INR mn) 10,44,450 NPV of equity (INR mn) 33,78,183 Cumulative Investments 23,73,570 EV/IC 1.9 Source: Edelweiss Research

RJio: NPV analysis (contd..) DCF ANALYSIS FY25 FY26 FY27 FY28 FY29 FY30 Terminal Value EBIT*(1-t) 3,16,751 3,38,679 3,34,076 3,29,958 3,36,624 3,54,582 Depreciation (INR mn) 2,34,287 2,71,244 3,28,498 3,85,188 4,39,412 4,83,282 Gross Cash Flow (INR mn) 5,51,038 6,09,923 6,62,574 7,15,146 7,76,036 8,37,864 Working Capital (INR mn) 17,847 18,377 18,785 19,195 19,631 20,096 Investment in WC (INR mn) 523 530 409 409 436 465 Capex (INR mn) 3,97,878 2,72,548 2,70,376 2,41,070 2,56,992 2,37,438 FCFF (INR mn) 1,52,637 3,36,845 3,91,789 4,73,667 5,18,608 5,99,961 83,19,458 FCFF growth (%) PV FCF 88,570 1,75,300 1,82,864 1,98,278 1,94,700 2,02,011 28,01,215 NPV (INR mn) 44,22,633 FY22 Debt (INR mn) 10,44,450 NPV of equity (INR mn) 33,78,183 Cumulative Investments 23,73,570 EV/IC 1.9 Source: Edelweiss Research

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RELIANCE INDS.

Global valuation comparison with telecoms companies

Div yield EPS CAGR Mcap Adjusted EPS (LC) EV/EBITDA( x) ROCE (%) Company (%) (%) (USD mn) FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY21-23E India Telecom Vodafone Idea Ltd 3,798 (9.2) (6.2) (4.8) 8.3 6.6 5.5 9.9 2.2 1.2 0.0 NA Bharti Airtel Ltd 40,386 (16.1) 9.3 20.3 8.5 7.2 6.4 2.9 5.4 6.9 0.5 NA Reliance Jio NA 2.7 3.5 4.5 22.6 15.8 12.4 10.0 12.7 15.2 NA 29.7 Reliance Consol 1,85,804 76.2 78.2 100.5 19.7 14.9 9.7 8.0 9.5 11.2 0.3 14.8 India Telecom-Mean (7.5) 2.2 6.7 13.1 9.8 8.1 7.6 6.8 7.8 0.3 29.7 US Telecom AT&T INC 2,09,345 3.2 3.1 3.2 7.4 7.5 7.6 6.3 5.8 6.3 7.1 0.3 Verizon Communications Inc 2,37,350 5.1 5.2 5.3 8.0 7.7 7.6 8.8 8.0 7.2 4.4 2.2 US Telecom-Mean 4.1 4.2 4.3 7.7 7.6 7.6 7.5 6.9 6.8 5.8 1.3 Europe Telecom Telenor Asa 24,272 9.0 10.0 10.5 6.2 6.0 5.8 7.6 9.3 10.6 6.5 8.2 Telefonica Sa 28,629 0.4 0.4 0.4 5.6 6.0 5.9 4.6 4.3 4.7 7.4 4.5 Deutsche Telekom Ag-Reg 1,03,363 1.1 1.3 1.5 7.0 6.7 6.2 3.5 4.1 4.9 3.4 14.0 Europe Telecom-Mean 3.5 3.9 4.1 6.2 6.2 6.0 5.2 5.9 6.7 5.7 8.9 APAC Telecom China Telecom Corp Ltd-H 25,548 0.3 0.3 0.3 1.8 1.8 1.7 4.9 5.0 5.1 5.7 5.3 China Tower Corp Ltd-H 24,265 0.0 0.1 0.1 4.2 3.9 3.8 2.6 3.3 3.6 3.4 18.9 Nippon Telegraph & Telephone 1,03,068 249.3 301.3 314.5 6.0 6.0 5.9 6.8 6.5 6.5 3.8 12.3 APAC Telecom-Mean 83.2 100.5 104.9 4.0 3.9 3.8 4.7 4.9 5.1 4.3 12.2 Middle-East Telecom Saudi Telecom Co 73,699 5.8 6.0 6.3 11.6 11.2 11.0 14.2 14.0 13.9 3.3 4.3 Middle East -Mean 5.8 6.0 6.3 11.6 11.2 11.0 14.2 14.0 13.9 3.3 4.3 Source: Edelweiss Research

