India Equity Research Oil & Gas May 1, 2021
RELIANCE INDUSTRIES
RESULT UPDATE
KEY DATA Rating HOLD Wire-less present; gas for future Sector relative Neutral Price (INR) 1,996 12 month price target (INR) 2,105 Reliance Industries’ (RIL) Q4FY21 EBITDA of INR234bn (up 7.2% YoY, Market cap (INR bn/USD bn) 13,290/179.3 8.3% QoQ) came 2.1% below estimate and PAT of INR124bn (up 17% Free float/Foreign ownership (%) 50.9/24.2 What’s Changed YoY, down 6% QoQ) missed estimate by huge 6.8%. Main driver, RJio’s Target Price ⚊ PAT attributable to RIL fell 3% YoY due to 33% stake sale and grew only Rating/Risk Rating ⚊ 2% QoQ. O2C contributed higher 69% to PAT versus 65% in Q4FY20. QUICK TAKE While O2C and RJio missed, retail beat forecasts. Upstream was a big Above In line Below positive as large satellite field started production ahead of schedule. Profit We believe gas will be a key driver contributing INR100bn to EBITDA Margins Revenue Growth by FY24E. Reiterate our “Deja Vu” ‘HOLD’ with unchanged TP of Overall INR2,105. We argue that RIL’s FAANG-like valuation (particularly RJio’s) is misplaced as O2C and telecom make up ~70% of value.
FINANCIALS (INR mn) O2C: All-time high petchem margin, but muted refining throughput Year to March FY20A FY21E FY22E FY23E O2C EBITDA slid 8.8% YoY, but improved 16% QoQ. High PP, LDPE and PVC prices Revenue 5967430 4669240 7112499 9141140 led to all-time high margin, which offset muted demand during the quarter. Polymer EBITDA 882170 807370 1135735 1497087 Adjusted profit 3,93,540 4,91,280 5,39,113 7,58,335 demand continued to be buoyant led by growth in health & hygiene, e-commerce Diluted EPS (INR) 62.1 76.2 79.7 112.2 and FMCG. Refining throughput rose 3% QoQ, but fell 8.7% YoY led by utilisation of EPS growth (%) (7.1) 22.8 4.6 40.7 107.7% on channel restocking. KG-D6 satellite cluster gas production commenced RoAE (%) 9.3 9.1 7.6 9.7 in April 2021, two months ahead of plan. Combined production from R-Cluster and P/E (x) 32.2 26.2 25.0 17.8 sat cluster is expected to be ~18mmscmd. MJ fields will start from Q3FY23. EV/EBITDA (x) 17.0 18.8 13.9 8.4 Dividend yield (%) 0.3 0.3 0.4 0.8 Muted retail EBITDA growth despite low base; slide in RJio ARPU While retail EBITDA rose 42% YoY, its EBITDA growth adjusted for INR5.34bn PRICE PERFORMANCE investment income narrowed down to 21% YoY. 94% of stores are now operational
2,325 53,000 versus 96% in Q3, but overall footfalls rose to 88% (75% in Q3). Grocery, fashion & 2,140 48,400 lifestyle registered all-time high revenues with strong traction in demand. JioMart 1,955 43,800 has been extended to 33 cities (23 in Q3) with total integrated stores at ~400. Rjio’s 1,770 39,200 digital service’s EBITDA rose 45% YoY (up 10% QoQ), but QoQ PAT was flat. ARPU 1,585 34,600 1,400 30,000 slid to INR138 (down 8.6% QoQ) due to removal of IUC charges. RJio’s net subscriber Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 addition was strong at 15.3mn (total 426.2mn). RIL IN Equity Sensex
Outlook: Hugely diluted retail & RJIO PAT attributable to RIL; ‘HOLD’ Explore: Following 33% stake sale, RJio’s PAT attributable to RIL fell 3% YoY for RJio versus standalone RJio growth of 44% YoY. Similarly, 10% stake sale in retail diluted standalone growth of 45% to 30% attributable to RIL. While consumer-facing, RJio and retail optically contribute to half of RIL’s EBITDA, it falls to only 31% at attributable consolidated PAT level. We reiterate ‘HOLD/SN’ with TP of INR2105. Financial model Podcast Financials Year to March Q4FY21 Q4FY20 % Change Q3FY21 % Change Net Revenue 14,95,750 13,62,400 9.8 11,78,600 26.9 EBITDA 2,33,510 2,17,820 7.2 2,15,660 8.3 Corporate access Video Adjusted Profit 1,24,300 1,06,150 17.1 1,32,220 (6.0) Diluted EPS (INR) 19.3 16.7 15.2 20.5 (6.0)
Jal Irani Pranav Kshatriya Shubham Mittal +91 (22) 6620 3087 +91 (22) 4040 7495 +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 71,12,499 91,41,140 Share capital 63,392 64,450 67,616 67,616 Gross profit 19,15,030 17,42,230 19,96,000 26,08,699 Reserves 44,69,920 70,36,530 77,05,708 84,41,357 Employee costs 1,40,750 1,48,170 1,48,637 1,67,594 Shareholders funds 45,33,312 71,00,980 77,73,324 85,08,973 Other expenses 8,92,110 7,86,690 7,11,628 9,44,018 Minority interest 80,160 1,27,314 1,64,700 2,11,303 EBITDA 8,82,170 8,07,370 11,35,735 14,97,087 Borrowings 32,95,250 24,53,280 21,99,633 20,42,696 Depreciation 2,22,030 2,65,720 3,31,090 3,99,717 Trade payables 9,67,990 10,88,970 10,10,439 11,59,986 Less: Interest expense 2,20,270 2,11,890 1,89,456 2,00,986 Other liabs & prov 24,67,290 21,26,426 18,15,512 21,61,183 Add: Other income 1,39,560 1,63,270 1,49,516 1,81,628 Total liabilities 1,16,59,152 1,32,12,120 1,32,78,758 1,43,99,291 Profit before tax 5,79,430 4,93,030 7,64,705 10,78,011 Net block 43,59,200 45,10,660 45,95,948 46,55,054 Prov for tax 1,37,260 17,220 1,93,366 2,73,074 Intangible assets 9,67,380 9,01,920 16,16,709 16,18,617 Less: Other adj 0 0 0 0 Capital WIP 10,91,060 12,59,530 1,70,479 1,70,479 Reported profit 4,37,980 4,34,860 5,39,113 7,58,335 Total fixed assets 64,17,640 66,72,110 63,83,137 64,44,151 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 5,39,113 7,58,335 Cash/cash equivalent 10,38,350 16,98,430 24,67,365 31,87,923 Diluted shares o/s 6,339 6,445 6,762 6,762 Sundry debtors 1,96,560 1,90,140 2,19,183 2,55,937 Adjusted diluted EPS 62.1 76.2 79.7 112.2 Loans & advances 2,24,010 25,490 6,86,403 8,16,591 DPS (INR) 6.5 7.0 8.8 16.5 Other assets 17,44,072 25,02,130 18,44,111 20,16,130 Tax rate (%) 23.7 3.5 25.3 25.3 Total assets 1,16,59,152 1,32,12,120 1,32,78,758 1,43,99,291
Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Brent prices ($/bbl) 60.9 44.8 62.0 65.0 Reported profit 4,37,980 4,34,860 5,39,113 7,58,335 GDP (YoY %) 4.8 (6.5) 7.5 6.0 Add: Depreciation 2,22,030 2,65,720 3,31,090 3,99,717 USD/INR (average) 70.7 75.0 73.0 72.0 Interest (net of tax) 1,68,091 2,04,489 1,41,549 1,50,074 EBITDA margin (%) 14.8 17.3 16.0 16.4 Net profit margin (%) 6.6 10.5 7.6 8.3 Less: Changes in WC 5,06,678 643,219 5,03,667 1,15,932 Revenue growth (% YoY) 5.2 (21.8) 52.3 28.5 Operating cash flow 9,80,970 2,61,850 15,39,504 14,61,988 EBITDA growth (%) YoY) 5.1 (8.5) 40.7 31.8 Less: Capex 7,65,170 10,58,370 9,67,886 4,60,731 Adj. profit growth (%) (0.6) 24.8 9.7 40.7 Free cash flow 2,15,800 (7,96,520) 5,71,618 10,01,257
Assumptions (%) Key Ratios Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Dom Gas Prod -mmscmd 1.7 5.0 12.0 22.0 RoE (%) 9.3 9.1 7.6 9.7 Petch EBITDA(USD/ mt) 137 84 138 156 RoCE (%) 10.6 8.0 9.6 12.2 ARPU (INR) 126.9 143.1 157.4 177.4 Inventory days 64 97 59 51 Chemical prod (mmt) 31.6 32.5 33.4 36.3 Receivable days 15 15 11 9 Retail Area(mn sq ft) 28.7 31.6 37.9 45.5 Payable days 92 128 75 61 Number of stores 11,784 12,962 15,555 18,666 Working cap (% sales) 8.2 14.2 7.1 1.6 RJIO subcribers(mn) 387.5 426.2 478.2 506.2 Gross debt/equity (x) 0.7 0.3 0.3 0.2 GRM ($/bbl) 8.9 6.2 7.7 9.0 Net debt/equity (x) 0.5 0.1 0.0 (0.1) Ref. throughput (mmt) 70.6 63.3 68.7 69.9 Interest coverage (x) 3.0 2.6 4.2 5.5
