Reliance Industries Facebook logs into Jio; strategic benefits aplenty Stock Update Stock Reliance Industries (RIL) and Facebook Inc (FB) have signed a binding agreement Sector: Oil & Gas for an investment of Rs. 43,754 crore by FB in Jio Platforms Ltd for a 10% equity Event Update stake. The deal enterprise value of Rs. 462,000 crore/$66 billion for Jio Platforms (is in-line with company’s estimate of $65-70 billion) implies a one-year forward EV/EBITDA of 14-15x. The cash inflow from the Facebook deal is expected reduce Change RIL’s consolidated net debt (Rs. 153,132 crore as on December 2019) by ~29% and also improve net debt/EBITDA ratio to 1.2x in FY2021E. Moreover, the commercial Reco: Buy partnership between Jio Platforms, Reliance Retail and WhatsApp would accelerate Jio’s new commerce initiative and would be crucial to build a digital ecosystem and CMP: Rs. 1,363 leverage the JioMart platform using WhatsApp. We maintain our Buy rating on RIL with an unchanged price target of Rs. 1,710. Price Target: Rs. 1,710 Facebook to invest Rs. 43,754 crore in Jio Platforms for 10% stake; deal to strengthen á Upgrade No change â Downgrade technology platform services and accelerate balance sheet de-leveraging: Reliance Industries (RIL) and Facebook Inc. (FB) has signed a binding agreement for an investment by latter of Rs. 43,754 crore in Jio Platforms Ltd (wholly-owned subsidiary Company details of RIL) for an equity stake of 10% in Jio Platforms. The investment by Facebook values Jio Platforms at Rs. 4.62 lakh crore on a pre-money enterprise value basis (or $65.95 Market cap: Rs. 864,268 cr billion, assuming a conversion rate of Rs. 70 to a US Dollar), which is in-line with company’s expectations of $65-70 billion EV for Jio Platforms. We highlight here that the investment values Jio Platforms among the top five listed companies in India 52-week high/low: Rs. 1,618/876 by market capitalisation. Concurrent with the investment, Jio Platforms, Reliance Retail and WhatsApp have also entered into a commercial partnership agreement NSE volume: (No of to accelerate its new commerce business on the JioMart platform. The transaction is, 97.0 lakh shares) however, subject to regulatory and other customary approvals. The deal is positive for RIL as an investment by a global technology giant like Facebook in Jio would further strengthen its technology platform services, drive cross-selling through Reliance BSE code: 500325 Retail and help in deleveraging of its consolidated balance sheet (we expect RIL’s consolidated net debt of Rs. 153,132 crore as of December 2019 to decline by ~29%, NSE code: RELIANCE assuming a cash inflow of Rs. 43,754 crore from the Facebook deal). Deal implies one-year forward EV/EBITDA multiple of 14-15x: As per the deal, Sharekhan code: RELIANCE Facebook will invest Rs. 43,754 crore in Jio Platforms for a 10% stake which implies a post-money equity value of Rs. 435,740 crore ($62 billion assuming Rs/US Dollar rate Free float: (No of of Rs. 70). Jio Platforms has net debt of Rs. 41,000 crore, which translates into an EV 316.8 cr shares) of Rs 462,000 crore for Jio Platforms. Hence, the implied valuation works out at 20.6x its 3QFY20 annualised EBITDA and one year forward EV/EBITDA of 14-15x (FY21E EBITDA of Rs 31,733 crore). Hence, valuation of Jio Platforms by Facebook implies sharp growth of 1.5x in Jio’s EBITDA from annualised Q3FY2020 EBITDA of Rs. 5,601 Shareholding (%) crore. Our Call Promoters 50.0 Valuation – Maintain Buy rating with unchanged PT of Rs. 1,710: RIL’s stock price has recovered sharply from the recent low of Rs. 876 but the valuation of 13.4x FY2022E FII 24.5 EPS and 9.3x FY2022E EV/EBITDA still looks attractive given 1) potential robust growth outlook for the digital services business supported by likely ARPU hike, ramp- DII 13.8 up of recently launched fibre broadband services and rollout of enterprise business and new commerce services and 2) accelerate the balance sheet deleveraging (in line Others 11.7 with target to become a net debt-free company by March 2021) post the Facebook deal and lower capex intensity going forward. Moreover, the company’s aim to increase share of EBITDA from the consumer business to 50% in next couple of years (from 37% in Q3FY2020) would play a crucial role in helping it tide over margin volatility in Price chart the cyclical downstream business. Hence, we maintain our Buy rating on RIL with an unchanged PT of Rs. 1,710 as a higher valuation for digital services business get offset 1800 by lower valuation for refining and petrochemicals businesses (as we assign lower 1600 EV/EBITDA multiple given weakness in GRM and petchem margins). 