FAANG valuation snapshot

EPS CAGR FCF OCF (USD Mcap EV/EBITDA( x) ROE (%) FY21-23E P/E (x) P/B (x) EV/ Sales (x) (USD bn) bn) Company (%) (USD mn) FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY21 FY21 FY21 FY22E FY23E RIL Consolidated 1,85,804 19.7 14.9 9.7 9.1 7.5 8.8 14.8 27.5 26.8 20.9 -10.6 3.5 1.9 2.6 3.4 2.5 FAANG Facebook 9,39,276 17.8 14.3 12.2 23.2 25.1 22.5 14.9 28.3 23.2 20.0 23.6 38.7 6.0 7.7 6.4 5.4 Amazon 16,87,886 31.1 22.2 18.0 23.2 25.7 23.2 29.5 63.7 49.6 39.6 25.9 66.1 12.4 3.5 3.0 2.5 Apple 21,25,170 23.3 18.0 18.0 70.7 129.0 130.2 3.8 28.7 24.6 23.9 73.4 80.7 34.5 5.7 5.5 5.3 Netflix 2,16,722 42.9 33.0 26.8 30.0 36.5 34.8 24.1 51.0 45.3 38.2 1.9 2.4 15.3 7.6 6.6 5.8 Alphabet 16,57,644 18.8 16.7 14.4 17.3 25.7 23.5 15.6 40.2 25.2 22.8 42.8 65.1 6.6 7.9 6.8 5.8 FAANG- mean 26.8 20.9 17.9 32.9 48.4 46.9 17.6 42.4 33.6 28.9 33.5 50.6 14.9 6.5 5.7 5.0

Source: Edelweiss Research

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RELIANCE INDS.

Retail: Low margin QoQ on restricted store operations RRL’s net revenue increased substantially by 19% YoY to INR336bn in Q1FY22 (INR282bn YoY), largely attributable to the resilient grocery business, growth in fashion & lifestyle and electronics and digital + new commerce (20% mix in Q1FY22). However, revenue dropped 19% QoQ on account of restricted store operations in Q1FY22. Reported EBITDA margin improved 200bps YoY to ~6% in Q1FY22 (but down 300bps QoQ). However, excluding the impact of investment income of INR5.5bn, margin improved merely 30bps YoY to 4.1%. Imposition of regional lockdowns in the wake of the second wave reduced operational to 61% in Q1FY22 from 94% QoQ resulting in a decline in overall footfall to 46% of pre-covid levels in Q1FY22 versus 88% in Q4FY21. Store expansion also remained a constraint on account of imposition of regional lockdown in Q1FY22. Fashion & lifestyle: Omni-commerce capabilities reaps fruit in current tough times Apparel and footwear revenue surged 3x YoY on better trading conditions. Small towns turned in a resilient performance and operating metrics remained well above average. AJIO continued to scale new heights, MAU and order were up >4x YoY. Own brand share increased to 27% during the quarter with launch of 500 new labels. Reliance Jewels revenue increased 2.5x YoY on higher operational days and better product mix. Luxury and premium brands’ digital commerce also scaled up with expansion in portfolios. Hamleys registered a strong rebound on the UK re-opening. Consumer Electronics: Highest-ever quarterly sales from reliancedigital.in During the quarter, the company bolstered digital commerce and maximized extraction from operational stores. Revenue increased 1.8x YoY (record quarter sales) boosted by Omni-channel platforms, financing tie-ups, exchange offers and launches. Grocery: Resilient performance despite covid-related lockdown While grocery business reporting YoY growth in continuing business, QoQ performance was impacted by operating restrictions. JioMart scales up further with 25% QoQ increase in orders with high repeats, and its coverage extended to 218 cities. Outlook: Funnel of initiatives in progress on expansion and activation With easing of lockdown restrictions, Reliance Retail is likely to accelerate new store openings, scale up digital commerce and expand category on JioMart. It is likely to grow new commerce merchant partnerships across businesses and geographies. Besides, it will launch or scale up new businesses such as JioMart Digital, Market Place, Beauty, Urban Ladder and Zivame.

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RELIANCE INDS.

Covid wave halted store expansion during the quarter

1QFY22 Total Addition Region Store Count Area (Sqft mn) Store Count Area (Sqft mn) North 2,859 6.2 6 0.1 South 3,721 13.0 56 0.4 East 2,787 5.6 17 0.1 West 3,358 8.9 43 0.2 International 78 0.8 1 - Total 12,803 34.5 123 0.8 Source: Edelweiss Research

Area under coverage rose 18% YoY; revenue per sq ft fell 17% YoY

35 20,000

28 16,000

21 12,000

(sq. ft.) (sq. 14 8,000

7 4,000

0 0

Q4FY19 Q1FY20 Q1FY19 Q2FY19 Q3FY19 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22

Area under coverage (Sqft) Revenue per sqft (RHS)

Source: Edelweiss Research

Margins improved YoY but plunged sequentially hit by covid-related restrictions Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Revenue (INR mn) 2,31,080 3,24,360 3,55,770 3,26,190 3,81,960 4,12,020 4,53,270 3,44,020 3,16,330 3,65,660 3,30,180 4,12,960 3,35,660 Revenue growth YoY % 99.7 121.5 89.3 34.9 65.3 27.0 27.4 5.5 (17.2) (11.3) (27.2) 20.0 6.1 EBITDA (INR mn) 12,060 13,920 16,800 19,230 20,490 23,220 27,270 25,560 10,830 20,090 30,870 36,170 19,410

EBITDA Margins % 5.2 4.3 4.7 5.9 5.4 5.6 6.0 7.4 3.4 5.5 9.3 8.8 5.8 Source: Edelweiss Research

Rapidly growing e-retail prospects in India  India's e-commerce retail market stood at USD30bn in 2019 and is likely to expand at a CAGR of 30% over (2019–26), thereby improving market penetration to 12% from 2% currently. (Source: Invest India)

 Online digital spending in India is estimated to be USD45–50bn and is projected to increase 11x to USD550bn by 2025. (Source: Invest India)

 Flipkart and Amazon together accounted for ~63% of overall e-retail market share in India in 2018. (Source: Forrester Research)

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RELIANCE INDS.