Valuation Metrics Valuation Drivers Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Diluted P/E (x) 32.2 26.2 25.0 17.8 EPS growth (%) (7.1) 22.8 4.6 40.7 Price/BV (x) 2.8 1.8 1.8 1.6 RoE (%) 9.3 9.1 7.6 9.7 EV/EBITDA (x) 17.0 18.8 13.9 8.4 EBITDA growth (%) 5.1 (8.5) 40.7 31.8 Dividend yield (%) 0.3 0.3 0.4 0.8 DividendYoY) payout ratio 11.0 12.1 12.7 17.1
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 Consol Segmental EBITDA Edelweiss Q4FY21 Q4FY20 % change YoY Q3FY21 % change QoQ Deviation (%) (INR mn) estimate O2C 114,070 125,520 (9.1) 97,560 16.9 120,807 (5.6) Oil and Gas 4,800 430 NM 40 NM 689 NM Organised retail 36,230 25,560 41.7 31,020 16.8 34,569 4.8 Digital services 89,450 61,750 44.9 89,420 0.0 85,005 5.2 Others (10,695) 2,680 NM (2,035) NM (2,142) NM Total EBITDA 233,510 217,820 7.2 215,660 8.3 238,626 (2.1) Source: Edelweiss Research Retail Margins adjusted for investment income remains flat YoY While RRL’s net revenue jumped 20% YoY to INR413bn in Q4FY21 (INR344bn in Q4FY20), adjusted EBITDA margin, excluding the impact of investment income of INR 5.3bn, remained relatively flat at 7.5% YoY. Consolidated EBITDA performance after adjusting for investment income reported as part of retail EBITDA % change % change Consol Segmental EBITDA (INR mn) Q4FY21 Q4FY20 Q3FY21 Edelweiss estimate Deviation (%) YoY QoQ O2C 114,070 125,520 (9.1) 97,560 16.9 120,807 (5.6) Oil and Gas 4,800 430 NM 40 NM 689 NM Retail (reported) 36,230 25,560 41.7 31,020 16.8 34,569 4.8 Less: Investment Income 5,340 7,750 Retail (adjusted) 30,890 25,560 20.9 23,270 32.7 34,569 (10.6) Digital services 89,450 61,750 44.9 89,420 0.0 85,005 5.2 Others (10,695) 2,680 NM (2,035) NM (2,142) NM Total EBITDA (Adjusted) 228,170 217,820 4.8 207,910 9.7 238,626 (4.4) Total EBITDA (Reported) 233,510 217,820 7.2 215,660 8.3 238,626 (2.1) Source: Edelweiss Research Hugely diluted retail & Rjio PAT attributable to RIL As RIL received a mammoth USD35bn cash infusion from equity sales, two major implications kick in: 1) Retail: With 10% stake sale, estimated growth in profits attributable to RIL has narrowed to 30% YoY in Q4FY21 versus YoY growth of 45% in overall retail reported PAT; 2) RJIO: Similarly, estimated growth in profit attributable from RJio drops to 3% YoY versus standalone reported growth of 20% due to the 33% stake sale. Also, importantly, while consumer-facing businesses RJio and retail optically contribute about half of RIL’s EBITDA, they contribute only 31% to RIL’s overall consolidated PAT. Second, quality of profit suffers as RIL’s investment income of INR5.3bn overshadows core earnings growth following cash infusions.
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Hugely diluted net profits attributable to RIL
Change Change Profits attributable to RIL (INR mn) Q4FY21 Q4FY20 Q3FY21 YoY % Q0Q% RJIO (Standalone) 33,600 23,310 44% 32,910 2% RIL stake (%) 67% 100% 67% RJIO (Profits attributed to RIL) 22,522 23,310 -3% 22,060 2% Retail (Reported) 22,470 15,490 45% 18,300 23% RIL stake (%) 85% 95% 85% Retail (Reported Profits attributed to RIL) 19,111 14,739 30% 15,564 23% O2C & Others 90,637 69,871 30% 93,386 -3% Total profits attributable to RIL (Reported) 132,270 107,920 23% 131,010 1% Source: Edelweiss Research
Stake sale has resulted in dilution of attributable PAT from Rjio/retail
100% 14 12 14 80% 17 22 17
60%
40% 65 71 69
Reliance PAT mix mix % PATReliance 20%
0% Q4FY20 Q3FY21 Q4FY21
O2C & Others Rjio Retail
Source: Edelweiss Research
Q4FY21 EBITDA growth drivers--O2C slump, surge in Oil & Gas/ RJio
24,930 12,830 2,33,510 2,17,820 31,919 20,469 4,370 10,670
4QFY20 R&M Petchem Oil & Gas Retail Digital Others 4QFY21 Services
Source: Edelweiss Research. *Note: Company disclosed only O2C EBITDA. Our assumption of 30% for Refining and 70% for petchem
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Segmental EBITDA forecast breakdown: CAGR of 27% through FY25E
(INR bn) FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E FY25E Segmental EBITDA Petrochemical EBITDA 137 165 259 376 309 252 331 423 471 524 Refining EBITDA 267 286 290 230 240 132 182 241 285 343 Oil and Gas EBITDA 17 4 10 15 7 4 30 57 101 106 Retail EBITDA 9 12 24 60 97 98 155 241 332 420 Telecom/Digital EBITDA 67 151 216 340 410 508 583 676 Consolidated EBITDA 417 462 642 839 882 807 1,136 1,497 1,801 2,097 Consol PAT (ex minority interest) 301 300 361 393 388 445 502 712 892 1,071 Net profit (ex Telco) 301 300 353 364 331 325 338 512 658 787 PAT growth (YoY) 20% 9% -1% 15% 13% 42% 25% 20% PAT growth (CAGR over FY21) 13% 26% 26% 25% EBITDA growth (CAGR over FY21) 35% 34% 30% 27% Source: Edelweiss Research
Segmental PAT forecast breakdown: We expect PAT CAGR of 27% through FY25E
(INR bn) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E Segmental PAT Refining, petchem, gas 277 314 336 352 309 319 353 494 597 691 Telecom/Digital 0 0 7 30 57 120 164 200 234 283 Retail 3 5 13 33 58 62 95 150 209 265 Consolidated PAT 300 299 361 396 394 435 539 758 947 1,138 PAT growth (YoY) 21% 10% -1% 10% 24% 41% 25% 20% PAT growth (CAGR over FY21) 24% 32% 30% 27% Source: Edelweiss Research Right on track for 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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Total equity raise and balance commitments
Source: Edelweiss Research
6 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
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Upstream KG-D6: Embarking on large growth opportunity from Apr’21 EBITDA came in at INR4.8bn (INR.04bn in Q3FY21) as the second cluster field producing gas is in full swing ahead of deadlines. Once all the KGD-6 gas fields are commissioned by FY23, it will contribute 30mmscmd at peak level (~15% of India’s domestic consumption) and EBITDA of INR100bn by FY25E (~5% of the consolidated EBITDA). Its profit share will also increase handsomely from zero currently to almost 2-3% of consolidated PAT. R-cluster has commenced operations and is producing ~4.5mmscmd of gas. Satellite cluster has also commenced operation from Apr’21, two months ahead of deadline. Total average production for Q4 remains strong at 7.1mmscmd. R-cluster is commissioned and producing ~4.5mmscmd of gas
All wells drilled, completed, tested and connected; sub-sea installation and testing works completed. Balance works on Control & Riser Platform are currently underway.
