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Entering a strong FCFgeneration phase;Initiate with BUY
A Giant Digital Leap
ARPU hike inevitable; Jioon track to ~50% RMS
target in wireless
Digital opportunities -Jio Mart, OTT apps
& IoT
RELIANCE INDUSTRIES
30 July 2020
INDIA | OIL & GAS| COVERAGE INITIATION
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TABLE OF CONTENTS
Introduction
Key charts
Investment thesis
ARPU hike inevitable; Jio on track to ~50% RMS target in wireless
Potential digital monetisation opportunities
Retail - driving omni-channel capabilities across segments
Downstream margins outlook subdued; RIL relatively better placed
Debt concerns behind us; entering a strong FCF generation phase
Key assumptions and estimates
Initiate Coverage with a BUY rating & TP of INR 2,500
Company Profile & Board of Directors
Financial tables 55
Three reasons to read this report:a) Why is Telecom industry revenue set to double in the next 5 years? Refer
to our analysis on sustainable APRUs from bottom-up & top-downperspectives
b) Framework for analyzing long-term digital opportunities and the scopefor monetisation
c) Our 3-year SOTP-based valuation suggests a steady returns profiledriven by earnings growth potential in the consumer business
30 July 2020
INDIA | OIL & GAS| COVERAGE INITIATION
JM Financial Institutional Securities Limited Page 2
RECENT REPORTS
RURAL SAFARI XTHE COVID-19 FILESINDIA STRATEGY THE 20/20 VIEW
COMPANY UPDATESUPRAJIT ENGINEERING
COVERAGE INITIATION GMM PFAUDLER
Reliance Industries
A Giant Digital Leap
ARPU hike inevitable; Jio on track to ~50% RMS target: Since industry consolidation is largely over, we expect industry ARPUs to rise on a mix of growth in data usage and tariff hikes. Although there exists limited visibility on TRAI floor tariffs, we believe a tariff hike is inevitable given that the industry needs an ARPU of INR 230-250 by FY25E for a pre-tax RoCE of 12-15% to justify future investments. Further, competitor VIL needs APRUs to more than double to +INR 270 by FY23 to avoid a duopoly market. Hence, we expect industry revenue to double by FY25E to ~INR 2,600bn. We expect Jio ARPU to post a 10% CAGR over FY20-28 and expect its strong subscriber additions to continue; we hence expect Jio to attain ~50% RMS target by FY25E (vs. 36% at end-FY20).
Potential digital monetisation opportunities: Jio is ideally placed to capture the growing digital pie given its: a) large +390mn telecom subscriber base, b) network effects by participation of marquee partners such as Facebook,and c) creation of a digital ecosystem, both Jio and third-party apps,enabling cross-selling of solutions.
Retail - driving omni-channel capabilities across segments: RIL expects to drive omni-channel capabilities across segments as well as extend JioMart to Consumer Electronics and Fashion & Lifestyle. Given its previous history of successful execution, this could as well become a sizeable value-creation opportunity in the future.
Downstream margins outlook subdued; RIL relatively better placed: We expect the refining/petchem margin outlook to be subdued in the near term given the large demand contraction. However, RIL is relatively better placed vs. peers due to its integrated and complex facility, and its feedstock sourcing and product placement strength.
Entering a strong FCF generation phase: Initiate with BUY: RIL is entering a strong FCF generation phase with major capex completed and expectation of strong 17-18% EPS CAGR over the next 3-5 years led by Digital and Retail businesses. Hence, we initiate with a BUY rating and TP of INR 2,500. Given the sharp +100% rally in the share price in the last 4 months, there could be near-term weakness given that EPS growth is likely to be muted in the next 1-2 quarters. However, we suggest using this opportunity to BUY as our 3-year TP suggests a potential return CAGR of ~17%.
Recommendation and Price Target Financial Summary (INR mn)
Current Reco BUY Y/E March FY19A FY20A FY21E FY22E FY23E
Current Price Target 2500 Net Sales 56,92,090 59,67,430 51,27,431 66,04,605 74,87,221
Upside/(Downside) 19.2% Sales Growth (%) 45.3 4.8 -14.1 28.8 13.4
EBITDA 8,41,670 8,82,170 8,95,500 12,34,724 15,00,156
EBITDA Margin (%) 14.8 14.8 17.5 18.7 20.0
Key Data – RIL IN Adjusted Net Profit 3,98,370 4,43,240 3,91,765 6,07,810 7,82,632
Current Market Price INR2,097 Diluted EPS (INR) 67.2 69.9 60.8 89.9 115.7
Market cap (bn) INR13800/US$184.5 Diluted EPS Growth (%) 10.4 4.0 -13.1 47.9 28.8
Free Float 39% ROIC (%) 11.2 11.3 10.1 13.8 16.3
Shares in issue (mn) 6,761.6 ROE (%) 11.7 10.5 8.0 10.5 11.8
Diluted share (mn) 6,444.7 P/E (x) 31.2 30.0 34.5 23.3 18.1
3-mon avg daily val (mn) INR40,372/US$539.7 P/B (x) 3.2 2.9 2.6 2.3 2.0
52-week range 2,199/867 EV/EBITDA (x) 19.2 18.3 16.3 11.3 9.0
Sensex/Nifty 38,071/11,203 Dividend Yield (%) 0.3 0.3 0.3 0.4 0.5
I INR/US$ 74.8 Source: Company data, JM Financial. Note: Valuations as of 29/Jul/2020
Price Performance JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters, S&P Capital IQ,
FactSet & Visible Alpha. You can also access our portal: www.jmflresearch.comPlease see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst
Certification.
