Company Update Institutional Research

India I Oil & Gas

16 July, 2020 Ltd BUY Price: Rs1,844 Target Price: Rs2,015 Creating a future ready ecosystem Forecast return: 9.3% RIL chairman (MDA) in the 43rd AGM of the company gave valuable Market Data updates on recent business developments and growth roadmap going forward. He Bloomberg: RIL IN emphasized that the 3 pillars for value creation remain the platforms business, the 52 week H/L: 1,979/867 new commerce business as part of RIL retail and the gradual transformation of the OTC Market cap: Rs12102.0bn business to a new materials/new energy business. Overall, with zero net debt objective Shares Outstanding: 6339.4mn having been achieved ahead of time, game changing partnerships with the big three (Facebook, and Microsoft) and expectations of similar value unlocking now Free float: 49.8% starting in retail, RIL stands on a strong footing over the next 5-7 years. BUY Avg. daily vol. 3mth: 2,35,22,720 Source: Bloomberg One of the largest continuous fund raise activity in the world Changes in the report With the closing of the US$4.5bn investment by google (announced in the AGM), RIL has Rating: Unchanged now raised a cumulative Rs2.1trn (including the Rs531bn raised via the rights issue) in a Target price: +21.7% matter of less than 3months – even though the entire funds will be received by Nov 2021 EPS: +4.8% FY21E, -5.4% FY22E (date of last instalment of rights issue) we believe net debt will turn negative by end of Source: Centrum Research estimates FY21E itself, radically changing the capital structure of the company. RIL relative to Nifty 50 JIO – monetization of the ecosystem the focus Having already set new benchmarks for the segment on the valuation front, the slew of investments by global tech behemoths and global PE heavyweights is just one part of the equation. RIL is now moving swiftly to demonstrate why the option value paid by the investors over the mobility value is justified. It already has successfully launched the JIO meet app (5mn sign ups in less than a month), has AR/VR products like JIO Glass in the offing and is also working on multiple offerings in the education/media/gaming and healthcare space to create diversified revenue sources beyond mobility. Source: Bloomberg Retail – the next unicorn Shareholding pattern MDA mentioned the successful pilot launch of JioMart – with focus solely on grocery Mar-20 Dec-19 Sep-19 Jun-19 alone, the initial launch in 200+ cities is already reflecting in 250k+ orders/day and Promoter 50.1 50.0 50.1 47.3 combined with the strongly growing offline/online retail business this is the next big FIIs 24.1 24.5 23.7 24.3 thing for RIL. MDA clearly mentioned multiple strategic deals in the offing which will be DIIs 5.5 5.3 5.4 4.6 disclosed over the next couple of quarters in the segment. We believe the biggest delta Public/other 20.4 20.2 20.8 23.8 in this segment can come via JioMart because the target market for this omni-channel Source: BSE model is not just organized retail (US$100bn) or e-commerce (US$40bn) but the traditional retail channel itself which is a >US$900bn opportunity. Valuations – a new paradigm We believe the drivers of value for RIL over the next few years are Retail (new commerce) and JIO (digital platform) with a relatively lower % from Oil to Chemicals (OTC). We have raised estimates of ARPU, lowered costs for JIO (based on Management feedback) while for retail we now move to DMart multiples as the benchmark as we do not see any other comparable story for RIL – resultant of these revisions, Target price raised to Rs2015/sh, 9.3% upside. We note that looking beyond FY22E for retail and building a nominal share of traditional retail by FY25E can deliver a bull case and blue sky value of Rs767/862 per share for retail, adding Rs114/209 per sh to RIL SoTP (Exhibit 13). Reiterate BUY. Financial and valuation summary YE Mar (Rs mn) FY18A FY19A FY20A FY21E FY22E Revenues 39,16,770 56,92,090 59,67,430 48,68,977 60,76,091 EBITDA 6,41,760 8,41,670 8,82,170 8,58,105 10,43,536 Probal Sen EBITDA margin (%) 16.4 14.8 14.8 17.6 17.2 Analyst, Oil & Gas

Oil& Gas Net profit 3,60,800 3,98,370 3,98,800 5,30,299 6,12,205 +91 22 4215 9001 EPS (Rs) 56.9 62.8 62.9 83.7 96.6 [email protected] EPS growth (%) 18.3 12.9 13.5 17.3 15.4

PE (x) 33.1 29.3 25.8 22.0 19.1 EV/EBITDA (x) 21.4 17.3 16.6 13.9 11.3 PBV (x) 4.0 3.0 2.6 2.3 2.1 RoE (%) 12.7 11.7 10.8 11.1 11.6 Akshay Mane RoCE (%) 8.2 8.6 8.0 7.6 8.4 Associate, Oil & Gas +91 22 4215 9265 Source: Bloomberg, Centrum Research estimates [email protected]

Please see Disclaimer for analyst certifications and all other important disclosures. Reliance Industries Ltd 16 July, 2020

