21 June 2021 Update | Sector: Oil & Gas Reliance Industries BSE SENSEX S&P CNX 52,574 15,747 CMP: INR2,238 TP: INR2,430 (+9%) Buy Motilal Oswal values your support Growing dominance of consumer businesses in the Asiamoney Brokers Poll 2021 for India Research, Sales, FY21 Annual Report analysis Corporate Access and Trading team. We request your ballot. FY21 has been a landmark year for Reliance Industries Ltd (RIL). The new-age Retail and Digital businesses flourished despite the COVID-led disruption, led by the emergence of RIL’s disruptive and aggressive growth philosophy. As a result, this cushioned the impact on the overall business and provided the much needed capital raise and deleveraging. RIL’s Fossil Fuels business struggled with a 37% decline in EBITDA in FY21. However, the Retail biz, partially supported by the Online Retail and Digital businesses, came in much stronger, arresting the decline to just 9% on a consolidated basis to INR807b. RIL managed to raise INR2.6t in capital through an asset monetization and rights issue. We delve into the company’s Annual Report, highlighting the key initiatives and business outlooks for the various segments. Digital Services At a time when most businesses were adversely impacted on account of COVID-19, RJio’s revenue/EBITDA grew 29%/43% in FY21, led by a strong 38m subscriber additions and 6% ARPU improvement. The exponential data growth seen in the past year further vindicated the product power and the importance of telecom services/players in a consolidated market. Stock Info The company turned FCF-positive, led by improving EBITDA and reducing capex Bloomberg RIL IN intensity, and ROEs edged up further. Nevertheless, the ROEs remain in single Equity Shares (m) 6,339 digits, underscoring weak monetization and the need for tariff hikes. M.Cap.(INRb)/(USDb) 14575.6 / 197.8 52-Week Range (INR) 2369 / 1606 Reliance Retail 1, 6, 12 Rel. Per (%) 8/0/-24 Reliance Retail Ventures Ltd (RRVL)’s standalone revenue/EBITDA grew 1%/- 12M Avg Val (INR M) 31097 12%, while the core revenue/EBITDA is estimated to have seen 19%/21% Free float (%) 50.9 decline due to the COVID impact. Financials Snapshot (INR b) At a time when most retailers were rationalizing operations, Reliance Retail Y/E March 2021 2022E 2023E added 1,456 new stores and made aggressive inroads into the Online business. Net Sales 4,669 6,078 6,730 It achieved 10% revenue contribution in 4QFY21, presenting huge potential. EBITDA 807 1,116 1,343 RRVL’s standalone debt increased to INR147b (v/s INR47b in FY20) and FCF Net Profit 437 602 757 turned negative to -INR76 (v/s INR98b in FY20). ROEs declined to 21% (v/s 36% Adj. EPS (INR) 67.7 93.4 117.5 EPS Gr. (%) 1.9 37.9 25.8 in FY20), but we expect a rebound as we come out of the COVID- lockdowns. BV/Sh. (INR) 1,086 1,171 1,278 O2C segment | Following other businesses’ trajectories Ratios Net D:E 0.3 0.3 0.2 RIL restructured its Refining and Petrochemical segments into the O2C RoE (%) 7.6 8.3 9.6 segment to attract strategic partnerships. As we had highlighted earlier, an RoCE (%) 8.2 8.1 9.2 incremental conversion of 10% in Oil-to-Chemicals (O2C) could add ~6%/3% to Payout (%) 8.4 8.9 9.2 stand/conso EBITDA. Valuations Unprecedented demand destruction of 9.5mnbopd in 2020 led to weaker P/E (x) 32.9 23.8 18.9 P/BV (x) 2.0 1.9 1.7 margins in refined products. Petrol and diesel cracks more than halved in FY21, EV/EBITDA(x) 20.3 14.7 11.9 while ATF declined to USD1.2/bbl in FY21 (from USD12.6/bbl in FY20). EV/Sales (x) 3.5 2.7 2.4 However, global PP & PE demand rose 3%, and supply constraints resulted in Div. Yield (%) 0.3 0.4 0.5 PP-naphtha/PE-naphtha margins expanding 22%/31%. Swarnendu Bhushan- Research Analyst ([email protected]) Aliasgar Shakir - Research Analyst ([email protected]) Sarfraz Bhimani - Research Analyst ([email protected]) Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. Reliance Industries Shareholding pattern (%) Capital raise of INR2.6t | Strengthening the balance sheet As On Mar-21 Dec-20 Mar-20 Total capex stood at INR797b, primarily toward the Digital, Retail, and O2C Promoter 49.1 49.1 48.9 businesses, and also included the forex impact. DII 12.5 12.7 13.6 FII 27.8 27.3 25.9 As a result of an INR2.6t capital raise (INR1.52t from Jio Platforms, INR0.47t Others 10.6 10.9 11.6 from Reliance retail, INR0.53t via rights issue and INR0.076t from RIL-BP JV), Our FII Includes depository receipts estimate suggests standalone net debt declined 