% 1M 6M 12M
Absolute 21.7 43.0 74.8
Relative* 11.7 54.8 73.0
*To the BSE Sensex Dayanand Mittal dayanand.mittal@jmfl.com
Tel: (91 96) 19388870
Vishnu K G vishnu.kg@jmfl.com
Tel: (91 94) 46896452
Krishan Parwani krishan.parwani@jmfl.com
Tel: (91 96) 62095500
We initiate coverage on RIL with a BUY rating and TP of INR 2,500/share as we expect RIL to enter a strong FCF generation
phase with major capex completed and expectation of strong 17-18% EPS CAGR over the next 3-5 years, led by Digital and Retail
businesses. We expect telecom industry revenue to double by FY25E as an ARPU hike looks inevitable given the industry’s future
investment needs and to avoid a duopoly market. Hence, we expect Jio ARPU to post a 10% CAGR over FY20-28 and expect
its strong subscriber additions to continue; Jio should attain ~50%
RMS target by FY25E (vs. 36% at end-FY20). Jio is also well-placed to tap potential digital monetisation opportunities. Further,
in Retail, it is driving omni-channel capabilities across segments as well as extending JioMart to Consumer Electronics and Fashion & Lifestyle; this has potential to become a sizeable value-creation
opportunity. The downstream margins outlook is subdued but RIL is better placed than peers to tide the crisis.
Our SoTP-based TP of INR 2,500/share comprises: a) Digital segment at an EV of INR 952/share based on INR 780 for the telecom business, INR 67 for option value of a duopoly market
and INR 105 for potential digital opportunities; b) Retail business at an EV of INR 584/share; we also value Jio Mart at an
EV of INR 115; and c) Energy business at an EV of INR 838/share.
Given the sharp +100% rally in the share price in the last 4
months, there could be near-term weakness given that EPS growth is likely to be muted in the next 1-2 quarters due to the pandemic. However, we suggest using this opportunity to BUY
as our 3-year TP suggests a potential return CAGR of ~17%. Key risks: a) limited APRU hike and lower-than-expected
subscriber additions in the telecom business; b) challenges in monetisation of digital opportunities and new commerce
business and c) continued weak downstream margins.
JM Financial Institutional Securities Limited Page 3
30 July 2020
INDIA | OIL & GAS| COVERAGE INITIATION
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 4
Key charts
Jio’s ARPU to be driven by increased data usage and tariff Exhibit 1.hikes
Source: Company, JM Financial.
Jio RMS to rise to ~50% by FY25E (from 36% at end-FY20) Exhibit 2.driven by subscriber addition and ARPU increase
Source: Company, JM Financial.
Jio’s peak capex cycle is over, long term capex intensity Exhibit 3.seen at 15% of sales
Source: Company, JM Financial.
INR 172/share equity value for RIL from duopoly optionality Exhibit 4.and digital applications
Source: JM Financial.
Retail business ROIC improved significantly to 27.1% in Exhibit 5.FY20 aided by higher OPM and better asset turns
Source: Company, JM Financial.
RIL’s FCF and FCF yield to rise sharply Exhibit 6.
-5%
-1%
3%
7%
11%
-550
0
550
1,100
1,650
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
E
FY
22
E
FY
23
E
FY
24
E
FY
25
E
(%)
INR
bn
FCF (INR bn) FCF yield (%) (RHS)
Source: Company, JM Financial.
100
125
150
175
200
225
250
0
25
50
75
100
125
150
FY18
FY19
FY20
FY21
E
FY22
E
FY23
E
FY24
E
FY25
E
ARPU
(INR)
Net
subsc
riber
additio
ns
(mn)
Jio Net subscriber adds (mn) Jio ARPU (INR) [RHS]
0%
20%
40%
60%
80%
100%
FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E
Reve
nue m
ark
et
share
(%
)
Jio Bharti Airtel VIL Others
0%
80%
160%
240%
0
200
400
600
FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E
Caepx/ sa
les (%
)Capex
(IN
R b
n)
Capex (INR bn) Capex / sales (%) [RHS]
67
83 8
14172
0
20
40
60
80
100
120
140
160
180
200
Optional value -Telecom Duopoly
Video OTT Audio OTT ConsumerIoT/smart devices
Total
INR/s
hare
2%
2% 2%3% 5%
6.5%
8.8%
15.9%
21.2%
27.1%
3.2
5.0
6.4 6.25.9
0
2
4
6
8
0%
6%
12%
18%
24%
30%
FY16 FY17 FY18 FY19 FY20
NOPAT margin - % ROIC - % Invested capital turns
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 5
Investment thesis
We initiate coverage on RIL with a BUY rating and TP of INR 2,500 as we expect RIL to enter
a strong FCF generation phase with major capex phase a thing of the past and expectation of
strong 17-18% EPS CAGR over the next 3-5 years led by Digital and Retail businesses. We
expect Telecom industry revenue to double by FY25E as an ARPU hike looks inevitable given
the industry’s future investment needs and to avoid a duopoly market. We expect Jio ARPU
to grow at 10% CAGR over FY20-28 and expect its strong subscriber additions to continue;
Jio should attain the ~50% revenue market share (RMS) target by FY25E (vs. 36% at end-
FY20). Jio is also well-placed to tap potential digital monetisation opportunities. Further, in
the Retail business, it is driving omni-channel capabilities across segments as well as
extending JioMart to Consumer Electronics and Fashion & Lifestyle; this can become a
sizeable value-creation opportunity. The downstream margins outlook is subdued, but RIL is
relatively better placed than peers to tide the crisis.