Thesis Snapshot

Centrum revised estimates Valuations Revised Old change Revised Old change We employ EV/EBITDA multiples for valuing the downstream energy, Retail YE Mar (Rs bn) FY21E FY21E (%) FY22E FY22E (%) and Telecom business segments, in line with peers and historical performance. Revenue 4,869 5,177 -6.0% 6,076 6,430 -5.5% Upstream is valued using DCF for producing assets and EV/boe for unproduced EBITDA 858 893 -3.9% 1,044 1,122 -7.0% reserves. Adj. PAT 530 506 4.8% 612 647 -5.4% Valuations Rs/share Adj. EPS (Rs/sh) 83.7 79.8 4.8% 96.6 102.1 -5.4% Refining + Petchem (7.5x EV/E FY22E) 722 Source: Bloomberg, Centrum Research estimates E&P (DCF + EV/boe) -4.5 RIL versus NIFTY 50 JIO (11.7x FY22E EBITDA) 519 Retail (30.3x FY22E EBITDA) 653 1m 6m 1 year US shale (0.5x BV) 55 RIL IN 14.2 22.2 45.9 Total EV 1,945 NIFTY 50 8.2 (14.0) (8.4) Source: Bloomberg, NSE Net Debt (70) Target price 2,015 Key assumptions Upside/(downside) (%) 9.3 YE Mar FY21E FY22E P/E mean and standard deviation Brent (US$/bbl) 45.0 50.0 INR/USD 73.0 73.0 RIL refinery throughput (mmt) 68.2 68.2 RIL average GRM (USD/bbll) 8.5 9.5 Retail EBITDA (Rsbn) 106.1 136.8 Petchem EBIT (INRbn) 238 282 Jio EBITDA (Rsbn) 310 420 Source: Centrum Research estimates

Click or tap here to enter text. EV/EBITDA mean and standard deviation

Peer comparison EPS CAGR Mkt Cap PE (x) P/Bv (x) EV/EBITDA (x) RoE (%) RoCE (%) Company (FY20-22E) (Rs mn) (%) FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E FY22E FY22E RIL 1,16,89,300 16.4 25.8 22.0 19.1 2.6 2.3 2.1 15.8 13.1 10.6 10.0 7.9 IOCL 7,86,356 19.9 10.5 12.7 7.3 0.8 0.8 0.8 10.5 9.5 7.6 10.4 7.5 BPCL 7,26,959 43.2 23.1 15.0 11.3 2.2 2.1 1.9 14.6 11.7 8.9 17.0 10.3 HPCL 3,08,881 67.3 16.8 7.9 6.0 1.1 1.0 0.9 11.1 8.6 7.3 15.2 7.6 Source: Company, Centrum Research estimates

Centrum Institutional Research 2 Reliance Industries Ltd 16 July, 2020

JIO – looking beyond mobility Value unlocking has gone beyond expectations RIL’s decision in Oct’19 to consolidate all Digital initiatives into one entity, JIO Platforms, paved the way to monetize and unlock greater value in their Digital Ecosystem. With investments from 13 marquee investors, RIL has managed to raise ~Rs1.5trn by selling 32.9% stake in JIO in less than 3 months, unlocking significant value for RIL shareholders and progressed towards a digital platform company on par with the likes of Alphabet, Facebook, Tencent, etc and rather being looked only as a Telecom service provider.

Exhibit 1: RIL has now divested 32.88% stake in JIO Platforms

67.12% % Marquee Investors 32.88%

Source: Company Data, Centrum

Google becomes the second largest minority shareholder after Facebook RIL announced the investment of Rs337.4bn by Google in JIO Platforms for a stake of 7.73%, valuing the JIO Platforms at an equity value of Rs4.36trn, similar to Facebook’s deal, however lower than the deals with other investors. With this investment, Google becomes the second largest minority shareholder after Facebook. Google’s investment in JIO Platforms forms a part of the US$10bn investment Fund for Digital India announced by Google few days ago (~US$4.5bn committed in JIO Platforms). The investment will accelerate RIL’s and Google’s objective of expanding the Digital network across the country. Additionally, JIO Platforms and Google have also entered into a commercial agreement to jointly develop an entry level affordable smartphone with optimizations to the Android operating system and the Play Store. Currently, there are around 100mn JIO Phone users in India while 350mn users are still using the feature phones. With the commercial agreement

Centrum Institutional Research 3

Reliance Industries Ltd 16 July, 2020

with Google, JIO focuses to penetrate and capture the feature phone market share thereby eliminating the 2G users in the country.

Exhibit 2: Investors in JIO Platforms till date Investor Stake sale Amount (Rs bn) Facebook 9.9% 435.7 Silver Lake 1.2% 56.6 Vista 2.3% 113.7 General Atlantic 1.3% 66.0 KKR 2.3% 113.7 Mubadala 1.9% 90.9 Silver Lake Additional 0.9% 45.5 ADIA 1.2% 56.8 L Catterton 0.4% 18.9 TPG 0.9% 45.5 PIF 2.3% 113.7 0.4% 18.9 Qualcomm 0.2% 7.3 Google 7.7% 337.4 Total stake sold 32.88% 1,520.6

Source: Company Data, Centrum

Exhibit 3: Global tech company valuation summary – Significant rerating possible for JIO over long term EBITDA Market Cap PAT growth PE (x) P/Bv (x) EV/EBITDA (x) growth (US$ mn) CY20-22E CY20-22E CY20E CY21E CY22E CY20E CY21E CY22E CY20E CY21E CY22E Alphabet Inc 10,38,069 19.2% 22.2% 29.0 22.8 19.1 4.8 4.1 3.5 16.1 12.8 10.5 Amazon.com Inc 15,38,225 31.1% 51.5% 91.8 58.8 44.1 18.0 13.9 10.3 35.4 26.3 21.8 Alibaba Group 6,66,871 34.6% 19.0% 30.8 29.2 22.6 4.9 5.1 4.2 31.6 23.8 18.0 Holding Ltd Facebook Inc 6,83,551 26.0% 20.4% 29.5 22.5 18.6 5.7 4.6 3.7 17.2 13.0 10.3 Tencent Holdings 51,59,789 20.5% 22.4% 39.0 31.5 26.2 8.5 6.7 5.4 26.4 21.6 17.5 Ltd Apple Inc 16,82,719 9.3% 8.9% 31.3 26.1 23.4 29.0 44.2 89.8 21.6 19.2 18.6