India e-retail market is likely to post 30% CAGR over 2019–26

250 15%

200 12%

150 9%

100 6%

50 3%

0 0% 2019 2026

India E-commerce retail market (USD bn) Market penetration (%)

Source: Edelweiss Research

Flipkart and Amazon made up bulk of e-retail market share in 2018

Indian E-Commerce market, 2018 (%)

Flipkart 26.20% 31.90% Amazon Myntra Paytm mall 1.80% Snapdeal 1.90% 3.30% Big basket 4.70% Others

31.20%

Source: Edelweiss Research

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RELIANCE INDS.

Operational peer matrix: RIL’s revenue/sq ft has risen 2x to highest EBITDA/sq ft

FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E Revenue(INR mn) Reliance Retail 183300 264377 514562 1019465 1303674 1577445 1943412 2681909 Vmart 8093 10017 12224 14337 16620 10755 16298 22147 Dmart 85838 118977 150332 200045 248702 241431 322217 411271 EBITDA (INR mn) Reliance Retail 9120 11632 23643 59201 91390 102534 126322 174324 Vmart 620 826 1328 1329 2138 1312 2282 3012 Dmart 6636 9812 13528 16333 21283 17430 27952 36089 Area (mn sqft) Reliance Retail 12.8 13.5 17.7 22.0 28.7 31.6 34.7 39.9 Vmart 1.0 1.2 1.4 1.8 2.2 2.3 2.5 2.9 Dmart 3.3 4.1 4.9 5.9 7.8 8.7 10.1 12.1 Revenue(INR / sqft) Reliance Retail 14320 19583 29071 46339 45424 49967 55963 67155 Vmart 9072 9588 9876 9660 NA NA NA NA Dmart 28660 32026 33407 37045 36307 29264 34370 37177 Revenue / store (Mn/store) Reliance Retail 56.5 73.1 134.1 97.9 110.6 121.7 136.3 171.0 Vmart 65.8 71.0 71.5 67.0 62.5 38.5 52.7 63.5 Dmart 780.3 908.2 969.9 1136.6 1162.2 1031.8 1220.5 1331.0 EBITDA(INR / sqft) Reliance Retail 713 862 1336 2691 3184 3248 3638 4365 Vmart 612 691 922 743 972 570 898 1053 Dmart 1993 2393 2761 2768 2729 2003 2781 2989 EBITDA/ store (Mn/store) Reliance Retail 2.8 3.2 6.2 5.7 7.8 7.9 8.9 11.1 Vmart 5.0 5.9 7.8 6.2 8.0 4.7 7.4 8.6 Dmart 60.3 74.9 87.3 92.8 99.5 74.5 105.9 116.8 Stores Reliance Retail 3245 3616 3837 10415 11784 12962 14259 15685 Vmart 123 141 171 214 266 279 309 349 Dmart 110 131 155 176 214 234 264 309 OCF/ Capital employed Reliance Retail 15.6% 35.7% 4.6% 6.6% 14.9% 11.7% 12.0% 9.3% Vmart 17.5% 21.9% 16.7% 18.7% 9.7% 5.8% 9.9% 16.0% Dmart 16.6% 9.1% 14.7% 13.3% 11.3% 11.0% 16.8% 15.1% Source: Edelweiss Research

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RELIANCE INDS.

Retail valuation comparison

Div yield EPS CAGR Mcap EV/EBITDA( x) ROCE (%) Company (%) (%) (USD mn) FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY21-23E India Grocery Reliance Retail NA 43.3 29.0 18.6 35.6 42.5 50.0 0.0 55.7 Avenue Supermarts 28,162 79.7 54.3 42.7 12.1 15.7 16.9 0.0 50.0 India Grocery-Mean 61.5 41.7 30.7 23.9 29.1 33.5 0.0 52.8 India Apparel ABFRL 2,602 NA 24.6 18.5 11.1 15.1 14.4 0.0 NA Trent 4,202 64.5 36.2 30.1 0.2 10.1 15.2 0.1 NA V-Mart 753 25.3 17.7 14.2 NA NA NA 0.1 NA India Apparel -Mean 44.9 26.2 20.9 5.7 12.6 14.8 0.1 NA India Footwear Bata 2,875 34.8 23.7 20.9 11.6 12.9 13.9 0.4 NA India jewellery Titan 21,017 51.7 41.5 33.4 13.4 14.3 15.0 0.4 61.3 India retail-Mean 49.9 32.4 25.5 14.0 18.4 20.9 0.1 55.7 US Retailing GAP 12,200 7.3 NA 5.4 5.7 7.6 9.4 2.2 NA Kroger 29,307 6.7 6.6 6.5 6.7 6.2 5.9 1.9 -7.3 Costco 1,68,795 20.2 18.7 17.1 16.4 15.9 15.3 0.8 8.6 Walmart 3,94,402 12.0 11.6 11.1 11.0 11.6 12.0 1.6 5.8 US Retailing-Mean 11.6 12.3 10.0 9.9 10.3 10.7 1.6 2.4 Europe Retailing M&S 4,397 6.1 5.9 5.8 2.7 4.3 4.5 1.6 170.5 H&M 42,164 10.4 9.0 8.4 7.2 10.0 10.7 2.7 27.5 Inditex 1,19,646 13.4 12.4 11.7 16.0 17.4 18.0 3.0 69.3 Carrefour 17,046 6.0 5.7 5.4 4.4 4.4 4.5 3.1 11.7 Europe Retailing-Mean 9.0 8.2 7.8 7.6 9.0 9.4 2.6 69.7 Japan Retailing Fast Retailing 81,557 19.5 17.0 15.7 8.7 9.4 9.4 0.6 19.2 Japan Retailing-Mean 19.5 17.0 15.7 8.7 9.4 9.4 0.6 19.2 Source: Edelweiss Research Note: Reliance Retail is our model assumption