Given the sharp +100% rally in share price in the last 4 months, there could be near-term
weakness given that EPS growth is likely to be muted in the next 1-2 quarters due to the
pandemic. However, we suggest using this opportunity to BUY as our 3-year TP suggests a
potential return CAGR of ~17%.
ARPU hike inevitable; Jio on track to ~50% RMS target in wireless
Given that industry consolidation is largely over, we expect industry ARPUs to rise on a mix of
growth in data usage and tariff hikes. We believe there is sufficient headroom for ARPU
expansion, given that ARPU to nominal GDP per capita is at historical lows of 0.6% (vs.
1.3%-1.5% levels seen during FY14-16 i.e. before Jio disrupted the market through rock
bottom tariffs). Although there exists limited visibility on TRAI floor tariffs, we believe a tariff
hike is inevitable given the industry needs an ARPU of INR 230-250 by FY25E for a pre-tax
RoCE of 12-15% to justify future investments. Further, Vodafone Idea Limited (VIL) needs
APRU to more than double to +INR 270 by FY23 to avoid a duopoly market. Hence, we
expect industry revenue to double by FY25E to ~INR 2,600bn. Further, industry capex
intensity is likely to moderate, and together with improving EBITDA, would improve ROCE of
players in the sector.
We have built in Jio’s ARPU CAGR at 10% over FY20-28. We expect Jio to attain ~50% RMS
by FY25E from 36% at end-FY20 (Exhibit 1 and 2), led by ARPU increases and strong
subscriber acquisition (as Jio’s tariffs continue to be at a 10-20% discount to Bharti and VIL
and aided by a strategic partnership with Google to launch low cost smartphones). Jio plans
to incrementally focus on ramping up its fibre to the home (FTTH), target of 50mn customers
in 3 years, and 5G/ Enterprise business.
India’s ARPU to GDP per capita has declined to record low Exhibit 7.of 0.6% in FY19-20 vs. 1.3-1.5% during FY14-16
Source: TRAI, JM Financial.
Industry revenues to double by FY25E, with Jio attaining Exhibit 8.close to ~50% of revenue market share
Source: TRAI, JM Financial.
Limited visibility on implementation of Trai’s floor tariff concept; but tariff hike inevitable
given the future investment needs
We believe that the regulator may not implement floor tariffs in the near term in light of the
ongoing pandemic, but it may also not oppose any fresh hikes in tariff, if the telcos choose to
do so, especially for higher ARPU broadband customers. Also, in our view, it is likely that the
0.0%
0.5%
1.0%
1.5%
2.0%
FY14
FY15
FY16
FY17
FY18
FY19
FY20
ARPU
/GD
P p
er
capita (%
)
Historical ARPU/ GDP per capita for India
0
50
100
150
200
250
300
0
500
1000
1500
2000
2500
3000
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
E
FY22
E
FY23
E
FY24
E
FY25
E
ARPU
( base
d o
n A
GR,IN
R)In
dust
ry A
GR (IN
R b
n)
Industry AGR (INR bn) ARPU (based on AGR,INR) [RHS]
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 6
telcos could opt for a hike in tariff, given the impending investments for spectrum and 5G
rollout. Our calculation suggests that industry ARPUs might need to reach INR 230-250 levels
by FY25E for a reasonable pre-tax RoCE of 12-15% considering the future investment needs
(cumulative investment of ~INR 8,000bn till end-FY25e).
Estimated ARPU of INR230-250 for a pre-tax RoCE of 12% and 15% based on future investment for private telcos Exhibit 9. For 12% ROCE For 15% ROCE Comments
Required return 12% 15%
Total invested capital (INR bn) 8,012 8,012 Book value of net invested capital at the end of FY20 + estimated capex over FY21-25E
Required EBIT (INR bn) 961 1,201
Actual non-statutory opex (INR bn)* 1,338 1,338 4QFY20 annualized opex ex-License Fees and Spectrum Usage Charges [SUC]
License Fee + SUC (%) 13% 13% License Fee taken at 8% and SUC at 5%
Required revenue (INR bn) 2,642 2,918
Number of subscribers (mn) 962 962
ARPU (INR ) 229 253
Source: Company, JM Financial.* Pre-IND AS numbers used
Significant ARPU increase required to avoid a duopoly market
VIL requires a significant ARPU increase in order to meet its payment obligations without any
further equity injection. Our calculations suggest VIL needs ARPU to rise from current INR 121
to +INR 270 by FY23 to meet its payment obligations in FY23E (Exhibit 32). A significant
ARPU increase for VIL would, however signify an ARPU uplift for other players as well.
However, if the required tariff hike does not come through, VIL might not be able to meet its
payment obligations. We value RIL’s share of the telecom business at an EV of INR 780/
share; additionally we also valued the option value of a duopoly market at INR 67/share for
RIL assuming a 50% probability for duopoly market and Jio garnering 40% of VIL’s total
subscriber base.
Potential digital monetisation opportunities
RIL’s foray into Digital services has been accelerated by strategic investments by various
marquee tech and PE players in Jio Platform (JPL). Covid-19 has accelerated both data
consumption due to virtual working and adoption of Digital apps. Jio is ideally placed to
capture a major share of this new and growing Digital pie given: a) the large +390mn
subscriber base of Jio; b) network effects provided by participation of marquee partners such
as Facebook; and c) creation of a digital ecosystem, consisting of both Jio and third-party
apps, enabling cross-selling of solutions. We have looked at the value arising from
applications having greater visibility – namely, monetisation of video OTT apps, audio OTT
and ramp-up of consumer Internet of Things (IoT) / smart sensors business. Cumulatively,
these contribute INR 105/share to our RIL target price (Exhibit 4).