Full commissioning will be done by CY21, but started production of 4.5mmscmd. R-cluster commenced production in Dec’20.
Peak production of ~12.8MMSCMD in mid-Apr’21, ahead of plan.
Satellite cluster is way ahead of timelines and producing ~13mmscmd at peak
All five wells were completed. The Drilling and Completion campaign is underway. Final installation campaign is on track and has commenced production from Apr’21, two months ahead of the plan.
Combined production from these two fields 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 Q4FY21. Pre-commissioning and commissioning likely in Q3FY23.
MJ Development Project progress
Source: Edelweiss Research, Company
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Gassales process is going in full swing
Conducted 3 rounds of bidding, including 2 rounds of bidding for KGD6 gas.
Competitive bidding with participation from various industries; signed GSPA with 19 successful bidders.
Gas prices realization expected to be higher in FY22. Third round of bidding in early May’21.
KGUDW1 development is still in progress
Infrastructure led exploration is planned in proven geological fairways. All 9 anchor piles installed.
Buoy delivered and towed to the field; Installation in progress.
All mooring lines pre-laid; installation (connection) in progress .
MJ: Hull Desk
Source: Edelweiss Research, RIL ppt
MJ: Buoy installation
Source: Edelweiss Research, RIL ppt
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RIL’s total domestic gas production surged after many quarters of dip
15.0 7.5
12.0 6.0
9.0 4.5
(Kbopd) 6.0 3.0 (mmscmd)
1.5 3.0
0.0 0.0
Q4FY15
Q2FY16
Q4FY16
Q2FY17
Q4FY17
Q2FY18
Q4FY18
Q2FY19
Q4FY19
Q2FY20
Q4FY20
Q2FY21 Q4FY21 Oil production Gas production (RHS)
Source: Edelweiss Research
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Rjio: Modest quarter with strong wave in coming quarters RJio’s results were marginally below our estimate. Revenue declined 6.1% QoQ versus our expectation of 4.8% decline. Revenue dip was on account of removal of IUC charges and lower number of days during the quarter. ARPU declined to INR138 (INR141 estimate) from INR151 in Q3FY21.
Subscriber addition was strong at 15.3mn (5.2mn in Q3FY21) takin total subscriber base to 426.2mn. Subscriber addition was significantly higher than our estimate of 7mn. However, we believe subscriber addition was aided by JioPhone subscribers, resulting in lower than expected ARPU.
Data usage per customer further increased 13.3GB per customer. This KPI may also have an impact of FTTH subscriber contribution.
EBITDA margin expanded 390bps QoQ to 47.8%, largely on account of IUC charges going away.
While RJio surprised positively on the subscriber addition front, we believe that higher contribution of JioPhone subscribers is likely to be ARPU dilutive. We believe competitive intensity amongst telecom companies is likely to remain high for another year, which will result in delay in tariff hike. However, subscriber addition is likely to remain strong. FTTH subscriber addition for the company has remained much slower than our expectation, but we do see strong demand for this product over the medium to long term. Incrementally, the company is focusing on indigenously developing 5G technology. It has not divulged any KPIs around its digital offering. Overall, we maintain our hypothesis that market is optimistic on RJio’s digital offering and there could be some disappointment. Key takeaway from Rjio Q4FY21 analyst meet
RJio is investing to create a talent pool and has over 8,000+ tech specialists.
It is developing all modern technologies in house with ‘Cloud Native’ as hygiene for all components.
The new JioPhone plan offers unlimited usage for 2 years for INR1,999, targeted at 300mn feature phone users in India.
The company is working on multiple device options to accelerate transition from 2G devices.
It has market leadership in 19 of 22 circles and overall AGR share of ~45% as of Dec 2020.
RJio has launched enterprise grade bundled offer – JioBusiness – to bring fiber connectivity and digital solutions to SMBs; monthly plans from INR900 to INR10,000.
RJio has launched JioGames to catalyse online gaming in India; it hosted multiple virtual tournaments in partnership with leading gaming companies; tournaments broadcasted on JioTV and YouTube.
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Covid : 2nd wave
RJio management has reshaped its priorities at address covid challenges. The focus is to minimise business disruption and ensure customers are not inconvenienced.
No impact on the network due to automation and network virtualisation .
Digital initiatives like Jio Associate programme to enhance customer outreach and continuity of recharges/services.
Spectrum
The company has enhanced spectrum footprint by purchase of spectrum via auction and trading agreement with Bharti Airtel.
RJio’s average life of spectrum is longest in the industry at 15.5 years.
Acquired spectrum suitable to use for 5G technology and NB-IoT.
5G
The company has completed testing of end-to-end indigenously developed 5G Radio and core network solution.
The company has achieved throughputs > 1Gbps at cell level.