Source: Bloomberg, Centrum

Centrum Institutional Research 4 Reliance Industries Ltd 16 July, 2020

Exhibit 4: JIO can leverage the marquee investors’ expertise and strategic support Player Core identity Focus Scale Leading Social media platform with >1.3bn Leverage the massive database of users and The largest social media company in the FB users; also owns world’s largest messaging offer targeted, focused value offerings viz; world; US$70bn in revenue in CY19 service WhatsApp with >1bn users globally ads, apps, products etc. Silver Lake’s ideal target company has a Silver Lake is the global leader in technology leading position in its market, a competitively investing, with approximately $40 billion in advantaged business model, a strong US$40bn portfolio; investee companies have combined assets under management and Silver Lake management team, proprietary core combined revenue of US$204bn and employ committed capital and a team of technologies, sound business processes, and >350k people approximately 100 investment/operating the potential for transformational value professionals located around the world. creation Investing in enterprise software since inception, Vista pioneered a sector-focused Vista aims to collaborate with portfolio approach to private equity. Vista partners companies to capitalize on new ideas. Their US$57bn portfolio - 60+ companies in diverse Vista with organizations at every phase of growth team of over 150 subject matter experts has sectors to rise to the next level and maximize future experience across enterprise software opportunities General Atlantic pioneered growth equity investing 40 years ago. focus is to seek investments that drive global growth. As A diversified growth focused equity investor General proven growth investors and committed focused on 4 key sectors; Consumer, Financial US$35bn invested in >350 companies globally Atlantic partners, General Atlantic’s value lies in their Services, Healthcare and Tech ability to underwrite and execute growth, drawing upon decades of experience and strategic value-add capabilities.

Intel Capital invests in innovative startups Intel Capital has invested US$12.9 billion in Intel Capital is the arm of Intel Corporation, targeting artificial intelligence, autonomous more than 1,582 companies worldwide, and Intel Capital leader in semiconductor industry, computing vehicles, datacenter and cloud, 5G, next- 692 portfolio companies have gone public or and communications technology. generation compute and a wide range of participated in a merger. other disruptive technologies.

Qualcomm is the world’s leading wireless Qualcomm Ventures is a global fund that More than $62 billion in cumulative research technology innovator and the driving force invests in pioneering companies across the and development spend, 35 years of Qualcomm behind the development, launch and wireless ecosystem in areas like 5G, AI, IoT, innovation and over 140,000 patents and expansion of 5G. automotive, networking and enterprise patent applications.

One of the most widely known companies in Google’s products and applications like the world. Google products and platforms Organise the world’s information and make it YouTube, Gmail, Search, Maps, are widely Google play an integral role in daily lives of billions of universally accessible and useful used applications with large user base. Google people. reported US$162bn in revenues in CY19

Source: Company Data, Centrum

Exhibit 5: Leading JIO applications provide differentiated features for high customer engagement

Full service app providing power in the hands of customers; all services and information available A full service super app…. through a single login; access to entire Jio eco system

Live and catch up TV; 16 languages, 11 genres, 640+ India’s no. 1 live TV app; Unique globally channels, 135+ HD channels

Video on demand: 6,000+ movies; 120,000+ episodes; Among the most popular video 60,000+ music videos; Exclusive Web Originals; built on entertainment apps in the country;

state of the art tech platform consistently high ratings 175+ Live channels, 900+ magazines, 300+ India’s leading news app with the best in newspaper editions; varied contents formats including class content bouquet Live TV, Short videos, News articles 45+ million tracks across 16 languages with No. 1 music app in the country; continues to differentiation through Artist Originals Program be the fastest growing streaming platform

Source: Company Data, Centrum

Centrum Institutional Research 5 Reliance Industries Ltd 16 July, 2020

Significant revenue monetization prospects beyond mobility! While the prospects of the traditional mobility (boosted marginally by some FTTH revenue) by itself are industry leading and create enough confidence in value of JIO, we see multiple levers of revenue growth on this large base over the next 2-3 years, which are not factored into our valuations/estimates and create material upside risk to our target valuation. . JioPhone can help increase rural connectivity – The attractive price point of the 4G feature phone can help continue migration of a higher number of rural consumers to 4G – the higher level of farm income due to higher remittances under Jan Dhan Yojana and the record harvest can augment the usage of mobile services, supporting JioPhone. . Creating a premium tier for Music/Video/content – While most content of JIO is free as of now, we see a gradual move to create a premium tier for music/video content wherein a customer signing up to a loyalty program (like Prime of Amazon) gets access to premium content. Even a nominal Rs30/month paid by <10% of JIO customer base nets Rs16bn in additional revenue annually to JIO. . Education & Healthcare – MDA showcased a couple of products/solutions for the education/healthcare industries during the AGM and we believe tying up retail customers on one end (students/patients) and enterprises on the other (Schools/universities/hospitals) creates a fees/usage based revenue opportunity which can be material over FY22-24E. . Retail/Fin Services – JIO is anyways responsible for the tech backbone behind the JioMart business model and is also going to maintain the tech infra to power the JV with WhatsApp – additionally, plans for launch later in the year will of course rely on JIO’s technical infra to power the execution of the services. . Google JV led OS/device launch – The OS/device will likely derive licensing fees from the apps to be run on the device and the OS will be developed by JIO. . Ad monetization opportunity for the FTTH business and media aired exclusively on JIO network. . Internet of things (IOT) – For IOT devices in higher end households also, JIO will derive revenue via providing the data backbone and the software for running the ecosystem. . 5G – JIO has via the start-up created an indigenous 5G technology which will reduce dependence on global vendors when licenses are actually launched in India for 5G – also once proven in ground implementation this creates a whole new business opportunity for telecom players domestically and abroad.