Platform business: A case of 1+1>2
We believe the logical conclusion of the ramp-up in digital applications would be the
development of a ‘Super App’ kind of structure, enabling consumers to use their
smartphones / devices for a variety of purposes – social media, ecommerce, gaming, payment
solutions, online learning and telemedicine, all within the Jio ecosystem.
Retail — driving omni-channel capabilities across segments
RIL’s ambition for organised retail business is even larger now and it expects to drive omni-
channel capabilities across segments as well as extend JioMart to Consumer Electronics and
Fashion & Lifestyle – JioMart has started off in the grocery space at present to begin with -
similar to how Reliance Retail initially began. Given its previous history of successful
execution, this could as well become a sizeable value-creation opportunity in the future. For
the near term, we expect larger value-creation potential from the Grocery and Consumer
Electronics businesses over FY20-23 while Fashion & Lifestyle segment is likely to take
relatively more time to recover from the pandemic.
We value the Retail business at an EV of INR 584/share (or INR 3,706bn) based on 25x
forward EBITDA. Further, we value Jio Mart at an EV of INR 115/share (or INR 732bn),
factoring the opportunity of digitisation of Kirana store (Exhibit 63). We expect Jio Mart to
get +10% market share in the digitised General Trade market (expecting it to be 50% of the
total GT market by FY30) by FY30 and given the profitability potential, we peg the value of
this business at INR 1,600bn by Mar’29, which implies INR 732bn in present value terms.
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 7
Downstream margins outlook subdued; RIL relatively better placed
We expect refining and petchem margins outlook to be subdued in the near term given the
huge ~8% global oil demand contraction likely in CY20 (Exhibit 65 and 66), ongoing capacity
additions and the resultant excess inventory build-up. However, RIL is relatively better placed
to mitigate this challenge due to its integrated and complex facility, locational advantage and
its strength for feedstock sourcing and product placement. Hence, we expect RIL to continue
to operate its plants at optimum utilisation despite near-term demand concerns. We expect
RIL’s GRM at USD 7.5/9.0/10.0/bbl in FY21/22/23 (vs. USD 8.9/bbl in FY20) and petchem
EBITDA margin at USD 192/221/243/tn in FY21/22/23 (vs. USD 218/tn in FY20). We value
Refining and Petchem business at an EV of INR 346/share and INR 424/share, respectively,
based on 7.5x EV/EBITDA.
Debt concerns behind us; entering a strong FCF generation phase
We take comfort from RIL’s deleveraging efforts via stake sale in JPL and rights issue to
become zero-net-debt ahead of its Mar’21 target. Although the RIL-Aramco deal for a
proposed 20% stake in RIL’s O2C has been delayed, we still see a possibility of this deal
going through given its strategic importance for Saudi Arabia to secure its future crude
markets. RIL is entering a strong free cash flow (FCF) generation phase with major capex
completed and expectation of strong 17-18% EPS CAGR over next 3-5 years led by growth
potential in the Digital and Retail business. We expect RIL’s FCF yield to improve from 2% in
FY20 to 7% in FY25 as RIL would generate FCF of INR 235bn in FY21 and grow to INR 993bn
by FY25 (Exhibit 6).
RIL’s net debt flow chart based on recent and proposed stake sale (INR bn) Exhibit 10.
Source: Company, JM Financial
RIL’s major capex (INR bn) phase is behind us Exhibit 11.
101
269 246
327
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1,135 1,149
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18
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19
FY
20
FY
21
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FY
22
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FY
23
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FY
24
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FY
25
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RIL's major capex phase is behind us
Source: Company, JM Financial
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Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 8
Initiate coverage with a BUY rating with TP of INR2,500
Our Target Price for RIL of INR 2,500/share (Sep’21 basis) is computed on a sum-of-the-parts
(SOTP) valuation method:
a) Petchem segment at an EV of INR 424/share based on 7.5x forward EV/EBITDA, in-line with
the implied Saudi Aramco deal multiple;
b) Refining segment at an EV of INR 346/share based on 7.5x forward EV/EBITDA, in-line with
the implied Saudi Aramco deal multiple;
c) E&P segment at an EV of INR 68/share based on 9.0x forward EV/EBITDA; higher multiple
as we EBITDA is likely to jump 3x due to a rise in gas production from new fields;
d) Digital segment (RIL’s 67.05% stake in JPL) at an EV of INR 952/share comprising: i)
Telecom business at INR 780/share based on DCF valuation; implied valuation of 14.3x
Sept’21 EV/EBITDA; ii) Option value of duopoly market at INR 67/share; and iii) Digital
opportunities at INR 105/share based on potential monetisation of Video OTT apps, audio
OTT and Consumer IoT business.
e) Retail business at an EV of INR 584/share based on 25x forward EBITDA. Further, we value
Jio Mart at an EV of INR 115/share, factoring the opportunity of digitisation of Kirana store.