RJio continues to be operator of choice for 426mn subscribers
450 388 398 406 411 426 370 380 355 331 307 310 280
252 (mm) 240 215 187 160 170 139 123 109
100
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21
Q3FY21 Q4FY21
Source: Edelweiss Research
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RJio quarterly financial snapshot
INR mn Q4FY21 Q3FY21 % QoQ Q4FY20 % YoY
Revenue from Operations 1,73,580 1,84,920 (6.1) 1,48,350 17.0
Network Operating expense 57,540 56,530 1.8 45,600 26.2
Access charges (net) 1,790 15,490 (88.4) 13,670 (86.9)
Employee benefits expenses 3,450 3,430 0.6 3,870 (10.9)
Selling and distribution expenses 3,050 2,980 2.3 2,270 34.4
Other expenses 5,330 4,960 7.5 5,430 (1.8) Operating expenses other than spectrum 71,160 83,390 (14.7) 70,840 0.5
License fee / Spectrum charges 19,520 20,390 (4.3) 15,760 23.9
EBITDA 82,900 81,140 2.2 61,750 34.3
EBITDA margin (%) 8.8 48 44 42 14.7
Depreciation 30,150 29,100 3.6 21,680 39.1
EBIT 52,750 52,040 1.4 40,070 31.6
Less: Interest cost 8,000 8,500 (5.9) 11,330 (29.4)
Add: Other income 230 520 (55.8) 260 (11.5)
Profit / (loss) before tax 44,980 44,060 2.1 29,310 53.5
Current tax - - (2,520) (100.0)
Deferred tax 11,380 11,150 2.1 8,520 33.6
Less: Provision for tax 11,380 11,150 2.1 6,000 89.7
Net Profit / (Loss) 33,600 32,910 2.1 23,310 44.1 Source: Edelweiss Research
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RJio--Statement of profit & loss
FY19 FY20 FY21 FY22 FY23 FY24 FY25 Subscribers (mn) 306.7 387.5 426.2 478.2 506.2 531.2 556.2 ARPU (INR) 131 127 143 157 177 189 201 Total revenues (INR mn) 3,88,381 5,28,360 6,98,880 8,54,319 10,47,981 11,78,898 13,09,515 YoY growth (%) 92.7 36.0 32.3 22.2 22.7 12.5 11.1
Operating Costs Network opex 1,13,379 1,69,300 2,20,580 2,62,150 3,14,037 3,51,586 3,75,876 % of revenue 29.2 32.0 31.6 30.7 30.0 29.8 28.7
License and WPC charges 41,592 57,200 77,550 98,151 1,20,384 1,35,421 1,50,425 % of revenue 10.7 10.8 11.1 11.5 11.5 11.5 11.5
Termination Cost 42,070 43,150 46,310 11,106 13,624 15,326 17,024 % of revenue 10.8 8.2 6.6 1.3 1.3 1.3 1.3
Employee costs 16,577 14,630 13,370 17,086 24,104 27,115 30,119 % of revenue 4.3 2.8 1.9 2.0 2.3 2.3 2.3
Subscribers acquisition and Servicing Expenses 11,500 12,770 11,720 29,901 36,679 35,367 32,738 % of revenue 3.0 2.4 1.7 3.5 3.5 3.0 2.5
Admin & Other exp 12,303 15,640 20,220 25,485 31,350 30,728 27,192 % of revenue 3.2 3.0 2.9 3.0 3.0 2.6 2.1 Total Costs 2,37,420 3,12,690 3,89,750 4,43,880 5,40,177 5,95,542 6,33,373
EBITDA (INR mn) 1,50,960 2,15,670 3,09,130 4,10,440 5,07,804 5,83,356 6,76,142 EBITDA Margin 38.9 40.8 44.2 48.0 48.5 49.5 51.6 Depreciation (INR mn) 63,984 73,960 1,15,340 1,49,502 1,85,456 2,12,471 2,41,248 Spectrum 6,960 8,045 12,546 16,262 20,173 23,112 26,242 Depreciation on other assets 12,870 14,876 23,199 30,071 37,302 42,736 48,524 Depreciation on incremental capex 44,997 52,013 81,113 1,05,138 1,30,423 1,49,421 1,69,659 EBIT (INR mn) 86,976 1,41,710 1,93,790 2,60,937 3,22,348 3,70,885 4,34,894
Interest (INR mn) 41,486 66,170 38,400 43,867 57,617 60,755 58,355 Add : Other income PBT (INR mn) 45,555 76,410 1,60,870 2,19,070 2,66,730 3,12,130 3,78,539
Tax 15,916 19,330 40,720 55,140 67,136 78,563 95,278
PAT (INR mn) 29,639 57,080 1,20,150 1,63,930 1,99,594 2,33,567 2,83,260
Capex (INR mn) (5,38,339) 2,34,280 2,20,873 2,54,435 3,20,139.92 3,89,197.00 4,05,447.33 Cumulative Capex 17,57,000 19,91,280 22,12,153 24,66,589 27,86,728 31,75,925 35,81,373
Source: Edelweiss Research
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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 1,95,259 2,41,213 2,77,533 Depreciation (INR mn) 35,765 63,984 73,960 1,15,340 1,49,502 1,85,456 2,12,471 Gross Cash Flow (INR mn) 59,391 1,29,068 1,80,002 2,60,353 3,44,762 4,26,669 4,90,005 Working Capital (INR mn) (4,61,890) (3,83,460) 46,740 49,612 50,251 51,047 51,585 Investment in WC (INR mn) (48,127) 78,430 4,30,200 2,872 639 796 538 Capex (INR mn) 5,01,957 (5,38,339) 2,34,280 2,20,873 8,54,435 3,20,140 3,89,197 FCFF (INR mn) (3,94,439) 5,88,977 (4,84,478) 36,608 (5,10,313) 1,05,733 1,00,270 FCFF growth (%) PV FCF (3,94,439) 5,88,977 (4,84,478) 32,832 (4,10,475) 76,276 64,874 NPV (INR mn) 44,52,716 FY20 Debt (INR mn) 10,72,590 NPV of equity (INR mn) 33,80,126 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) 3,25,431 3,51,799 3,48,915 3,46,542 3,55,057 3,73,635 Depreciation (INR mn) 2,41,248 2,74,366 3,30,783 3,86,601 4,40,117 4,85,050 Gross Cash Flow (INR mn) 5,66,680 6,26,166 6,79,697 7,33,143 7,95,173 8,58,685 Working Capital (INR mn) 52,122 52,666 53,084 53,503 53,950 54,426 Investment in WC (INR mn) 537 544 418 419 447 476 Capex (INR mn) 4,05,447 2,77,612 2,75,798 2,46,850 2,63,154 2,61,833 FCFF (INR mn) 1,60,695 3,48,009 4,03,481 4,85,874 5,31,573 5,96,376 82,69,744 FCFF growth (%) PV FCF 93,246 1,81,110 1,88,321 2,03,388 1,99,567 2,00,804 27,84,475 NPV (INR mn) 44,52,716 FY20 Debt (INR mn) 10,72,590 NPV of equity (INR mn) 33,80,126 Cumulative Investments 23,73,570 EV/IC 1.9 Source: Edelweiss Research