Centrum Institutional Research 6 Reliance Industries Ltd 16 July, 2020

RJIO expected to see material growth ahead RIL’s telecom segment saw a strong growth in FY20 with Revenue/EBITDA/EBIT growing by 39.9/43.4/63.8% yoy supported by a sharp increase in subscribers to 388mn by FY20, growing by 26.3% yoy. However, ARPU at Rs125/month/user remained muted vs FY19. Given the discussion with the management, we have revised upwards our ARPU estimates to Rs150/Rs165 per month per user vs earlier estimates of Rs145/Rs155, while Subscribers to grow to 436/496mn in FY21/22E.

Exhibit 6: Tariff to steadily improve over the next two years Exhibit 7: Subscriber addition to remain strong as well

180 165 600 160 150 496 138 500 140 131 125 436 388 120 400 100 307 300 80 mn 187 Rs/month 60 200 40 100 20 0 0 FY18 FY19 FY20 FY21E FY22E FY18 FY19 FY20E FY21E FY22E Source: Company Data, Centrum Source: Company Data, Centrum

Exhibit 8: JIO financial summary (Rs mn) FY19 FY20 FY21E FY22E Revenue 3,88,380 5,43,160 7,54,200 9,51,456 Interconnection & access costs 42,070 57,950 74,448 30,146 License and spectrum fee 41,590 57,200 81,477 1,10,603 Network costs 1,13,380 1,69,300 2,13,478 2,43,025 SG&A costs 23,800 28,410 49,032 1,15,078 Employee costs 16,580 14,630 26,000 32,250 EBITDA 1,51,020 2,16,540 3,09,765 4,20,355 EBITDA margin (%) 38.9% 39.9% 41.1% 44.2% DD&A 63,980 73,960 91,356 1,10,492 EBIT 87,040 1,42,580 2,18,409 3,09,863 EBIT margin (%) 22.4% 26.3% 29.0% 32.6% Finance cost 41,480 66,170 63,151 81,218 PBT 45,560 74,950 1,55,258 2,28,646 ARPU (Rs/sub/month) 131 125 150 165 Subscribers (mn) 307 388 436 496

Source: Company Data, Centrum | Note: JIO Financials are including stake sales of ~32.9% to investors

FTTH – a key monitorable RIL received around 15mn registrations from nearly 1,600 towns since last year after they invited registrations of interest for availing FTTH services. Based on the registrations, RIL has drawn a plan to penetrate 20mn residences and 15mn business establishments over the next 12-15M. RIL has built significant momentum in JioFiber roll out and expects to complete the network rollout within the next 12 months. Until last year, JIO had already connected 0.5mn houses for testing. RIL’s basic plans for the FTTH starts with 100mbps speed going up to 1Gbps, pricing ranging from Rs700 per month to Rs10,000 per month. For cloud computing, RIL has entered into a long term alliance with Microsoft to accelerate the digital transformation in India. RIL will set up data centres across the country and Microsoft will bring their Azure cloud platform into JIO’s datacentres.

Centrum Institutional Research 7 Reliance Industries Ltd 16 July, 2020

RIL has set aggressive targets to connect 20mn houses and 15mn commercial establishments which potentially can add Rs275bn in revenue by FY22E (assuming Rs700p.m of ARPU). However, we build in conservative estimates for the FTTH segment with FY21/22E ARPU of Rs800/Rs880 per month with subscribers in FY21E at 4mn to grow to 7.3mn by FY22E.

Exhibit 9: Our estimates for FTTH segment (Rs mn) FY21E FY22E FTTH Revenue 13,500 29,766 # cities for FTTH service 20.0 25.0 Homes passed (mn) 26.5 36.5 Penetration (%) 15% 20% FTTH subs (mn) 4.0 7.3 ARPU (Rs/ month) 800 880

Source: Centrum

Overall, we expect the momentum in JIO to sustain over FY20-22E delivering an estimated CAGR of 32.4/39.3/47.4% over FY20-22E in revenue/EBITDA/EBIT, respectively. We value the segment at 11.7x FY22E EV/EBITDA which delivers an EV of Rs519/sh in our SoTP.

Centrum Institutional Research 8 Reliance Industries Ltd 16 July, 2020 Retail – The next Unicorn gears up now operates ~11,784 stores Pan-India, with over 1500 stores added during FY20. The company operates the most extensive store network in the country across 6,900 cities and towns. In FY20, Reliance Retail reported Revenue/EBITDA at Rs1.6trn/Rs96.5bn, growing strongly by 24.8/55.7% yoy driven by higher growth seen from the grocery and fashion and lifestyles segments.

Exhibit 10: Segment wise FY20 Retail revenue break up Exhibit 11: Segment wise FY20 Retail EBITDA break up

Grocery Electronics Fashion & Lifestyle Grocery Electronics Fashion & Lifestyle Connectivity Petrol Retail Connectivity Petrol Retail