RIL is entering a strong FCF generation phase with major capex completed and expectation of
strong 17-18% EPS CAGR over the next 3-5 years led by Digital and Retail businesses. Hence,
we initiate with a BUY rating and TP of INR 2,500/share (Sep’21 basis). We have also
computed a 3-year Target Price (Sept’23 basis), which comes to INR 3,350/share, implying a
potential ~17% CAGR return. Given the sharp +100% rally in the share price in the last 4
months, there could be near-term weakness given that EPS growth is likely to be muted in
the next 1-2 quarters. However, we suggest using this opportunity to BUY as our 3-year TP
implies a potential return CAGR of ~17%.
We also take comfort from the company’s effort to address balance sheet concerns by
expediting its deleveraging exercise and getting to zero net debt ahead of its end FY21
target. At CMP, stock is trading at FY22E P/E of 23.3x (3 yr avg: 18.6x), FY22E P/B of 2.3x (3
yr avg: 1.7x) and FY22E EV/EBITDA of 11.3x (3 yr avg: 10.8x).
RIL Sum-of-the-parts valuation - our Sept’ 2021 Target Price for RIL is INR 2,500/share Exhibit 12.
Source: JM Financial Note: We have used 6,349mn shares for our target price computation (including 423mn Rights shares but excluding 413mn Treasury shares)
Business segment
Valuation
methodology
EBITDA
(INR Bn)
Valuation
multiple
Valuation
(INR bn)
Valuation
(USD bn)
Valuation
(INR/share) Comments
Energy business 5,322 71 838
Petchem EV/ EBITDA 359 7.5 2,692 36 424
Valued at 7.5x EV/EBITDA; in-line with multiple
implied by Saudi Aramco deal
Refining EV/ EBITDA 293 7.5 2,198 30 346
Valued at 7.5x EV/EBITDA; in-line with multiple
implied by Saudi Aramco deal
E&P EV/ EBITDA 48 9.0 431 6 68
Valued at 9x EV/EBITDA; higher multiple used as
EBITDA to jump 3x
Digital business (for RIL's 67.05% share) 6,044 81 952
a) Telecom business DCF 4,952 66 780
Based on DCF valuation; implied valuation of
14.3x Sept'21 EV/EBITDA
b) Optional upside in Telecom business 423 6 67
50% probability of duopoly market; Jio garnering
40% of VIL subscriber without any ARPU dilution
c) Digital opportunities 669 9 105
Based on potential monetization of Video OTT
apps, JioSaavn and Consumer IoT business
Retail business EV/ EBITDA 4,437 60 699
a) Retail business 3,706 50 584
Valued at 25x EV/EBITDA, based on peers
valuation range
b) JioMart New commerce business 732 10 115
Valuing kirana digitisation opportunity assuming
Jio Mart gets ~10% market share in General
Trade ecommerce market by FY30
Total Enterprise Value 15,803 212 2,489
Less: Net Debt -70 -1 -11
Factoring: a) Rs1,521bn from 32.95% stake sale
in JPL; b) Rs76bn from BP; and c) rights issue
proceeds of INR531bn
Total Equity Value 15,873 213 2,500
CMP 2,097
% upside 19%
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 9
RIL Sum-of-the-parts valuation - our Sept’ 2023 Target Price for RIL is INR 3,350/share Exhibit 13.
Source: JM Financial Note: We have used 6,349mn shares for our target price computation (including 423mn Rights shares but excluding 413mn Treasury shares)
Risks along with EPS and valuation sensitivity
a) Refining margin sensitivity: Every USD 1/bbl increase/decrease in GRM has a
positive/negative impact of 2% of our valuation, 5% of our FY22E EPS, and 3% of our FY22E
EBITDA. An unexpected decline in refining margin could have a negative impact on RIL’s
earnings and valuation.
b) Petchem margin sensitivity: Every USD 20/ton increase/decrease in EBITDA margins has a
positive/negative impact of 2% of our valuation, 4% of our FY22E EPS, and 2% of our FY22E
EBITDA. An unexpected slide in petchem EBITDA margins could hurt RIL’s earnings and
valuation.
c) Retail margin sensitivity: Every 50bps increase/decrease in retail EBITDA margins has a
positive/negative impact of 1% of our valuation, FY22E EPS, and FY22E EBITDA. Any
downside to retail profitability could have a negative impact on RIL’s earnings and valuation.
d) ARPU and subscriber sensitivity: Every INR 10 increase/decrease in ARPU has a
positive/negative impact of 2% of our valuation, 3% our FY22E EPS, and 2% of our FY22E
EBITDA. Every 20mn increase/decrease in subscribers has a positive/negative impact of 1% of
our valuation, 1% our FY22E EPS, and 1% of our FY22E EBITDA. Lower than expected ARPU
and subscriber growth could have a negative impact on RIL’s earnings and valuation.
RIL Earnings and valuation sensitivity Exhibit 14.