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RELIANCE INDS.

O2C: Petchem margins drive strong performance  Reported O2C EBITDA of INR122bn (+48% YoY, +7% QoQ), in line with our estimate.

 Downstream margins remained strong with product deltas near or above five- year averages.

 Total throughput increased from 17.8 MMT to 190 MMT on YoY basis. Cracker operating rates was at 95%, marginally lower on scheduled shutdown of ROGC.

 Favorable light-feed cracking environment and increased domestic gas availability helped O2C optimize its costs.

 Refinery throughput at 76.7 mb/d in Q1FY22 improved by 1.5mb/d QoQ, 7mb/d higher YoY.

 Cracker operating rates remained healthy at 82%, with strong product demand pull.

 PP, PE and PVC prices strengthened YoY by 53%, 49% and 103%, respectively, with higher feedstock prices and healthy global demand growth on the back of economic revival in US and Europe.

 On a YoY basis, PP and PE margins over naphtha strengthened by 15% (USD650/MT) and 3% (USD507/MT), respectively.

 PVC margins over naphtha/EDC strengthened by 43% (USD683/MT) YoY amid limited import availability.

 Oil supplies remained tight due to strong compliance to production targets by OPEC+ countries.

 Transportation fuel cracks gained momentum with stronger demand pull as economies reopened, particularly in the west. Mobility is 12% below pre-covid, largely due to ongoing restrictions in several emerging markets and constrained international aviation traffic

 Polymer domestic demand grew by 28% YoY off a lower base of 1Q last year due to nationwide lockdown with sustained demand from essential sectors, e.g. food and FMCG packaging, ecommerce packaging and health & hygiene.

 Polyester filament and fibre markets witnessed high growth rates with improved domestic downstream operations supported by firm international markets.

O2C operating excellence

Production meant for sale (mmt) Q1FY22 Q4FY21 Change Q0Q% Transportation fuels 9.8 9.9 -1% Polymers 1.4 1.5 -7% Fiber Intermediates 1.1 1.1 0% Polyster 0.6 0.6 0% Chemicals and Others 3 3.5 -14% Total 16.5 16.6 -1% Source: Edelweiss Research

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RELIANCE INDS.

Refinery throughput remains flat at 16.5MMT with 106% capacity utilisation 19.0 120.0

18.2 115.0

17.4 110.0 (%)

16.6 105.0 (mn tonnes) (mn

15.8 100.0

15.0 95.0

Q3FY15 Q1FY16 Q3FY16 Q1FY17 Q3FY17 Q1FY18 Q3FY18 Q1FY19 Q3FY19 Q1FY20 Q3FY20 Q1FY21 Q3FY21 Q1FY22 Refinery throughput Capacity utilisation (RHS)

Source: Edelweiss Research

FO/ naphtha cracks slip QoQ Gasoline and gasoil cracks improve QoQ 8.0 19.5

1.6 15.4

(4.8) 11.3

(11.2) (USD/bbl)

(USD/bbl) 7.2

(17.6) 3.1

(24.0) -1

Q1FY20 Q1FY16 Q3FY16 Q1FY17 Q3FY17 Q1FY18 Q3FY18 Q1FY19 Q3FY19 Q3FY20 Q1FY21 Q3FY21 Q1FY22

Q1FY22 Q1FY15 Q3FY15 Q1FY16 Q3FY16 Q1FY17 Q3FY17 Q1FY18 Q3FY18 Q1FY19 Q3FY19 Q1FY20 Q3FY20 Q1FY21 Q3FY21 Naphtha cracks Fuel oil Gasoline cracks Diesel cracks

Source: Edelweiss Research Source: Edelweiss Research

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RELIANCE INDS.

Product deltas and domestic demand Polyster chain margin and domestic demand

Source: Edelweiss Research, RIL ppt Source: Edelweiss Research, RIL ppt

O2C: First-mover advantage

Source: Edelweiss Research

Deep and unique integration across O2C sites

Source: Edelweiss Research, Company

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RELIANCE INDS.