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Global valuation comparison with telecoms companies Div yield EPS CAGR Mcap Diluted EPS (LC) EV/EBITDA( x) ROCE (%) Company (%) (%) (USD mn) FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY21E FY20-22E India Telecom Vodafone Idea Ltd 3,243 (10.7) (9.6) (6.1) 7.3 8.0 6.4 -4.6 9.9 2.1 0.0 -23.5 Bharti Airtel Ltd 39,837 (4.5) (16.1) 11.1 10.5 9.8 8.2 -5.9 -6.0 3.9 0.4 NA Reliance Jio NA 1.0 2.4 3.9 22.6 15.7 11.0 9.1 9.8 13.8 NA 44.0 Reliance Consol 168,930 62.1 54.4 92.5 17.4 19.1 12.6 10.6 9.9 12.2 0.3 22.1 India Telecom-Mean (4.7) (7.7) 3.0 13.4 11.2 8.5 -0.5 4.6 6.6 0.2 10.3 US Telecom AT&T INC 224,267 3.2 3.2 3.2 6.4 7.7 7.7 6.0 6.3 5.8 6.6 0.5 Verizon Communications Inc 239,255 4.8 5.1 5.2 7.0 8.0 7.8 9.1 8.8 8.0 4.4 3.2 US Telecom-Mean 4.0 4.1 4.2 6.7 7.8 7.8 7.5 7.6 6.9 5.5 1.9 Europe Telecom Telenor Asa 25,021 9.4 8.7 10.1 6.0 6.5 6.2 8.4 7.9 8.7 6.3 4.7 Telefonica Sa 25,613 0.3 0.4 0.4 5.5 5.9 6.0 2.7 3.3 3.5 8.0 16.5 Deutsche Telekom Ag-Reg 91,660 1.1 1.1 1.3 5.5 6.5 6.2 3.3 3.2 4.2 3.8 10.1 Europe Telecom-Mean 3.6 3.4 3.9 5.7 6.3 6.1 4.8 4.8 5.5 6.0 10.4 APAC Telecom China Telecom Corp Ltd-H 28,447 0.3 0.3 0.3 1.6 2.0 1.9 4.8 4.9 5.0 5.0 5.3 China Tower Corp Ltd-H 25,381 0.0 0.0 0.1 4.6 4.3 4.0 2.1 2.6 3.3 3.2 19.2 Nippon Telegraph & Telephone 98,323 232.0 248.2 294.5 4.8 5.8 5.7 6.8 7.9 9.2 3.8 10.7 APAC Telecom-Mean 77.4 82.8 98.3 3.7 4.0 3.9 4.6 5.1 5.8 4.0 11.7 Middle-East Telecom Saudi Telecom Co 67,728 5.5 5.8 6.0 9.7 10.8 10.4 14.2 14.2 14.0 3.5 NA Middle East -Mean 5.5 5.8 6.0 9.7 10.8 10.4 14.2 14.2 14.0 3.5 NA Source: Edelweiss Research
FAANG valuation snapshot
EPS FCF OCF (USD Mcap EV/EBITDA( x) ROE (%) CAGR# P/E (x) P/B (x) EV/ Sales (x) (USD bn) bn) Company (%) (USD mn) FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY20 FY20 FY20 FY21E FY22E RIL Consolidated 168,930 17.4 19.1 12.6 9.3 7.2 9.0 25.7 33.0 37.7 22.2 2.9 13.1 2.9 2.6 3.2 2.4 FAANG Facebook 921,753 17.8 13.9 11.8 23.2 25.1 22.9 20.8 27.8 23.3 20.0 23.6 38.7 6.9 7.3 7.6 6.4 Amazon 1,748,702 31.1 22.6 18.4 23.2 25.2 25.2 29.9 66.0 53.5 42.4 25.9 66.1 16.9 3.5 3.6 3.1 Apple 2,193,756 23.3 19.1 18.9 70.7 132.1 156.2 18.8 29.6 26.0 25.1 73.4 80.7 31.7 5.9 6.0 5.8 Netflix 227,674 42.9 34.7 28.1 30.0 36.1 34.4 35.5 53.6 47.4 39.8 1.9 2.4 17.7 7.7 8.0 6.9 Alphabet 1,596,849 18.8 16.5 14.3 17.3 24.8 23.1 29.3 38.9 25.1 22.9 42.8 65.1 6.9 7.3 7.6 6.5 FAANG- mean 26.8 21.4 18.3 32.9 48.7 52.4 26.9 43.2 35.1 30.1 33.5 50.6 16.0 6.3 6.6 5.7 Source: Edelweiss Research
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RELIANCE INDUSTRIES
Retail: Flat margins YoY despite double digit revenue growth RRL’s net revenue increased substantially by 20% YoY to INR 413bn in Q4FY21 (INR 344bn in Q4FY20), largely attributable to: 1) fashion lifestyle & grocery registering all time high revenue; and 2) strong growth in consumer electronics & stepped up devices sales led by Jio phone plans. Reported EBITDA margin improved 140bps YoY to ~9% in Q4FY21. However, excluding the impact of investment income of INR 5.3bn, margin remained relatively flat at 7.5% YoY. With ease of lockdown restrictions, 94% of stores remained operational during the quarter and overall footfall increased to 88% of pre-covid levels vs. 75% in Q3FY21. Recovery was largely led by small towns. Besides, company added 826 stores taking the overall count to 12,711 during the quarter.
Fashion & lifestyle: Strengthening market leadership in micro markets Trends reported 2x revenue growth from small town stores and now more >400 stores are integrated with JioMart receiving daily order of >2x QoQ. Ajio reported 4x YoY growth in booking revenue and 2x growth in option count. F&L New Commerce has extended geographic coverage to 2,265 cities with catalogue up 3x (>650 new brands in addition). Reliance Jewels revenue increased 1.8x YoY on buoyant consumer demand and augmented affordable light weight jewellery with the launch of 3 new occasion themed collections. Grocery: Strong traction from tier 3 and below cities Grocery business reported all time high revenues led by higher ABVs offset by lower footfalls. 80% of overall orders were repeat orders with order frequency of 1.5x and ABVs were 20% higher for >180 days customers. JioMart Kirana extended services to 10 new cities and now active in 33 cities. Pharma: Scaling up online 114 pharmacies were operationalized during the quarter. Pan-India brand campaign initiated for Netmeds resulting in higher web visit (>25% QoQ). Currently, second wave covid -19 is likely to impact business in the near term. 40- 50%/ 80-90% of overall stores remain operational for Fashion & Lifestyles & Grocery business respectively. Overall footfalls, have plunged to 35-40% vs. 88% in Q4FY20. Accelerated store opening witnessed during the quarter
4QFY21 Total Addition Region Store Count Area (Sqft mn) Store Count Area (Sqft mn) North 2,859 6.2 136 0.5 South 3,673 12.7 338 1.2 East 2,778 5.5 168 0.7 West 3,324 8.6 184 0.8 International 77 0.8 Total 12,711 33.8 826 3.2 Source: Edelweiss Research
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Area under coverage rose 18% YoY; revenue per sq ft fell 17% YoY
Source: Edelweiss Research
Double digit revenue growth in Q4FY21
Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Revenue (INR mn) 231,080 324,360 355,770 326,190 381,960 412,020 453,270 344,020 316,330 365,660 330,180 412,960 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 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 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 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 grow at CAGR 30% over (2019-2026), thereby improving market penetration to 12% from 2% currently (source: Invest India).