Source: JM Financial
Business segment
Valuation
methodology
EBITDA
(INR Bn)
Valuation
multiple
Valuation
(INR bn)
Valuation
(USD bn)
Valuation
(INR/share) Comments
Energy business 5,988 80 942
Petchem EV/ EBITDA 411 7.5 3,081 41 485
Valued at 7.5x EV/EBITDA; in-line with multiple
implied by Saudi Aramco deal
Refining EV/ EBITDA 326 7.5 2,443 33 385
Valued at 7.5x EV/EBITDA; in-line with multiple
implied by Saudi Aramco deal
E&P EV/ EBITDA 84 5.5 464 6 72 Valued at 5.5x EV/EBITDA
Digital business (for RIL's 67.05% share) 7,169 96 1,129
a) Telecom business DCF 5,835 78 919
Based on DCF valuation; implied valuation of 12x
Sept'23 EV/EBITDA
b) Optional upside in Telecom business 515 7 81
50% probability of duopoly market; Jio garnering
40% of VIL subscriber without any ARPU dilution
c) Digital opportunities 819 11 129
Based on potential monetization of Video OTT
apps, JioSaavn and Consumer IoT business
Retail business EV/ EBITDA 7,191 97 1,133
a) Retail business 6,289 84 991
Valued at 25x EV/EBITDA, based on peers
valuation range
b) JioMart New commerce business 901 12 142
Valuing kirana digitisation opportunity assuming
Jio Mart gets ~10% market share in General
Trade ecommerce market by FY30
Total Enterprise Value 20,347 273 3,204
Less: Net Debt -931 -12 -147 Net debt at end end Sept'2023
Total Equity Value 21,278 286 3,350
CMP 2,097
% upside 60%
Change
FY22e Base case
assumption INR bn % change INR % change INR % change
GRM (USD/bbl) 9.0 +/- USD 1/bbl 39 3% 4.2 5% 50 2%
Petchem EBITDA margins (USD/ton) 221 +/- USD 20/tn 31 2% 3.3 4% 42 2%
Retail EBITDA margins (%) 5.9% +/- 0.5% 11 1% 1.2 1% 21 1%
Jio w ireless ARPU 171 +/- INR 10 26 2% 2.9 3% 39 2%
Jio w ireless subscriber (mn) 457 +/-20mn 10 1% 1.1 1% 28 1%
Base case 1,235 90 2,500
Impact on FY22 EBITDA Impact on FY22 EPS Impact on TP
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 10
ARPU hike inevitable; Jio on track to ~50% RMS target in wireless
Just over three years since its launch, Jio has become the undisputed leader both in terms of
revenues and subscriber market share. Given that industry consolidation is largely over, we
expect industry ARPUs to rise going forward, driven by a mix of increase in data usage and
tariff hikes. Although there exists limited visibility on TRAI’s floor tariff, we believe a tariff
hike is inevitable given the industry needs an ARPU of INR230-250 by FY25E for a pre-tax
RoCE of 12-15% to justify future investment requirements. Further, VIL needs APRU to more
than double to +INR 270 by FY23 to avoid a duopoly market. Hence we expect industry
revenue to likely double by FY25E to ~INR 2,600bn. We expect Jio ARPU to post a 10%
CAGR during FY20-28 and expect its strong subscriber acquisition pace to continue. Hence,
we expect Jio to attain ~ 50% RMS by FY25E (from ~36% at end FY20). We value RIL’s
share of the telecom business at an EV of INR 780/ share; additionally also valued the option
value of a duopoly market at INR 67/share for RIL.
Jio on track to achieve ~50% RMS target in wireless business
Jio’s continued robust subscriber additions over the past 3 years means it is now the
undisputed leader both in terms of subscriber market share and revenue market share. Jio
witnessed a net subscriber addition of 81mn in FY20, taking the total number of subscribers
to 388mn at the end of FY20 and enabling it to reach 36% in terms of both subscriber and
revenue market shares.
We expect Jio’s ARPUs to sequentially increase in the coming quarters driven by: a) recent
tariff hikes and b) plan upgrades due to higher data demand. However, despite the recent
tariff hikes, Jio’s tariffs continue to be at a 10-20% discount to Bharti and VIL in key price
points. Hence, we expect net subscriber additions to continue to be healthy for Jio and
expect it to increase its subscriber market share to ~45% by FY25E (from ~36% at end-FY20)
and revenue market share (RMS) to increase to ~50% by FY25E (from ~36% at end-FY20) –
(Exhibits 24 and 28). Jio’s market share gains could be higher in the scenario of further
consolidation of the market to a duopoly market – this is not part of our base case scenario.
Jio’s subscriber addition remained robust; ARPU yet to reflect tariff hike Exhibit 15.
Source: Company, JM Financial.
Consolidation to drive doubling of industry revenue over next 5 years
Jio’s aggressive tariff pricing over the past few years has resulted in a sharp decline in industry
AGR revenue to ~INR 1,300bn in FY19-20 from ~INR 1,800bn in FY17 (Exhibit 21); this has
driven major consolidation in the industry and had reduced it to 4 players now, including the
public sector BSNL/MTNL (from a peak of 15 players in 2012). Jio was able to reach a
subscriber market share of ~36% at end-FY20 and become the market leader in less than 4
years of its launch; with all players (except Bharti) seeing major subscriber market share loss.
100
115
130
145
160
10
20
30
40
50
2QFY
18
3QFY
18
4QFY
18
1QFY
19
2QFY
19
3QFY
19
4QFY
19
1QFY
20
2QFY
20
3QFY
20
4QFY
20
ARPU
(INR)
Net
sub
scrib
er a
dditi
ons
(mn)
Net Subscriber adds (mn) ARPU ( INR )
Jio’s aggressive tariff has resulted in
decline in industry AGR revenue to
~INR 1,300bn in FY19-20 from ~INR
1,800bn in FY17
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 11
AGR RMS for the telecom industry for FY12 Exhibit 16.
Source: Company, JM Financial. *Others include Aircel, TTSL, Telenor, MTS and MTNL.
Exhibit 17.
Source: Company, JM Financial.
AGR RMS for the telecom industry for 9MFY20 Exhibit 17.
Source: TRAI, JM Financial.* Others include RCOM. TRAI is yet to publish AGR data for 4QFY20.