47% YoY to INR935b in FY21 Stock performance (one-year) and consol net debt fell 71% YoY to INR539b. Although, at the end of FY21, as per our calculation – gross debt for standalone was at INR1,938b and consol. was at INR2,238b. Valuation and view RJIO: RJio plans to accelerate growth through JioPhone, Enterprise Data, and other digital avenues via the recent spate of launches, coupled with new digital app offerings. Thus, we assign an EV/EBITDA multiple of 20x on FY23 EBITDA, with TP of INR847/share (for its 66% stake). The higher multiple captures the digital revenue opportunity, potential tariff hikes, and opportunity in the Feature Phone market (not built into our estimates). Retail: We value Reliance Retail’s core business at 35x FY23E EV/EBITDA and assign 4x to Connectivity, arriving at TP of INR755 – after excluding the recent 10% stake sale. Our premium valuation multiples capture the accelerated growth in new store openings, digital commerce, and the new JioMart platform. O2C: Vaccination drives appear to be gaining momentum the world over, with large economies such as the US and India inoculating more than 4m daily. This is expected to soon revive demand for transportation fuels, thus boosting GRMs. Since the company has stopped disclosing GRMs separately, we build in EBITDA of USD107/134/mt for FY22/FY23E (vis-à-vis USD73–84/mt reported over 3Q– 4QFY21) – on the back of improvement in refining and petchem margins. Using SOTP, we value the O2C business at FY23E EV/EBITDA of 7.5x, arriving at a valuation of INR764/share for the standalone business, and add INR68 for the E&P assets. We ascribe an equity valuation of a) INR847/share to RJio on FY23E 20x EV/EBITDA and b) INR755/share to Reliance Retail on FY23E 35x EV/EBITDA, factoring in the recent stake sale. Reiterate Buy, with TP of INR2,430/share. Exhibit 1: RIL – SoTP: Maintain Buy at TP of INR2,430 7.5x FY23 EBITDA Equity value Standalone 4 847 755 2,430 68 764 O2C E&P Reliance Retail RJio Net debt / Target price (cash) INR/share Source: MOFSL 21 June 2021 2 Reliance Industries Consolidated financials | Capital raise of INR2.6t Segmental business-wise split Consolidated revenues fell 18.3% YoY to INR5,392b, weighed by (a) lower volumes and realization across key products in the O2C segment and (b) Retail being impacted by store closures and operational disruptions. The revenue decline was partially offset by growth in the Digital biz. Standalone revenue was down 24% to INR2,789b in FY21, with contribution reducing from 55% to 52% as O2C revenue declined 29% to INR3,200b. Retail revenue declined 6% to INR1,538b despite the sharper impact seen in Discretionary categories such as Fashion and Apparel and Consumer Durables, which faced store closures. However, the launch of the online portal JioMart – which reported sales in Grocery and other categories – cushioned the impact. Digital revenue was up 30% to INR903b. The combined revenue contribution from Digital and Retail increased from 35% to 45%. Consolidated EBITDA was down 4.6% YoY to INR976b as O2C was impacted by pandemic-related demand destruction. However, this was cushioned by Retail EBITDA declining just 2% to INR98b. Digital EBITDA was up 46% to INR340b. The combined EBITDA contribution from Digital and Retail increased from 32% to 45%. Rise in networth The consolidated networth rose to INR6.9t (from INR4.4t), primarily led by retained earnings, a rights issue, and equity issuances by subsidiaries. The standalone networth rose to INR4.7t in FY21 (from INR3.9t), primarily led by retained earnings as well as a rights issue. Exhibit 2: Movement in consol networth Consolidated (INRb) FY20 FY21 Equity share cap 63 64 Other equity 4,428 6,937 Non-controlling interest 122 993 Networth (exluding non controlling interest) 4,491 7,001 Retained earnings 491 Other comprehensive income (forex translation reserve) 338 Dividend (39) Rights issue 529 ESOP 7 Issue of equity by subsidiaries 1,174 Others 7 Source: Company, MOFSL 21 June 2021 3 Reliance Industries Exhibit 3: Movement in standalone networth Standalone (INRb) FY20 FY21 Equity share cap 63 64 Other equity 3,849 4,680 Net worth 3,912 4,745 Retained earnings 319 Other comprehensive income 26 Dividend (39) Loss on acquisition of RHUSA loan (332) Rights issue 529 Stock option 4 Gain from amalgamation of RHUSA & REGDL 324 Source: Company, MOFSL Movement in debt Total capex stood at INR797b in FY21, primarily toward the Retail, Digital, and O2C segments.