Refining: Severe pain, greater gain; RIL highly competitive Indian refining capacities are significantly more competitive than globally capacity given 25% lower capital as well as operating cost than global refineries. They rank at the bottom of the operating and capex cost curves. We believe that the Indian refinery upgrades are well timed to enhancing complexity and distillate yields even further.

Managements across OMCs are focusing on upgradation of bottoms, which would replace low-margin heavy distillates with profitable light and middle distillates. Improving distillate yields are likely to structurally improve competitiveness of Indian refineries even further. While FGE expects the next few years to be very challenging for refiners, those that can successfully manage their way through them will likely see better times in the long term, perhaps even a Golden Age! Indian refiners dominate operating cost curve

6.0 5.7

5.0 4.1 4.0 3.5 3.0 3.0 2.5 2.7

(USD/ bbl) (USD/ 2.3 2.0 2.1 2.2 2.0

1.0

IOCL

BPCL

HPCL

BORL

HMEL

Thai Oil Thai

Reliance

USrefinery Japanrefinery

Operarting cost (USD/bbl) refinery Europe

Source: Edelweiss Research

Competitiveness of Indian refining capacity India capacity 26% more competitive than global

725 20 55

600 16 38

475 12 21

(%) (%)

(USD/ t) (USD/ 350 8 4

225 4 -13

100 0 -30

Iraq

UAE

Iraq

UAE

India

India

China

Oman

China

Brunel

Oman

Kuwait

Brunel

Kuwait

Bahrain

Bahrain

Malaysia

Malaysia

Saudi Arabia Saudi Saudi Arabia Saudi Capital cost (USD/t) % of upcoming capacity (RHS) Fixed cost competitiveness %

Source: Edelweiss Research Source: Edelweiss Research

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RELIANCE INDS.

Refining/ petchem valuation compelling even at ~USD5/bbl GRM

20 19 16 16 13 14 12 10

8 7 4 4

FY23 PE multiple multiple (x) PE FY23 4

0

RIL

IOCL

BPCL

HPCL

USrefining

APACrefining

Korea refining Korea Europe refining Europe

Source: Edelweiss Research

Indian refiners in a sweet spot – Highest distillate yields and high heavy crude sourcing

Source: Edelweiss Research Refinery runs likely to recover from Q2CY21 According to FGE, an oil economics specialist, global monthly refinery runs would increase and there will be an increase in throughput from Q2CY21 as global oil demand recovers. Recovery of oil demand depends on the covid situation as well; refinery utilisation will rise accordingly.

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RELIANCE INDS.

Global refinery runs to recover from Jul–Aug-21

Source: Edelweiss Research, FGE

Complex margins to get better from Jul- Aug-21

Source: Edelweiss Research, FGE

Gasoline cracks to increase from Jul- Aug-21 owing to rise in demand

Source: Edelweiss Research, FGE

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RELIANCE INDS.

FGE data suggest product cracks to improve further as demand rises, implying strong refining margins ahead

Source: Edelweiss Research, FGE

Global refining valuation comparison

Div yield EPS CAGR Mcap Adjusted EPS (LC) EV/EBITDA( x) ROCE (%) ROE (%) P/B (x) P/E (x) Company (%) (%) (USD mn) FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY19 FY21 FY23E FY23E FY23E FY21 FY21-23E India OMC Indian Oil Corporation Limited 13,479 23.6 24.8 29.3 4.5 4.4 3.7 16.0 14.7 15.1 20.8 19.0 20.5 0.7 3.6 11.3 11.6 Bharat Petroleum Corporation Limited 13,305 52.1 63.7 68.6 7.3 7.9 6.5 12.5 13.3 13.6 26.2 28.8 36.5 2.5 6.6 17.4 14.8 Hindustan Petroleum Corporation Limited 5,215 73.4 68.3 76.3 3.9 3.9 3.8 19.5 18.6 18.7 30.9 27.8 29.7 1.1 3.6 8.3 1.9 India OMC-Mean 5.2 5.4 4.7 16.0 15.5 15.8 26.0 25.2 28.9 1.5 4.6 12.3 9.4 India Refining Reliance Industries Limited 1,85,804 76.2 78.2 100.5 19.7 14.9 9.7 8.0 9.5 11.2 9.1 7.5 8.8 1.7 20.9 0.3 14.8 Chennai Petroleum Corp Ltd 266 40.2 18.6 32.9 5.1 9.7 8.0 2.7 2.6 3.8 17.3 16.9 24.1 0.9 4.0 NA -9.5 India Refining-Mean 12.4 12.3 8.8 5.4 6.1 7.5 9.1 7.5 8.8 1.7 12.4 0.3 2.7 US Refining Marathon Petroleum Corp 41,234 1.3 3.5 4.2 11.5 9.3 8.6 0.8 3.5 6.0 1.7 7.4 12.6 2.7 15.1 3.7 79.9 Phillips 66 39,833 2.9 6.9 7.4 14.9 8.9 8.6 3.5 8.9 8.9 6.2 13.8 16.2 1.8 12.4 4.0 60.2 Valero Energy Corp 33,228 1.1 5.8 5.8 12.2 7.1 7.1 1.9 6.9 7.6 3.4 12.5 13.7 1.7 13.9 4.8 127.6 US Refining-Mean 12.9 8.4 8.1 2.1 6.4 7.5 3.8 11.2 14.1 2.1 13.8 4.2 89.2 Europe Refining Rubis 5,221 2.8 3.1 3.3 9.0 8.3 7.9 7.2 7.5 7.4 11.2 11.6 11.4 1.6 12.9 4.4 7.9 Dcc Plc 8,512 3.8 4.1 4.2 9.1 8.8 8.5 7.2 7.0 6.8 14.1 13.6 13.2 2.2 13.8 2.8 6.2 Europe Refining-Mean 9.0 8.6 8.2 7.2 7.3 7.1 12.6 12.6 12.3 1.9 13.3 3.6 7.0 South korea Refining SK Innovation Co Ltd 22,967 5,572.6 11,439.5 14,022.9 11.4 10.0 8.9 2.0 3.5 3.9 3.9 6.9 7.7 1.4 19.8 0.6 58.6 S-Oil Corp 10,328 9,197.4 8,762.3 9,091.8 7.2 7.6 7.4 8.5 7.3 6.5 17.5 15.0 13.4 1.5 11.3 2.6 -0.6 South korea Refining-Mean 9.3 8.8 8.1 5.2 5.4 5.2 10.7 11.0 10.6 1.5 15.5 1.6 29.0 APAC Refining Vietnam National Petroleum 2,975 2,716 3,274 3,522 10.0 8.8 8.5 9.5 10.0 10.4 15.7 16.7 17.3 2.6 15.6 3.6 13.9 Petrochina 1,41,040 0.4 0.3 0.3 4.0 4.0 4.2 3.9 3.5 3.6 5.3 4.8 5.0 0.4 9.0 6.4 -4.9 Sinopec 83,497 0.5 0.5 0.5 4.0 3.9 3.7 6.0 5.7 5.7 8.1 7.7 7.6 0.5 6.6 8.7 1.2 APAC Refining-Mean 6.0 5.6 5.5 6.5 6.4 6.6 9.7 9.7 10.0 1.2 10.4 6.2 3.4 Source: Edelweiss Research