India’s ARPU to GDP per capita was at respectable 1.3-1.5% during FY14 to FY16, i.e. before
Jio disrupted the market through rock bottom tariffs. However, ARPU started declining
sharply since FY17 due to rising competition after the entry of Jio. The consistent decline in
ARPU from FY17 has resulted in a record low ARPU-to-GDP per capita ratio of ~0.6% in FY19
and FY20. This is also evident from FY20 ARPU of ~INR 103 vs. inflation adjusted ARPU of INR
175-200 during FY11-16 (and even higher during the earlier period) giving sufficient
headroom for a tariff hike. Globally also, ARPU for India is one of the lowest at sub USD
2/month.
India has one of the lowest ARPUs globally Exhibit 18.
Source: Company, JM Financial.
31%
21%13%
12%
9%
15%
Bharti Airtel Vodafone Idea BSNL RCOM Others
33%
31%
27%
9%
Jio Bharti Airtel VIL BSNL/MTNL and Others
0
8
16
24
32
40
48
Ind
ia
Bangla
desh
Ind
on
esi
a
Sri
lanka
Nig
eri
a
Bra
zil
Chin
a
Mala
ysia
UK
Sin
gap
ore
So
uth
Kore
a
US
ARPU
(U
SD
/month
)
ARPU (USD/month)
ARPU to nominal GDP per capita is
at historical lows of 0.6% vs 1.3%-
1.5% levels seen during FY14-16
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 12
India’s ARPU to GDP per capita has declined to record low Exhibit 19.of 0.6% in FY19-20 vs 1.3-1.5% during FY14-16
Source: TRAI, JM Financial.
Inflation adjusted ARPUs are at historical lows Exhibit 20.
Source: TRAI, JM Financial.
ARPUs need to rise to INR 230-260 (from INR 103 in FY20) for the ARPU-to-GDP per capita
ratios to go back to 1.3%-1.5% levels seen earlier. After nearly three years of very low tariffs,
tariff was hiked by 30-40% across players in Nov-Dec’19, signalling a price revival. Going
forward, we expect increase in tariffs due to industry consolidation, which coupled with
higher usage is expected to drive industry revenue to nearly double at ~INR 2,600bn by
FY25e vs. ~INR 1,300bn in FY19 and FY20. Further, industry capex intensity is likely to
moderate going forward, and together with improving EBITDA across the industry, would
improve the ROCEs of players in the sector.
Consolidation to drive doubling of industry revenues over Exhibit 21.
the next 5 years…
Source: Company, JM Financial.
….and capex intensity to soften improving the ROCE Exhibit 22.
profile
Source: Company, JM Financial.
Jio’s subscriber market share to rise to ~45% and RMS to ~50% by FY25e
Despite the recent tariff hikes, Jio’ tariffs continue to be at a 10-20% discount to Bharti and
VIL in key price points.
Despite recent tariff increases, Jio’s tariffs continue to be at a discount Exhibit 23.
Jio Bharti VIL
28 day 1 GB/Day * 174 219 219
28 day 1.5 GB/Day 199 219 219
28 day 2 GB/Day 249 298 299
28 day 3 GB/Day 349 398 399
84 day 1.5 GB/Day 555 598 599
84 day 2 GB/Day 599 698 649
365 day 24 GB 1299 1498 1499
365 day 1.5 GB/Day 2020 2398 2399
Source: Company, JM Financial. * Jio’s 1GB/day plan is only for 24 days, effective tariff for 28 days calculated at INR 174.
0.0%
0.5%
1.0%
1.5%
2.0%
FY14
FY15
FY16
FY17
FY18
FY19
FY20
AR
PU/G
DP
per
capi
ta (%
)Historical ARPU/ GDP per capita for India
0
100
200
300
400
500
600
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
ARPU
base
d o
n A
GR (IN
R b
n)
ARPU (INR) Inflation adjusted ARPU (INR)
0
50
100
150
200
250
300
0
500
1000
1500
2000
2500
3000
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
E
FY
22
E
FY
23
E
FY
24
E
FY
25
E
AR
PU
( base
d o
n A
GR,IN
R)In
dust
ry A
GR (IN
R b
n)
Industry AGR (INR bn) ARPU (based on AGR,INR) [RHS]
0%
13%
25%
38%
50%
63%
75%
88%
100%
0
250
500
750
1000
1250
1500
1750
2000
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
E
FY
22
E
FY
23
E
FY
24
E
FY
25
E
Capex / sa
les (%
)
Tota
l Indust
ry c
apex (IN
R b
n)
Total Industry Capex (INR bn) Capex / sales (%) [RHS]
Consolidation to drive industry
revenue to double at ~INR 2,600bn
by FY25e; significant headroom for
ARPU expansion
Jio’s subscriber addition likely to
continue as its tariff is still at a 10-
20% discount to Bharti/VIL
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 13
VIL has lost c.130mn customers in the first 18 months of the merger. These have been driven
by difficulties in integrating networks across circles, leading to network disruptions, and a
relatively lower ARPU customer base, which has shifted to Jio due to lower price points. A
part of the customer loss could also be attributed to the minimum recharge plans introduced
in November 2018. Recently, VIL rejigged its organisational structure and adopted a cluster-
wise approach, wherein the entire business has been reorganised into 10 clusters rather than
the circle-wise approach adopted earlier. We believe this signals intent to focus only on
strong circles and could lead to more customer churns. Accordingly, we believe the subscriber
market share for VIL would decrease from the current 27% to 21% by the end of FY25E.