0.6% 8.7% 21.2% 5.3% 9.6%

34.3%

27.4% 13.8% 11.9% 8.3%

Source: Company Data, Centrum Source: Company Data, Centrum

Having seen a strong performance in FY20, we expect Reliance Retail to expand their business from the gradual build-up of the online profile to complement the strong offline presence already in place. JioMart to provide material growth opportunities over the next few years Along with the investment in JIO Platforms, Facebook also entered into a commercial agreement with Reliance Retail’s new commerce business on JioMart. With this agreement, RIL’s expects to explore ~400mn WhatsApp user base in India and expects to connect ~30mn local stores through this partnership. Both the companies will work closely to ensure that consumers are able to access the nearest kiranas who can provide products and services to their homes by transacting seamlessly with JioMart using WhatsApp. The commercial agreement between WhatsApp and JioMart is targeted to enable seamless access to India’s 60mn micro, small and medium businesses, 120mn farmers, 30mn small merchants and millions of small and medium enterprises in the informal sector. We believe RIL can piggyback on the widespread reach and acceptance of the WhatsApp platform to better drive adoption of the JioMart platform – this can accelerate adoption and growth of the Retail segment online. With the online partnership with WhatsApp as part of the deal with Facebook, we belive RIL has set sight on expanding their Retail segment not only through the organised channel (online/offline) but also penetrate the traditional retail channel (small kirana stores) which provides a huge opportunity (~US$900bn) to the company. Currently, JioMart has been rolled out in 200 cities clocking 250k orders/day. While JioMart currently focuses largely on groceries, management has highlighted their plans to foray into other segments like electronics, Pharmaceuticals, Healthcare, Fashion on JioMart platform. Additionally, given strong interest from strategic and financial investors in Reliance Retail segment, the company will look to monetise and unlock greater value in this segment as well similar to JIO Platforms. We have substantially raised the target multiple for the retail business in our valuation to 30.3x EV/E (from 18x EV/E, implying 35x for core retail in line with Dmart, which we believe

Centrum Institutional Research 9 Reliance Industries Ltd 16 July, 2020

provides the only credible comparative to RIL, given the scale and scope of the business opportunity targeted by RIL) and 8x for non core retail. This delivers a target EV of Rs4.1trn or Rs653/sh. Additionally, we believe even these multiples do not adequately convey the scale of the opportunity for RIL retail. RIL’s unique strength and growth prospect for retail comes via its presence not only in organized retail and E-commerce but by the business model for JioMart which envisages the first real attempt to marry traditional retail with digital delivery and thereby open up the massive US$900bn+ traditional retail segment which has largely remained untouched by organized retail or E-Commerce players. We therefore have attempted to look at 2 scenarios for the medium term prospects of RIL retail (FY21-25E). In the first stage we assume a steady growth in organized retail + E- commerce and RIL’s continuing growth of market share in the same (similar to last few years). In the more bullish scenario we assume that RIL will manage to bite off at least 1% of the traditional retail space by FY25E – (even though this entails a moderation in EBITDA margins as the overheads involved). This translates to a bull case value of Rs767/sh (EV/E of 30x applied to FY25E EBITDA discounted at 11% to FY22E) in first case and a blue sky value of Rs862/sh in second case highlighting the significant upside opportunity for RIL retail over the next 5 years.

Exhibit 12: Reliance Retail medium term outlook FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E Reliance Retail Revenue (Rs mn) 6,91,980 13,05,660 16,29,360 16,59,685 21,21,459 26,15,279 31,08,611 36,95,260 Reliance Retail Revenue (US$ bn) 10.7 18.7 22.9 22.7 29.1 36.1 43.2 51.7 Reliance Retail share (%) 19.8% 20.9% 25.6% 19.5% 17.6% 15.9% 15.6%

Blended EBITDA 25,290 62,010 96,530 1,06,120 1,36,760 1,56,917 1,86,517 2,21,716 Margin 4% 5% 6% 6% 6% 6% 6% 6%

target Multiple 30 30 30 30 30 30 30 30 Target EV FY22E 41,02,796 Target EV FY25E 66,51,468 Discounted back to FY22E @11% 48,63,496 Per share 767

Source: Company Data, Centrum

Exhibit 13: Scenario analysis Case I discounted to FY22E Rsbn BULL CASE 4,863 Case II discounted to FY22E Rsbn BLUE SKY 5,466 Target EV (@30x) Case I Per share 767 Case II Per share 862 BASE CASE VALUE 653

Source: Centrum

Exhibit 14: Retail segment summary (Rs mn) FY18 FY19 FY20 FY21E FY22E Total revenues 6,91,980 13,05,660 16,29,360 16,59,685 21,21,459 Core retail 3,62,670 7,31,170 9,27,780 9,37,058 12,18,175 Non-core retail 3,29,310 5,74,490 7,01,580 7,22,627 9,03,284 Total EBITDA 25,290 62,010 96,530 1,06,120 1,36,760 Core 21,880 51,750 82,800 87,382 1,12,809 Non-core 3,410 10,260 13,730 18,738 23,951 Margin (%) Core 6.0% 7.1% 8.9% 9.3% 9.3% Non-core 1.0% 1.8% 2.0% 2.6% 2.7%

Source: Company Data, Centrum

Centrum Institutional Research 10 Reliance Industries Ltd 16 July, 2020

Exhibit 15: Retail global peers – Substantially lower growth reflects in moderate valuations EBITDA PAT Market Cap PE (x) P/Bv (x) EV/EBITDA (x) growth growth (US$ mn) CY20-22E CY20-22E CY20E CY21E CY22E CY20E CY21E CY22E CY20E CY21E CY22E Walmart 373,846 -0.8% 0.9% 23.1 26.2 24.3 4.3 3.7 4.7 13.0 12.7 12.3 Target 60,042 -1.3% 1.3% 17.3 23.9 17.9 4.7 4.9 4.6 10.9 11.1 9.4 Costco 144,820 8.9% 9.6% 38.5 35.3 32.1 8.2 7.2 6.2 21.0 19.1 17.2 Tesco 20,939 -0.5% 26.1% 23.8 15.3 12.9 1.7 1.3 1.3 7.1 6.3 5.2 Carrefour 11,422 7.1% 10.4% 11.4 10.4 9.7 1.0 1.0 0.9 4.3 4.0 3.3

Source: Company Data

Centrum Institutional Research 11 Reliance Industries Ltd 16 July, 2020 OTC business – Muted near term prospects We expect the Oil-to-Chemicals (OTC) business segment to remain weak driven by weak demand due to CoVid-19 pandemic and very low product spreads environment. In the past two years, the non-energy businesses’ EBIT contribution has grown to significant levels in line with the company’s objective of growing the non-energy businesses to as much as all energy segments combined over the next few years and FY20 has been a precursor to that transition. We expect the consumer segments’ contribution growing to ~50% of consolidated EBIT by FY22E, well in line with management’s vision and guidance.