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Global petrochemical valuation comparison

Div yield EPS CAGR Mcap Adjusted EPS (LC) EV/EBITDA( x) ROCE (%) Company (%) (%) (USD mn) FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY21-23E India Petchem Indian Oil Corporation Limited 13,479 23.6 24.8 29.3 4.5 4.4 3.7 16.0 14.7 15.1 11.3 11.6 Reliance Industries Limited 1,85,804 76.2 78.2 100.5 19.7 14.9 9.7 8.0 9.5 11.2 0.3 14.8 India -Mean 49.9 51.5 64.9 12.1 9.7 6.7 12.0 12.1 13.2 5.8 13.2 US Petchem Dupont DE Nemours INC 43,917.7 3.7 4.4 5.0 12.5 11.5 10.8 3.6 8.9 8.9 1.5 15.1 Phillips 66 39,833 2.9 6.9 7.4 14.9 8.9 8.6 3.5 8.9 8.9 4.0 60.2 Valero Energy Corp 33,228 1.1 5.8 5.8 12.2 7.1 7.1 1.9 6.9 7.6 4.8 127.6 US -Mean 2.6 5.7 6.1 13.2 9.2 8.8 3.0 8.2 8.5 3.4 67.6 Europe Petchem Basf Se 75,237 4.9 5.0 5.4 8.1 7.8 7.3 7.3 7.2 7.6 5.0 5.1 Lyondellbasell Indu-Cl A 36,802 15.0 13.2 13.9 6.3 7.1 6.9 16.4 11.2 5.9 4.0 -3.7 Europe -Mean 9.9 9.1 9.7 7.2 7.4 7.1 11.8 9.2 6.8 4.5 0.7 Middle-East Petchem Saudi Basic Industries Corp 1,00,469 5.5 5.6 6.3 10.4 10.3 9.8 7.7 8.5 8.6 3.0 7.3 Aldrees Petroleum and Transp 1,324 2.3 2.9 3.7 12.1 10.5 9.1 4.8 5.5 6.5 2.0 27.0 Middle East -Mean 3.9 4.3 5.0 11.2 10.4 9.5 6.3 7.0 7.5 2.5 17.2 APAC Petchem Sumitomo Chemical Co Ltd 9,132 20 61 68 7.6 7.1 7.2 5.3 5.4 5.2 2.9 82.9 Petrochina 1,41,040 0.4 0.3 0.3 4.0 4.0 4.2 3.9 3.5 3.6 6.4 -4.9 Sinopec 83,497 0.5 0.5 0.5 4.0 3.9 3.7 6.0 5.7 5.7 8.7 1.2 APAC -Mean 7.1 20.5 23.0 5.2 5.0 5.0 5.1 4.9 4.9 6.0 26.4 Source: Edelweiss Research