Online digital spending in India is currently estimated at around 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 INDUSTRIES
India e-retail market is likely to post CAGR of 30% 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 & Amazon accounted for major 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 INDUSTRIES
Operational peer matrix: RIL’s revenue/sq ft has risen 2x to highest EBITDA/sq ft
FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E Revenue(INR mn) Reliance Retail 183300 264377 514562 1019465 1303674 1577445 2366168 3691221 Vmart 8093 10017 12224 14337 16620 9938 19322 22463 Dmart 85838 118977 150332 200045 248702 236573 336198 408955 EBITDA (INR mn) Reliance Retail 9120 11632 23643 59201 91390 102534 153801 239929 Vmart 620 826 1328 1329 2138 875 2512 2920 Dmart 6636 9812 13528 16333 21283 17175 29165 35477 Area (mn sqft) Reliance Retail 12.8 13.5 17.7 22.0 28.7 31.6 37.9 45.5 Vmart 1.0 1.2 1.4 1.8 2.2 2.3 2.6 2.9 Dmart 3.3 4.1 4.9 5.9 7.8 8.3 10.3 12.1 Revenue(INR / sqft) Reliance Retail 14320 19583 29071 46339 45424 49967 62458 81196 Vmart 9072 9588 9876 9660 NA NA NA NA Dmart 28660 32026 33407 37045 36307 29479 36297 36596 Revenue / store (Mn/store) Reliance Retail 56.5 73.1 134.1 97.9 110.6 121.7 152.1 197.8 Vmart 65.8 71.0 71.5 67.0 62.5 35.4 61.1 64.0 Dmart 780.3 908.2 969.9 1136.6 1162.2 1056.1 1249.8 1323.5 EBITDA(INR / sqft) Reliance Retail 713 862 1336 2691 3184 3248 4060 5278 Vmart 612 691 922 743 972 377 966 1014 Dmart 1993 2393 2761 2768 2729 2082 2838 2938 EBITDA/ store (Mn/store) Reliance Retail 2.8 3.2 6.2 5.7 7.8 7.9 9.9 12.9 Vmart 5.0 5.9 7.8 6.2 8.0 3.1 7.9 8.3 Dmart 60.3 74.9 87.3 92.8 99.5 76.7 108.4 114.8 Stores Reliance Retail 3245 3616 3837 10415 11784 12962 15555 18666 Vmart 123 141 171 214 266 281 316 351 Dmart 110 131 155 176 214 224 269 309 OCF/ Capital employed Reliance Retail 15.6% 35.7% 4.6% 6.6% 14.9% 11.7% 11.5% 8.3% Vmart 17.5% 21.9% 16.7% 18.7% 9.7% 12.4% 14.0% 20.0% Dmart 16.6% 9.1% 14.7% 13.3% 11.3% 13.3% 11.7% 12.5% Source: Edelweiss Research
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Traditional retail valuation comparison
Div yield EPS CAGR Mcap EV/EBITDA( x) ROCE (%) Company (%) (%) (USD mn) FY20 FY21E FY22E FY20 FY21E FY22E FY21 FY20-22E India Grocery Reliance Retail NA 46.6 43.3 29.0 34.3 35.6 42.5 0.0 34.2 Avenue Supermarts 24,974 66.7 108.0 63.9 17.5 9.3 14.1 0.0 23.5 India Grocery-Mean 56.6 75.7 46.5 25.9 22.5 28.3 0.0 28.9 India Apparel ABFRL 2,182 NA 24.6 18.5 11.1 15.1 14.4 0.0 NA Trent 3,731 150.6 42.6 30.7 6.9 5.0 10.2 0.2 23.6 V-Mart 706 25.3 17.7 14.2 NA NA NA 0.1 NA India Apparel -Mean 87.9 28.3 21.1 9.0 10.0 12.3 0.1 23.6 India Footwear Bata 2,379 19.3 97.1 22.7 12.3 -1.5 11.1 0.3 7.2 India jewellery Titan 17,896 81.7 43.9 35.6 12.8 13.8 14.4 0.5 20.2 India retail-Mean 65.0 53.9 30.7 15.8 12.9 17.8 0.1 21.8 US Retailing GAP 12,408 6.7 NA 7.0 5.0 4.5 7.0 2.5 2.4 Kroger 27,478 5.8 6.4 6.3 6.3 6.7 6.2 2.1 9.9 Costco 164,662 20.5 20.9 19.2 14.7 15.9 15.8 1.1 11.9 Walmart 393,634 9.9 12.8 12.1 10.8 10.5 11.0 1.6 5.8 US Retailing-Mean 10.8 13.4 11.1 9.2 9.4 10.0 1.8 7.5 Europe Retailing M&S 4,275 5.9 8.5 6.7 5.5 1.1 3.2 0.0 -2.9 H&M 40,868 13.3 10.2 9.1 0.9 6.9 9.9 2.8 133.7 Inditex 111,028 15.4 13.2 12.1 17.9 14.5 16.3 3.1 -0.7 Carrefour 15,837 5.5 5.8 5.5 4.1 4.5 4.5 3.4 10.7 Europe Retailing-Mean 10.0 9.4 8.3 7.1 6.7 8.5 2.3 35.2 Japan Retailing Fast Retailing 87,062 18.2 20.5 17.7 4.9 8.8 9.5 0.6 37.6 Japan Retailing-Mean 18.2 20.5 17.7 4.9 8.8 9.5 0.6 37.6 Source: Edelweiss Research
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RELIANCE INDUSTRIES
O2C: Subdued performance Reported O2C EBITDA of INR114bn (-8.8% YoY, +16% QoQ), below our estimate.
Sharp demand contraction due to 2nd wave of covid impacted throughput.
PP, PE and PVC prices strengthened during the quarter by 19%, 16% and 18% QoQ, respectively, amidst limited availability from domestic and deep-sea suppliers and healthy demand.
High PP and LDPE and PVC prices helped in all time high margins during the quarter which offset the muted demand during the quarter.
Polymer demand continued to be buoyant led by growth in health & hygiene, e- commerce, FMCG and revival of auto industry.
Throughput was 17.1MMT, an increase of 2.2% over Q3FY21.
Global oil demand rose from the lows though slightly down by 1 mb/d QoQ on persisting lockdowns.
Road mobility index at 97% globally(vs.103% in Q3FY21); North America & Asia (ex-China) over100%.
Domestic oil product demand at 54.1MMT, marginally lower QoQ, but up 2.5% YoY.
Gasoline and diesel demand remained soft QoQ, up 9.7% and 4.1% YoY, respectively
ATF demand grew 15.9% QoQ on a low base; down 29.3% YoY.
Domestic polymers and polyester demand remained stable QoQ, but rose 12% and 21% YoY, respectively.
Strong YoY demand across sectors– healthcare, packaging, consumer durables, textiles and auto.
Avg. feedstock prices strengthened with supply cuts and stimulus packages.
OPEC+ cut ~8 mb/d supply with Saudi cutting additional 1 mb/d.
Resilient PE demand led by rapid growth in e-commerce packaging.
Robust growth in non-woven segment(PPE/mask), up 41% YoY.
Healthy growth in PP co-polymer with revival in auto sector.
Polymer prices and margins at multi-year high on supply disruption.
Global gasoil demand fell by 0.8mbd QoQ to 26.8mbd.
Gasoil margin recovered QoQ as US outages tightened West of Suez balances, attracting cargoes from Asia.
Global mobility tracker for air travel was at ~54% (vs ~56% in Q3).
Cracks improved QoQ as domestic air travel continued to normalize in major countries.
Global gasoline demand declined by 0.7mbd QoQ to 23.6mbd.
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RELIANCE INDUSTRIES
Oil demand recovery in 2021 to 96.5mb/d seen short of 2019 levels of 99.7mb/d as per IEA.
Throughput of 17.1MMT (16.7MMT in Q3FY21) implies utilisation of 110.3%. GRM premium over Singapore benchmark stood subdued though not disclosed explicitly led by modest cracks in Q4FY21.