Exhibit 16: Contribution of non-energy business has grown significantly over the past two years

100%

80%

60%

40%

20%

0% FY16 FY17 FY18 FY19 FY20 FY21E FY22E Energy business Non-energy business

Source: Company Data, Centrum

Refining segment Given the material demand weakness and limited evidence of IMO impacting diesel spreads favourably, we believe that only the favourable crude costs helps keep RIL GRMs above peers. We maintain conservative estimates of US$8.5/bbl and US$9.5/bbl GRMs for FY21/22E. Having said that, with the Petcoke Gasifier having been fully commissioned and return of some parity with spot LNG prices due to a sharp dip in international Petcoke prices, we factor a benefit of US$0.1/bbl in FY21E and US$0.5/bbl in FY22E from the project in GRMs for RIL.

Exhibit 17: RIL’s refining performance to remain subdued in FY21E

14 GRMs - LHS Refining EBITDA - RHS 350 11.6 12 11.0 300 286 290 9.5 271 10 9.2 261 8.9 250 245 8.5 237 8 200

6 150 US$/bbl 4 100

2 50

0 - FY17 FY18 FY19 FY20 FY21E FY22E

Source: Company Data, Centrum

Centrum Institutional Research 12 Reliance Industries Ltd 16 July, 2020

Petchem segment Due to the weakness persisting in key products spreads and driven by threats of significant capacity additions of 18mtpa globally (in next 3 years) coupled with the CoVid-19 related demand collapse, we factor a muted EBITDA of Rs294bn in FY21E while growing to Rs338bn by FY22E.

Exhibit 18: Petchem profitability to remain muted in FY21E

Petchem EBITDA - LHS Petchem EBITDA as a % of total - RHS 400 50% 44% 350 39% 45% 35% 34% 40% 300 32% 31% 35% 250 30%

Rs bn 200 25%

150 20% 15% 100 10% 50 164 259 379 309 294 338 5% 0 0% FY17 FY18 FY19 FY20 FY21E FY22E

Source: Company Data, Centrum

E&P – new projects could improve dynamics over FY21-22E On exploration project updates, the R series fields are part of three major proposed projects in the KG D6 block, which collectively are estimated to produce 3tcf (~0.5bn boe) of incremental gas over the next 5-7 years. RIL expects to restart the production from KG D6 by end of this year which has seen some delay due to the pandemic. Subsequent to this, RIL’s board had also approved the development of the second series of fields (Satellite cluster, estimated output of 6-7 mmscmd), with the FDP of the third project MJ1 (estimated output 10-12 mmscmd) also approved. US shale – Lower volumes keep profitability muted Gas production from the shale gas business has seen a declining trend on account of natural decline and slowdown in economic activity. Realisations for both oil and gas declined and have remained under pressure. We have an overall value of Rs55/sh coming from shale in our SoTP, with shale contribution to our FY21/22E EBITDA at <1%.

Target to become net carbon-zero company by 2035 In the AGM, MDA mentioned the 15-year vision for the OTC segment which would drive RIL to become a new materials and new energy company through adoption of new technology therefore targeting to become a net carbon-zero company by 2035. He highlighted that company has already made significant progress towards converting carbon dioxide emissions into high value proteins, neutraceuticals, advanced materials, etc. We also note that the deal announced last year where Saudi Aramco would pick up a minority stake in RIL’s OTC business segment has not been fulfilled due to weak macro environment. However, management has maintained that while the deal discussion did not progress as per timeline, both the company’s remain committed for a long term partnership.

Centrum Institutional Research 13 Reliance Industries Ltd 16 July, 2020 Financials and Valuations – Earnings to remain strong We believe JIO and the retail businesses will continue its strong growth momentum over FY20-22E (assuming the CoVid-19 related damage is limited to H1FY21E) while petchem segment will see some pressure over the next 12M and given the demand weakness and limited evidence of IMO impacting diesel spreads favourably, we believe that only the favourable crude costs will help keep RIL GRMs above peers. Therefore, we build 8.8/16.4% CAGR in consolidated EBITDA/EPS over FY20-22E.

Exhibit 19: Strong earnings prospects over FY20-22E

EBITDA Rsbn LHS EBIT Rsbn LHS EPS Rs/sh RHS 1200 120 1,044

1000 882 100 842 858 97 800 84 80 642 71 Rs bn 600 63 60 462 56

47 Axis Title 400 40

200 20 345 475 632 660 636 796 0 - FY17 FY18 FY19 FY20 FY21E FY22E

Source: Company Data, Centrum

In addition to sharply higher profitability, we also expect earnings quality to improve over the next few years as reflected in the return ratios trends. Post a sustained period of RoE/RoCE hovering in a very narrow range, we expect higher earnings to reflect in improvement in key return ratios by FY22E as well.

Exhibit 20: Return ratios expected to improve by FY22E

14 RoE ROCE ROIC 12.0 11.8 12 11.3 11.1 10.6 10.6 10.5 10.3 10.0 9.6 10 9.0 8.6 9.0 8.98.8 7.5 7.9 8 % 6.8

6

4

2

0 FY17 FY18 FY19 FY20 FY21E FY22E

Source: Company Data, Centrum

The improved earnings profile and better-quality earnings also show up in the stronger cash flow profile. We expect FCF for FY20-22E to aggregate >Rs600bn versus a negative FCF of ~Rs800bn over FY16-19.