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SoTP valuation: TP of INR2,175/share Base value Base value Base value % Comments (USD bn) (INR bn) (INR/share) Global Refining peers trade at 8.1x. Assumed GRM of Refining (@ EV/Q2FY23E EBITDA = 9.8x) 27.4 2,027 314 16% USD7.7/bbl, USD8.9/bbl in FY22/23 Global petchem peers trade at 8.5x. Assumed EBITDA Petchem (@ EV/Q2FY23E EBITDA = 9.8x) 44.3 3,281 509 25% of USD130/mt, USD135 in FY22/23 India Upstream 8.2 607 94 5% DCF basis. Includes CBM, R-Series and Satellite fields 20% premium to BP Plc's acquisition of 49% during BP Petro Retail @51% stake 1.2 91 14 1% 2019-20 Retail (@ EV/Q2FY23E EBITDA = 26x) 49.1 3,631 563 28% Indian retail peers trade at 26x JIO Mart 6.0 441 68 3% Valued at 35x gross margin, similar to D-Mart Retail + JIO Mart 55 4,071 632 Less: Minority Interest in Retail 7.7 568 88 RIL's holding in Retail business 41.4 3,063 475 RIL has 85.05% stake in RIL Retail Digital (Implied EV/EBITDA=11x) 69.7 5,160 801 Less: Minority Interest in Jio 23.4 1,730 268 DCF based EV of INR 5.2tn; 33.52% stake held by PE RIL's holding in Digital business 46.4 3,430 532 27% funds 100 Value of operating assets 175 12,940 2,008 % Net debt/ (Net Cash) -6.9 -509 -79 3% Value of non operating assets 28.7 2,124 330 14% At book value 100 SOTP (pre-holdco discount) 210 15,573 2,416 Before Holding co discount % Less: Holding company discount (10%) 21.0 1,557 242 10% holdiing company discount SOTP 189.4 14,016 2,175 CMP 13,566 2,105 Return on CMP (%) 3.3% Source: Edelweiss Research

Breakdown of retail valuation

INR bn EBITDA Multiple Value Core retail 134.0 26.0 3483.1 Petro 1.2 26.0 32.3 Connectivity 16.4 5.0 81.8 Futre Group acquisition 15.6 16.0 249.6 Combined Value 151.6 25.4 3,846.8 Shares 6,445 Source: Edelweiss Research

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Quarterly financial snapshot (INR mn)

Year to March Q1FY22 Q1FY21 YoY % Q4FY21 QoQ % FY21 FY22E FY23E Net revenues 15,44,390 8,82,530 75.0 14,95,750 3.3 46,69,240 66,98,817 79,72,388 Raw material costs 9,03,050 4,74,640 90.3 10,15,370 (11.1) 29,27,010 47,99,974 55,81,091 Gross profit 6,41,340 4,07,890 57.2 4,80,380 33.5 17,42,230 18,98,843 23,91,298 Employee expenses 42,570 31,680 34.4 39,760 7.1 1,48,170 1,48,481 1,64,609 Other expenses 2,20,190 2,07,460 6.1 2,07,110 6.3 7,86,690 6,35,972 8,44,384 EBITDA 2,57,940 1,86,830 38.1 2,57,830 0.0 8,07,370 11,14,389 13,82,304 Depreciation & amortisation 68,830 63,080 9.1 69,730 (1.3) 2,65,720 3,31,720 4,04,830 EBIT 1,89,110 1,23,750 52.8 1,88,100 0.5 5,41,650 7,82,669 9,77,474 Less: Interest Expense 33,970 67,350 (49.6) 40,440 (16.0) 2,11,890 1,87,816 1,95,772 Add: Other income 42,190 43,880 (3.9) 32,370 30.3 1,63,270 1,49,852 1,82,715 Profit before tax 1,97,330 1,00,280 96.8 1,80,030 9.6 4,93,030 7,44,706 9,64,417 Less: Provision for Tax 34,640 2,600 1,232.3 13,870 149.7 17,220 1,85,458 2,40,059 Reported Profit 1,46,990 1,50,410 (2.3) 1,56,590 (6.1) 4,34,860 5,28,842 6,79,723 Adjusted Profit 1,46,990 1,00,750 45.9 1,48,620 (1.1) 4,91,280 5,28,842 6,79,723 No. of Shares outstanding (mn) 6,550 6,445 1.6 6,445 1.6 5,926 5,926 5,927 Adjusted Diluted EPS 22.4 15.6 43.6 23.1 (2.7) 76.2 78.2 100.5

As % of net revenues 0.1 0.1 0.1 0.1 0.1 0.1 0.1 1.1 Gross profit 41.5 46.2 32.1 37.3 28.3 30.0 EBIDTA 16.7 21.2 17.2 17.3 16.6 17.3 Net profit 9.5 17.0 10.5 9.3 7.9 8.5 Tax rate 17.6 2.6 7.7 3.5 24.9 24.9 Source: Edelweiss Research

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Major company assumptions

RIL FY19 FY20 FY21E FY22E FY23E COMPANY ASSUMPTIONS Petchem Naphtha cracking margins (USD/mt) 842 526 777 525 621 Polypropylene margins (USD/mt) 192 184 199 203 207 Paraxylene margins (USD/mt) 453 255 194 198 202 PTA margins (USD/mt) 211 190 140 142 145 MEG margins (USD/mt) 68 31 -29 50 51