1400 Key Risks 1200 Lower-than-expected refining and petrochemical margins in case global capacity 1000 additions surpass incremental demand. 800 19 19 20 19 - - - Valuation (Consolidated) Rs cr - Apr Apr Dec Aug Particulars FY2018 FY2019 FY2020E FY2021E FY2022E Revenues 391,677 567,135 538,542 533,035 597,681 Price performance OPM % 16.4 14.8 16.0 17.7 19.2 Adjusted PAT 34,993 39,837 42,322 47,084 60,109 (%) 1m 3m 6m 12m Adjusted EPS (Rs) 59.1 67.3 71.5 79.6 101.6 % y-o-y change 17.3 13.8 6.2 11.3 27.7 Absolute 54 -11 -2 0 PER (x) 23.1 20.3 19.1 17.1 13.4 Relative to EV/EBIDTA (x) 16.6 12.7 12.4 11.3 9.3 33 13 18 19 Sensex RoCE (%) 10.6 9.7 10.0 10.1 11.2 RoNW (%) 11.9 10.3 11.2 11.2 12.5 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates April 22, 2020 2 Stock Update Stock RIL-Facebook deal values Jio Platforms at EV of Rs. 462,000 crore ($66 billion); implies one-year forward EV/EBITDA of 14-15x: Facebook’s (FB) investment values Jio Platforms (a wholly-owned subsidiary of RIL) at an enterprise value of Rs. 462,000 crore ($66 billion assuming RS/USD rate of Rs70), which is largely in line with the company’s expectation of $65-70 billion. The investment by FB would translate into a 10% stake in Jio Platforms on a fully diluted basis. The implied valuation works out at 20.6x its Q3FY20 annualised EBITDA and one year forward EV/EBITDA of 14-15x (FY21E EBITDA of Rs 31,733 crore). Out of the total investment of Rs. 43,754 crore by Facebook, ~Rs. 15000 crore would be retained in Jio Platforms and the remaining Rs. 28,000 crore will be used to redeem optionally convertible preference shares (OCPS) of RIL. We highlight here that the investment values Jio Platforms among the top-five listed companies in India by market capitalisation. The transaction is, however, subject to regulatory and other customary approvals. The deal is positive for RIL as an investment by a global technology giant like Facebook in Jio would further strengthen its technology platform services, drive cross-selling through Reliance Retail and help deleverage its consolidated balance sheet. Reliance Jio Infocomm Ltd, which provides connectivity platform to over 388 million subscribers, will continue to be a wholly-owned subsidiary of Jio Platforms. Exhibit 1: Valuation of Jio Platforms by Facebook Particulars Rs cr Facebook's equity investment in Jio Platforms 43,574 Facebook's stake in Jio Platforms 10% Post-money equity valuation 435,740 Pre-money equity valuation 421,000 Net debt of Jio Platforms 41,000 Pre-money Enterprise Value 462,000 Implied EV/EBITDA multiple (x) on Q3FY20 annualised EBITDA 20.6 Implied one-year forward EV/EBITDA (x) 14.6 Source: Company; Sharekhan Research Partnership between Jio Platforms, Reliance Retail, and WhatsApp to leverage JioMart platform Concurrent with the investment, Jio Platforms, Reliance Retail and WhatsApp have also entered into a commercial partnership agreement to further accelerate its new commerce business on the JioMart platform using WhatsApp. The partnership is crucial to build a digital ecosystem and leverage the JioMart platform using WhatsApp and Jio’s strong digital customer base. Moreover, the move is likely to accelerate rollout and ramp-up of Jio’s new commerce initiative with multiple cross-selling opportunities supported by its unique online-offline retailing strategy. Facebook deal to fasten balance sheet deleveraging process The RIL-Facebook deal is a steep forward to reduce RIL’s debt level and would help the company achieve its target to become zero net debt company by March 2021. RIL’s net debt stood at Rs. 153,132 crore (gross debt of Rs. 306,851 crore and cash and cash equivalents of Rs. 153,719 crore) as on December 2019. With RIL-Facebook deal, we expect RIL’s net debt decline by ~29% and net debt/EBITDA ratio would improve to ~1.2x in FY2021E assuming cash inflow of Rs. 43,754 crore from Facebook deal. Exhibit 2: RIL SoTP valuation Particulars Methodology Value per share (Rs/share) Refining 7x FY22E EV/EBITDA 277 Petrochem 7x FY22E EV/EBITDA 289 Upstream EV/BOE 40 Retail 21x FY22E EV/EBITDA 371 Digital Services 12x FY22E EV/EBITDA 1,041 Others 20 Enterprise Value 2,038 Less: Net Debt 328 Price target 1,710 Source: Sharekhan Research April 22, 2020 3 Stock Update Stock About company RIL is a diversified conglomerate with business interests across oil refining, petrochemicals, exploration and production, retail and digital services.