O2C operating excellence
Production meant for sale (mmt) Q4FY21 Q3FY21 Change Q0Q% Transportation fuels 9.9 9.7 2% Polymers 1.5 1.5 0% Fiber Intermediates 1.1 1.1 0% Polyester 0.6 0.6 0% Chemicals and Others 3.5 3.3 6% Total 16.6 16.2 2% Source: Edelweiss Research
Refinery throughput fell to 17.1MMT with 110.3% 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
Q2FY15
Q4FY15
Q2FY16
Q4FY16
Q2FY17
Q4FY17
Q2FY18
Q4FY18
Q2FY19
Q4FY19
Q2FY20
Q4FY20
Q2FY21 Q4FY21 Refinery throughput Capacity utilisation (RHS)
Source: Edelweiss Research
FO cracks slip but naphtha cracks improved QoQ Gasoline and gasoil cracks improved QoQ
8.0 19.5
1.6 15.4
(4.8) 11.3
(11.2)
(USD/bbl) 7.2 (USD/bbl)
(17.6) 3.1
(24.0) -1
Q2FY18 Q2FY21 Q4FY21 Q4FY15 Q2FY16 Q4FY16 Q2FY17 Q4FY17 Q4FY18 Q2FY19 Q4FY19 Q2FY20 Q4FY20
Q4FY14 Q2FY15 Q4FY15 Q2FY16 Q4FY16 Q2FY17 Q4FY17 Q2FY18 Q4FY18 Q2FY19 Q4FY19 Q2FY20 Q4FY20 Q2FY21 Q4FY21 Naphtha cracks Fuel oil Gasoline cracks Diesel cracks
Source: Edelweiss Research Source: Edelweiss Research
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RELIANCE INDUSTRIES
Advantage of first mover in O2C
Source: Edelweiss Research, Company
Deep and unique integration across O2C sites
Source: Edelweiss Research, Company
Polymer margin growth Polymer India demand growth
Source: Edelweiss Research, Company Source: Edelweiss Research, Company
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RELIANCE INDUSTRIES
Polyester India demand growth Polyester chain margins
Source: Edelweiss Research, Company Source: Edelweiss Research, Company
Refining: Severe pain, greater gain; RIL highly competitive The near-term refining cycle is poised to remain painful. Global oil economics consultant FGE forecasts global refinery utilisation would remain below 75% and Singapore complex GRM negative for most of 2020. However, on the flip side, acute pain will result in a permanent closure of high-cost refineries, particularly in the EU and Japan, which have high operating costs exceeding USD5/bbl. In sharp contrast, RIL’s operating cost is among the lowest globally at USD2–2.25/bbl. Its capital cost is also lower by more than 20%. Permanent closures augur well for the long-term health of the industry. While FGE expects the next few years to be very challenging for refiners, those that can successfully manage their way through them will likely see better times in the long term, perhaps even a Silver Age! Indian refiners dominate operating cost curve
7.0
5.8
4.6
3.4 (USD/ bbl) (USD/ 2.2
1.0
IOCL
BPCL
HPCL
BORL
HMEL
Thai Oil Thai
Relaince
Valero (US)
Tesero (US) Tesero Marathon(US)
Source: Edelweiss Research
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RELIANCE INDUSTRIES
Distillate-heavy and highly complex refiners such as RIL earn superior GRMs
80.0 Indian refiners lie at the top end of the spectrum with high distillate yield and PTT 64.0 IOCL Repsol S-Oil BPCL SK Energy 48.0 Total Sinopec Exxon Mobil HPCL Shell Reliance 32.0 AndeavorMarathon 16.0 PetroChina Aramco Middle Distillate MiddleDistillate Yield (%) Refining Capacity 0.0 0 4 8 12 16 20 24 Nelson Complexity Index
Source: Edelweiss Research Refinery runs are likely to recover from mid-2021 According to FGE, an oil economics specialist, global monthly refinery runs would increase and there will be an increase in throughput from June 2021 as global oil demand recovers. Recovery of oil demand also depends on covid situation as well; refinery utilisation will rise accordingly. Global refinery runs to recover from Q2CY21
Source: Edelweiss Research
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RELIANCE INDUSTRIES
Complex margins to get better from Jun-21
Source: Edelweiss Research
Gasoline cracks to increase from Jun’21 owing to increase in demand
Source: Edelweiss Research
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Global refining valuation comparison Div yield EPS CAGR Mcap Diluted EPS (LC) EV/EBITDA( x) ROCE (%) Company (%) (%) (USD mn) FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY21E FY20-22E India OMC Indian Oil Corporation Limited 11,176 (1.0) 14.4 23.7 29.4 5.6 4.0 0.2 7.7 10.9 9.4 NA Bharat Petroleum Corporation Limited 12,264 15.5 46.7 51.3 19.9 9.3 8.6 5.1 10.1 10.1 3.8 81.8 Hindustan Petroleum Corporation Limited 4,609 17.3 38.0 51.0 11.9 4.6 3.8 2.4 8.4 10.1 9.8 71.6 India OMC-Mean 20.4 6.5 5.5 2.6 8.7 10.4 7.7 76.7 India Refining Reliance Industries Limited 168,930 62.1 54.4 92.5 17.4 19.1 12.6 10.6 9.9 12.2 0.3 22.1 Chennai Petroleum Corp Ltd 222 (76.2) 40.2 18.6 5.6 4.4 4.4 10.1 13.5 13.5 #N/A N/A NA India Refining-Mean 11.5 11.7 8.5 10.3 11.7 12.8 0.1 22.1 US Refining Marathon Petroleum Corp 36,243 (3.9) 0.0 2.8 7.3 12.5 9.4 -6.3 -0.6 2.7 4.3 NA Phillips 66 35,428 (0.8) 2.0 6.7 #N/A N/A 14.1 8.3 -1.0 8.9 8.9 4.5 NA Valero Energy Corp 30,232 (3.4) 0.7 5.7 30.6 12.3 6.7 -3.7 1.4 6.8 5.3 NA US Refining-Mean 19.0 13.0 8.1 -3.7 3.3 6.1 4.7 NA Europe Refining Rubis 4,867 2.7 2.9 3.2 6.7 8.4 7.9 6.9 7.5 7.6 4.7 NA Dcc Plc 8,566 3.5 3.7 4.0 8.5 10.2 9.6 6.9 7.1 7.1 2.4 5.6 Europe Refining-Mean 7.6 9.3 8.7 6.9 7.3 7.3 3.5 5.6 APAC Refining Vietnam National Petroleum 2,714 862 2,908 3,273 24.0 9.2 7.9 3.0 9.9 10.4 3.9 NA Petrochina 113,980 0.1 0.3 0.3 2.8 3.4 3.4 1.1 3.4 3.5 7.4 NA Sinopec 75,883 0.3 0.5 0.5 4.5 3.9 3.7 3.5 5.6 5.5 9.3 21.1 APAC Refining-Mean 10.4 5.5 5.0 2.5 6.3 6.4 6.9 21.1 Source: Edelweiss Research
Global petrochemical valuation comparison