Centrum Institutional Research 14 Reliance Industries Ltd 16 July, 2020

Exhibit 21: Cashflows to remain strong

OpCF Rsbn FCF Rsbn 981 796 815 715 496 423 225 227 152

(15)

(271)

(504) FY17 FY18 FY19 FY20 FY21E FY22E

Source: Company Data, Centrum

Exhibit 22: RIL SoTP valuation on FY22E financials (Rs bn) Basis Multiple (x) EBITDA EV Rs/sh Valuation of petchem business EV/EBITDA 7.5 338 2547 402 Valuation of refining business (incl RPL) EV/EBITDA 7.5 271 2030 320 KG-D6 (D1-D3, MA, satel. fields and NEC-25) DCF (84) (13.2) Retail EV/EBITDA 35/8 core/N.core 4140 653 CBM (3.5tcf) Multiple USD1.0/boe 55 8.7 Telecom EV/EBITDA 11.7 3290 519 Shale gas Multiple 0.5x BV 350 55

Total EV 12,329 1,945 Net debt (FY21E) (443) (70) Total equity value 12,772 2,015 Price (Rs) 1,844 Upside/(downside) (%) 9.3

Source: Centrum

Exhibit 23: Key assumptions FY18 FY19 FY20 FY21E FY22E Brent crude US$/bbl 57.5 71.2 60.7 45.0 50.0 INR/USD 64.6 70.0 71.0 73.0 73.0

Refining thruput mt 69.8 68.3 70.6 68.2 68.2 GRMs US$/bbl 11.6 9.2 8.9 8.5 9.5 Petchem EBITDA 258.6 378.7 309.3 293.5 338.2 Petchem EBIT 211.8 323.9 255.5 238.4 281.7

JIO subs #mn 186.6 306.7 387.5 435.5 495.5 ARPU (Rs) 138.3 130.6 125.3 150.0 165.0 JIO EBITDA 67.3 151.0 216.5 309.8 420.4

Retail revenue growth (%) 104.9% 88.7% 24.8% 1.9% 27.8% Retail EBITDA margin (%) 3.7% 4.7% 5.9% 6.4% 6.4% Retail EBITDA 25.3 62.0 96.5 106.1 136.8

Source: Company Data, Centrum

Centrum Institutional Research 15 Reliance Industries Ltd 16 July, 2020

Exhibit 24: Domestic retail and telecom peer comparables EPS CAGR Company Mkt Cap PE (x) P/Bv (x) EV/EBITDA (x) RoE (%) (FY20-22E) (Rs mn) (%) FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY22E

DMART 13,90,351 23.88 105.63 102.95 67.54 12.79 11.95 10.09 66.66 68.41 45.12 16.51

TRENT 2,20,722 51.57 137.21 639.44 76.55 7.21 9.02 8.31 35.11 65.70 34.88 9.23

ABFRL 90,475 na na na 77.32 10.90 8.47 7.65 13.38 20.61 12.25 8.69

BHARTI 30,74,752 na na 150.65 38.43 3.12 3.76 3.37 10.49 9.93 8.24 9.52

Source: Company Data, Bloomberg | Note: EPS CAGR and PE for Bharti and ABFRL not applicable due to negative EPS for FY20-21E.