Chemicals 0.1 0.1 1.1 2.1 3.1 Chemicals production (mmt) 31.1 31.6 32.5 33.4 36.3 Chemicals EBITDA (USD/mt) 173 138 159 130 135

Refining 0.1 0.1 1.1 2.1 3.1 Refining throughput (mmt) 68.3 70.6 63.3 68.7 69.9 GRM (USD/bbl) 9.2 8.9 6.2 7.7 9.0

India E&P 0.1 0.1 1.1 2.1 3.1 Gross gas production - KG-D6 (mmscmd) 2.0 1.7 5.0 18.0 30.0

Telecom Subscribers (mn) 306.7 387.5 426.2 485.6 513.6 ARPU (INR) 131.2 126.9 143.1 147.1 170.9 EBITDA growth (%) 124.2 42.9 43.3 27.3 28.2

Retail Area (mn sq ft) 22.0 28.7 31.6 34.7 39.9 Number of stores 10,415 11,784 12,962 14,259 15,685 EBITDA growth (%) 146 60 7 23 38 Source: Edelweiss Research

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Company Description RIL is the largest private player in the refining, petrochemical, E&P, digital and organized retail sectors in India. While RIL’s refining complex in Jamnagar is the largest in the world and among the most complex, it is also among the largest integrated petrochemical producers globally. Its consumer business (JIO and Retail), which has picked up the scale in the last 4-5 years will contribute 50% of the total EBITDA by FY25 which is currently dominated by Oil to Chemical business. RIL has a weight of 13% in BSE Sensex and is the only Indian company which has crossed USD150bn in valuations. Investment Theme RIL’s strength lies in its ability to build businesses of global scale and execute complex, time-critical, and capital-intensive projects which will prove advantageous as it embarks on large investments in all segments. We expect its consumer business (Digital and Retail) to contribute ~50% of EBITDA from FY25 given its strong expansion and customer base. We are now giving rich valuations to JIO and Retail seeing its huge potential, though remain positive on their core O2C business (both refining and chemicals). We believe refining margins in Asia will rise due to a “paradigm shift in regional refining dynamics” from West to East, which will favour a complex refiner like Reliance. Global utilization rates have bottomed out in chemicals. RIL is almost done with its capex cycle, investing in world-scale projects like petcoke gasification, off-gas crackers and telecoms, which are expected to drive future growth in months to come has started commissioning and remaining projects of KG- D6 will start soon. Key Risks Slow down in global demand or larger than expected capacity additions could impact RIL’s refining and chemical margins. Delays in government approvals for India E&P or weak domestic gas prices could hamper progress in upstream. Weak natural gas prices could lower the profitability of upstream assets. Rupee appreciation may impact negatively as RIL is positively leveraged to the depreciating currency. About half of RIL business is in unrelated diversifications, especially telecoms & related, which would attract a conglomerate discount. Our reverse DCF calculation suggests that (especially) for Jio Platforms and Retail the market is baking-in very high earnings growth expectation sustaining over the next 10 years, which by any measure is a tall ask. Deleveraging to zero-debt has swung the needle to the other extreme, raising RIL’s WACC to match cost of equity (CoE). The sharp rise in WACC precipitates a negative economic spread for RIL even after we assume robust earnings growth.

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Additional Data Management Holdings – Top 10* Chairman and Mukesh D Ambani % Holding % Holding Managing Srichakra Comme 11.67 Reliance Indust 4.80 DirectorNon Executive Nita Ambani Non Independent KARUNA COMMERCI 8.61 Capital Group C 4.32 DirectorExecutive P M S Prasad Director Tattvam Enterpr 8.61 PETROLEUM TRUST 3.80 Executive Pawan Kumar Kapil Director Devarshi Commer 8.61 RELIANCE SERVIC 2.71 Auditor E&Y Life Insurance 5.86 FMR LLC 2.32

*Latest public data

Recent Company Research Recent Sector Research Date Title Price Reco Date Name of Co./Sector Title ‘New Energy’ an ESG positive; Pause in earnings momentum ; 24-Jun-21 2205.35 Hold 06-Jul-21 Oil & Gas Company Update Sector Update Wire-less present; gas for future ; All-time high volumes; Result 01-May-21 2024.05 Hold 25-Jun-21 Indraprastha Gas Result Update Update Modest quarter; growth outlook 23-Jan-21 Profit beat, but…; Result Update 2049.6 Hold 25-Jun-21 ONGC intact; Result Update

Rating Interpretation Daily Volume 175 2325 TP TP 2,105 2,105 TP 2035 140 1,844

1745 105

(INR) TP 1,415 1455 (Mn) 70

1165 35 875 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 0 RIL IN Equity Buy Hold Reduce Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21

Source: Bloomberg, Edelweiss research Source: Bloomberg

Rating Distribution: Edelweiss Research Coverage Rating Rationale

Buy Hold Reduce Total Rating Expected absolute returns over 12 months

Rating Distribution* 170 54 19 244 Buy: >15%

>50bn >10bn and <50bn <10bn Total Hold: >15% and <-5%

Market Cap (INR) 214 40 5 259 Reduce: <-5% *1 stocks under review

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

Aditya Narain Head of Research [email protected]

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