Div yield EPS CAGR Mcap Diluted EPS (LC) EV/EBITDA( x) ROCE (%) Company (%) (%) (USD mn) FY21 FY21E FY22E FY21 FY21E FY22E FY21 FY21E FY22E FY21E FY20-22E India Petchem Indian Oil Corporation Limited 11,176 (1.0) 14.4 23.7 29.4 5.6 4.0 0.2 7.7 10.9 9.4 NA Reliance Industries Limited 168,930 62.1 54.4 92.5 17.4 19.1 12.6 10.6 9.9 12.2 0.3 22.1 India -Mean 30.6 34.4 58.1 23.4 12.3 8.3 5.4 8.8 11.5 4.8 22.1 US Petchem Dupont DE Nemours INC 41,217.2 3.3 3.4 4.1 16.8 15.5 14.4 3.4 8.9 8.9 1.6 8.7 Phillips 66 35,428 (0.8) 2.0 6.7 #N/A N/A 14.1 8.3 -1.0 8.9 8.9 4.5 NA Valero Energy Corp 30,232 (3.4) 0.7 5.7 30.6 12.3 6.7 -3.7 1.4 6.8 5.3 NA US -Mean (0.3) 2.1 5.5 23.7 14.0 9.8 -0.4 6.4 8.2 3.8 8.7 Europe Petchem Basf Se 74,365 2.9 4.6 4.8 7.5 8.3 8.0 -0.7 7.1 7.2 5.0 21.0 Lyondellbasell Indu-Cl A 34,686 4.8 12.7 11.7 11.5 6.9 7.3 6.3 13.9 10.5 4.1 36.2 Europe -Mean 3.8 8.6 8.3 9.5 7.6 7.6 2.8 10.5 8.9 4.6 28.6 Middle-East Petchem Saudi Basic Industries Corp 99,192 0.2 4.1 4.6 17.0 11.3 10.6 0.3 6.1 7.0 3.0 220.7 Aldrees Petroleum and Transp 1,262 1.5 2.2 2.9 13.1 11.9 10.4 3.2 4.6 5.4 2.2 NA Middle East -Mean 0.8 3.1 3.8 15.1 11.6 10.5 1.7 5.4 6.2 2.6 220.7 APAC Petchem Sumitomo Chemical Co Ltd 8,436 19 20 56 8.3 8.9 7.3 2.4 1.8 5.1 2.2 52.6 Petrochina 113,980 0.1 0.3 0.3 2.8 3.4 3.4 1.1 3.4 3.5 7.4 NA Sinopec 75,883 0.3 0.5 0.5 4.5 3.9 3.7 3.5 5.6 5.5 9.3 21.1 APAC -Mean 6.4 7.1 18.8 5.2 5.4 4.8 2.3 3.6 4.7 6.3 36.9 Source: Edelweiss Research
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SOTP valuation: TP of INR2,105/share Base value Base value Base value % Comments (USD (INR bn) (INR/share) bn) Global Refining peers trade at 6.9x. Assumed GRM of Refining (@ EV/Q1FY23E EBITDA = 9.5x) 25.2 1,868 290 14% USD7.7/bbl, USD8.9/bbl in FY22/23 Global petchem peers trade at 7.1x. Assumed EBITDA Petchem (@ EV/Q1FY23E EBITDA = 9.5x) 45.4 3,362 522 25% of USD138/mt, USD156 in FY22/23 India Upstream 5.0 370 57 3% DCF basis. Includes CBM, R-Series and Satellite fields 20% premium to BP Plc's acquisation of 49% during BP Petro Retail @51% stake 1.2 91 14 1% 2019-20 Retail (@ EV/Q1FY23E EBITDA = 26x) 57.4 4,244 659 32% 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 63 4,685 727 Less: Minority Interest in Retail 8.4 620 96 RIL's holding in Retail business 49.0 3,624 562 RIL has 85.05% stake in RIL Retail Digital (Implied EV/EBITDA=11x) 70.1 5,188 805 Less: Minority Interest in Jio 23.5 1,739 270 DCF based EV of INR 5.2 trn; 33.52% stake held by PE RIL's holding in Digital business 46.6 3,449 535 26% funds
Net debt 3.5 259 40 2% Value of non operating assets 28.7 2,124 330 14% At book value SOTP (pre-holdco discount) 204 15,071 2,339 100% Before Holding co discount Less: Holding company discount (10%) 20.4 1,507 234 10% Holding company discount SOTP 183.3 13,564 2,105 CMP 12,864 1,996 Return on CMP (%) 5.4% Source: Edelweiss Research
Breakdown of retail valuation
Q1FY23, INR bn EBITDA Multiple Value Core retail 159.0 26.0 4133.3 Petro 1.2 26.0 32.3 Connectivity 16.4 5.0 81.8 Future Group acquisition 15.6 16.0 249.6 Combined Value 176.6 25.5 4,497.0 Shares 6,445 Source: Edelweiss Research
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Financial snapshot
Year to March Q4FY21 Q4FY20 YoY % Q3FY21 QoQ % FY21 FY22E FY23E Net revenues 14,95,750 13,62,400 9.8 11,78,600 26.9 46,69,240 71,12,499 91,41,140 Raw material costs 10,15,370 8,95,790 13.3 7,22,490 40.5 29,27,010 51,16,498 65,32,441 Gross profit 4,80,380 4,66,610 3.0 4,56,110 5.3 17,42,230 19,96,000 26,08,699 Employee expenses 39,760 37,130 7.1 42,440 (6.3) 1,48,170 1,48,637 1,67,594 Other expenses 2,07,110 2,11,660 (2.1) 1,98,010 4.6 7,86,690 7,11,628 9,44,018 EBITDA 2,33,510 2,17,820 7.2 2,15,660 8.3 8,07,370 11,35,735 14,97,087 Depreciation & amortisation 69,730 63,320 10.1 66,650 4.6 2,65,720 3,31,090 3,99,717 EBIT 1,63,780 1,54,500 6.0 1,49,010 9.9 5,41,650 8,04,645 10,97,369 Less: Interest Expense 40,440 60,640 (33.3) 43,260 (6.5) 2,11,890 1,89,456 2,00,986 Add: Other income 32,370 41,330 (21.7) 44,530 (27.3) 1,63,270 1,49,516 1,81,628 Profit before tax 1,55,710 1,35,190 15.2 1,50,280 3.6 4,93,030 7,64,705 10,78,011 Less: Provision for Tax 13,870 26,770 (48.2) 880 1,476.1 17,220 1,93,366 2,73,074 Reported Profit 1,32,270 63,480 108.4 1,31,010 1.0 4,34,860 5,39,113 7,58,335 Adjusted Profit 1,24,300 1,06,150 17.1 1,32,220 (6.0) 4,91,280 5,39,113 7,58,335 No. of Shares outstanding (mn) 6,445 6,338 1.7 6,445 0.0 5,926 5,926 5,927 Adjusted Diluted EPS 19.3 16.7 15.2 20.5 (6.0) 76.2 79.7 112.2
As % of net revenues Gross profit 32.1 34.2 38.7 37.3 28.1 28.5 EBIDTA 15.6 16.0 18.3 17.3 16.0 16.4 Net profit 8.8 4.7 11.1 9.3 7.6 8.3 Tax rate 8.9 19.8 0.6 3.5 25.3 25.3 Source: Edelweiss Research
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Major company assumptions
RIL FY19 FY20 FY21E FY22E FY23E COMPANY ASSUMPTIONS Petchem Naphtha cracking margins (USD/mt) 842 526 848 553 650 Polypropylene margins (USD/mt) 192 184 200 204 208 Paraxylene margins (USD/mt) 453 255 210 214 218 PTA margins (USD/mt) 211 190 137 140 143 MEG margins (USD/mt) 68 31 -46 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) 173 136 85 138 156
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 12.0 22.0
Telecom Subscribers (mn) 306.7 387.5 426.2 478.2 506.2 ARPU (INR) 131.2 126.9 143.1 157.4 177.4 EBITDA growth (%) 124.2 42.9 43.3 32.8 23.7
Retail Area (mn sq ft) 22.0 28.7 31.6 37.9 45.5 Number of stores 10,415 11,784 12,962 15,555 18,666 EBITDA growth (%) 146 60 7 49 56 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 ESG CXO e-series: Sustainable 23-Jan-21 Profit beat, but…; Result Update 2049.6 Hold 12-Apr-21 Oil & Gas tomorrow; Sector Update Low-base effect; better days 01-Nov-20 Painful revival; Result Update 2054.5 Hold 08-Apr-21 Oil & Gas ahead; Sector Update Reliance Industries - Future value: Unbridled prospects; no threat 31-Aug-20 0 Hold 23-Mar-21 Oil & Gas Syne; Company Update from EVs ; Sector Update
Rating Interpretation Daily Volume 175 2325 TP TP 2,105 2,105 TP 2030 140 1,844
1735 105
(INR) TP 1,415 1440 (Mn) 70
1145 35 850 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 0 RIL IN Equity Buy Hold Reduce Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20
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* 163 60 19 242 Buy: >15%
>50bn >10bn and <50bn <10bn Total Hold: >15% and <-5%
Market Cap (INR) 198 51 4 253 Reduce: <-5% * stocks under review
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