Centrum Institutional Research 16 Reliance Industries Ltd 16 July, 2020

P&L Balance sheet YE Mar (Rs mn) FY18A FY19A FY20A FY21E FY22E YE Mar (Rs mn) FY18A FY19A FY20A FY21E FY22E Revenues 39,16,770 56,92,090 59,67,430 48,68,977 60,76,091 Equity share capital 59,220 59,260 63,390 63,390 63,390 Operating Expense 32,55,030 47,73,290 49,20,929 38,81,260 48,53,135 Reserves & surplus 28,75,840 38,11,860 44,69,920 49,24,150 54,60,286 Employee cost 95,230 1,24,880 1,40,750 1,82,975 2,37,868 Shareholders fund 29,35,060 38,71,120 45,33,310 49,87,540 55,23,676 Others -75,250 -47,750 23,581 -53,363 -58,447 Minority Interest 35,390 82,800 80,160 13,20,718 13,20,718 EBITDA 6,41,760 8,41,670 8,82,170 8,58,105 10,43,536 Total debt 21,03,560 30,13,490 32,95,250 15,71,912 14,41,912 Depreciation & Amortisation 1,67,060 2,09,340 2,22,030 2,22,144 2,47,839 Non Current Liabilities 0 0 0 0 0 EBIT 4,74,700 6,32,330 6,60,140 6,35,961 7,95,697 Def tax liab. (net) 2,45,430 4,51,470 5,12,230 5,50,450 5,79,115 Interest expenses 80,520 1,64,950 2,20,270 99,815 92,015 Total liabilities 53,19,440 74,18,880 84,20,950 84,30,620 88,65,421 Other income 88,620 83,860 1,39,560 1,70,120 1,12,039 Gross block 57,54,710 58,45,250 74,27,500 84,26,338 92,35,749 PBT 4,93,670 5,51,240 5,34,990 7,06,266 8,15,722 Less: acc. Depreciation (17,73,990) (19,81,480) (22,03,510) (24,25,654) (26,73,493) Taxes 1,33,460 1,53,900 1,37,260 1,77,767 2,05,317 Net block 39,80,720 38,63,770 52,23,990 60,00,684 65,62,257 Effective tax rate (%) 27 27.9 25.7 25.2 25.2 Capital WIP 18,70,220 17,94,630 10,91,060 7,35,872 5,15,111 PAT 3,60,210 3,97,340 3,97,730 5,28,499 6,10,405 Net fixed assets 59,09,070 57,78,370 64,17,640 68,39,146 71,79,957 Minority/Associates 590 1,030 1,070 1,800 1,800 Non Current Assets 86,530 1,76,760 3,74,070 3,74,070 3,74,070 Recurring PAT 3,52,869 3,98,370 4,52,230 5,30,299 6,12,205 Investments 8,28,620 23,56,350 27,67,670 13,57,852 13,57,852 Extraordinary items 7,931 0 -53,430 0 0 Inventories 6,08,370 6,75,610 7,39,030 6,59,321 8,27,269 Reported PAT 3,60,800 3,98,370 3,98,800 5,30,299 6,12,205 Sundry debtors 1,75,550 3,00,890 1,96,560 2,00,095 2,49,702 Cash & Bank 42,550 1,10,810 3,09,200 13,30,681 13,64,497 Ratios Loans & advances 1,34,430 1,62,800 4,98,350 4,56,271 5,09,491 YE Mar FY18A FY19A FY20A FY21E FY22E Other current assets 3,27,610 4,14,710 3,27,630 3,44,012 3,61,212 Growth (%) Trade payables 10,68,610 10,83,090 9,67,990 8,65,359 10,85,791 Revenue 28.3 45.3 4.8 -18.4 24.8 Other current liab. 16,83,300 14,32,510 22,04,410 22,22,998 22,22,998 EBITDA 38.9 31.2 4.8 -2.7 21.6 Provisions 41,380 41,820 36,800 42,470 49,841 Adj. EPS 18.3 12.9 13.5 17.3 15.4 Net current assets (15,04,780) (8,92,600) (11,38,430) (1,40,448) -46,458 Margins (%) Total assets 53,19,440 74,18,880 84,20,950 84,30,620 88,65,421 Gross 25.7 25.7 27.1 29.6 29.4 EBITDA 16.4 14.8 14.8 17.6 17.2 Cashflow EBIT 12.1 11.1 11.1 13.1 13.1 YE Mar (Rs mn) FY18A FY19A FY20A FY21E FY22E Adjusted PAT 9 7 7.6 10.9 10.1 Profit Before Tax 4,94,260 5,52,270 5,36,060 7,06,266 8,15,722 Returns (%) Depreciation & Amortisation 1,67,060 2,09,340 2,22,030 2,22,144 2,47,839 ROE 12.7 11.7 10.8 11.1 11.6 Net Interest 51,000 1,15,390 1,15,630 -203 53,414 ROCE 8.2 8.6 8 7.6 8.4 Net Change – WC 1,85,380 (2,87,820) 2,19,040 68,498 -60,174 ROIC 6.7 7.2 6.4 6.3 7.9 Direct taxes -98,440 (1,21,910) -83,860 (1,39,547) (1,76,652) Turnover (days) Net cash from operations 7,14,590 4,23,460 9,80,740 7,95,506 8,15,414 Gross block turnover ratio (x) 0.7 1 0.8 0.6 0.7 Capital expenditure (7,29,540) (9,27,770) (7,55,530) (6,43,650) (5,88,650) Debtors 12 15 15 15 14 Acquisitions, net 0 0 0 0 0 Inventory 72 55 59 74 63 Investments 23,330 -38,240 -17,290 14,22,078 60,122 Creditors 115 93 86 98 83 Others 23,310 14,730 15,650 1,04,411 43,214 Net working capital -140 -57 -70 -11 -3 Net cash from investing (6,82,900) (9,51,280) (7,57,170) 8,82,838 (4,85,314) Solvency (x) FCF -14,950 (5,04,310) 2,25,210 1,51,856 2,26,764 Net debt-equity 0.7 0.7 0.6 0 0 Issue of share capital 4,530 2,320 1,300 12,40,558 0 Interest coverage ratio 8 5.1 4 8.6 11.3 Increase/(decrease) in debt 1,91,310 8,32,940 3,14,910 (17,23,338) (1,30,000) Net debt/EBITDA 3.2 3.4 3.4 0.3 0.1 Dividend paid -39,160 -42,820 -45,920 -76,069 -76,069 Per share (Rs) Interest paid (1,76,690) (2,33,380) (2,85,080) -99,815 -92,015 Adjusted EPS 55.7 62.8 71.3 83.7 96.6 Others 0 0 -10,620 1,800 1,800 BVPS 463 610.7 715.1 786.8 871.4 Net cash from financing -20,010 5,59,060 -25,410 (6,56,864) (2,96,284) CEPS 82 95.9 106.4 118.7 135.7 Net change in Cash 11,680 31,240 1,98,160 10,21,481 33,816 DPS 6 6.5 6.5 10 10 Source: Company, Centrum Research estimates Dividend payout (%) 10.5 10.3 10.3 12 10.4 Valuation (x) P/E 33.1 29.3 25.8 22 19.1 P/BV 4 3 2.6 2.3 2.1 EV/EBITDA 21.4 17.3 16.6 13.9 11.3 Dividend yield (%) 0.3 0.4 0.4 0.5 0.5 Source: Company, Centrum Research estimates

Centrum Institutional Research 17 Reliance Industries Ltd 16 July, 2020

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Reliance Industries

Source: Bloomberg

Centrum Institutional Research 19 Reliance Industries Ltd 16 July, 2020

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Reliance Industries

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Centrum Institutional Research 20 Reliance Industries Ltd 16 July, 2020

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Centrum Institutional Research 21