However, we believe that the subscriber losses for Bharti Airtel have largely played out, as
evidenced by the stable overall subscriber number, and healthy addition of 4G customers in
4QFY20. Despite the premium pricing to Jio, Airtel’s benefits program (Airtel Thanks) has
been a major differentiator, ensuring stickiness of high ARPU customers and upgrade of the
existing customer base. We have built in gradual subscriber additions for Bharti Airtel, taking
the subscriber market share from the current 26% to 29% by the end of FY25E.
RIL, in its FY20 AGM, had announced that Google would buy a 7.73% stake in Jio Platforms
Limited (JPL), the intermediate holding company for the Telecom business. The company also
highlighted that this was a strategic partnership, wherein Google and Jio would work
together to develop low cost 4G/5G Android-based smartphones, targeting existing 350mn
2G users and accelerating their upgrade to mobile broadband. While Jio already has a 4G-
enabled feature phone (Jiophone), it has limited apps that can be installed in its OS
(Operating System). We expect the new device, based on Android, would be much more
attractive for the consumers, given the huge app ecosystem in Android OS. Moreover, the
development of a low cost 5G smartphone (the current prices range from USD 750 – 1000 in
India), would enable Jio to accelerate 5G subscriber additions relative to its competition, and
sustain growth in both the user base and revenues in the medium to long term.
Jio subscriber market share to rise to ~45% by FY25E (~36% at end-FY20) Exhibit 24.
Source: Company, JM Financial.
0%
20%
40%
60%
80%
100%
FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E
Subsc
riber
mark
et
share
(%
)
Jio Bharti Airtel VIL Others
Development of low cost
smartphone with Google could
sustain Jio’s growth in subscriber
and revenues in the medium to long
term
Jio’s subscriber market share to rise
to ~45% by FY25E (from ~36% at
end-FY20) and RMS to increase to
~50% by FY25E (from ~36% at
end-FY20)
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 14
ARPU to see a gradual rise; increased data consumption post Covid-19 a boost
Bharti’s higher ARPUs are driven by the high-quality MBB (Mobile Broadband) subscriber
base. This could be attributed to the higher usage and stickiness driven by programmes such
as Airtel Thanks benefits. However, for VIL, usage and stickiness seems to be low, as shown
by the lower ARPU for MBB subscribers. The tariff hikes in Dec’19 are yet to reflect for Jio
customers and the higher tariffs are expected to flow through in FY21.
Subscriber, ARPU and revenue break-up Exhibit 25. Avg. subs (mn) % of subs Revenue (INR bn) % of revenue ARPU (INR)
Jio
Post-paid 4 1% 2 2% 199
Smartphones 285 75% 123 83% 144
Jiophone 90 24% 23 15% 84
Total users 379 100% 148 100% 131
Bharti
Post-paid 15 5% 18 14% 399
MBB/ Smartphones 145 51% 96 74% 221
2G 123 43% 16 13% 44
Total users 283 100% 130 100% 154
VIL
Post-paid 23 8% 30 26% 399
MBB/ Smartphones 118 40% 64 55% 167
2G 156 53% 23 19% 45
Total users 298 100% 118 100% 121
Industry (ex- BSNL/MTNL)
Post-paid 42 4% 51 13% 383
MBB/ Smartphones 548 57% 284 72% 170
2G (including Jiophone) 369 38% 62 16% 54
Total users 960 100% 395 100% 134
Source: Company, JM Financial.
Jio’s FY20 revenues at INR 543bn, grew 34% YoY, with EBITDA at INR 216bn, growing 43%
YoY. Exit ARPU at INR 131, however was only up 1.7% QoQ. The muted growth could have
been driven by: a) aggressive pushing of long-term plans just before the implementation of
the tariff hike; b) promotional offers for Jiophone in 3QFY20, increasing the number of low
ARPU customers in the subscriber base and c) extension of recharge benefits due to the
lockdown. However, we expect ARPUs to sequentially increase in the coming quarters driven
by: a) recent tariff hikes; b) plan upgrades by users due to higher data demand. Hence, we
have built in an ARPU growth of c.15% for FY21 and long-term (FY20-28) ARPU CAGR of
10%. Jio is poised to benefit from virtual working initiatives due to its extensive coverage
(99%), in our view.
Industry data usage per subscriber to increase Exhibit 26.
Source: TRAI, company, JM Financial.
Jio ARPU growth to be driven by increased data usage and Exhibit 27.tariff hike
Source: Company, JM Financial.
0
2
4
6
8
10
12
14
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25
Data
usa
ge p
er
data
subsc
riber
(GB/m
onth
)
Average Monthly Data Usage (GB/month)
100
125
150
175
200
225
250
0
25
50
75
100
125
150
FY18
FY19
FY20
FY21
E
FY22
E
FY23
E
FY24
E
FY25
E
ARPU
(INR)
Net
sub
scrib
er a
dditi
ons
(mn)
Jio Net subscriber adds (mn) Jio ARPU (INR) [RHS]
Industry data consumption to see
sustained rise post Covid-19; Jio
ARPU growth to be driven by
increased data usage and tariff hike
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 15
Jio RMS to rise to ~50% by FY25E (from ~36% at end-FY20) driven by strong Exhibit 28.subscriber additions and ARPU increase
Source: Company, JM Financial.
Limited visibility on implementation of TRAI’s floor tariff concept; but tariff hike inevitable given the future investment needs
On 17Dec’19, the regulator TRAI floated a consultation paper (click here) to discuss on
whether it should fix a floor tariff given the dire state of the industry due to intense
competition, huge AGR liability and capex requirement in future owing to impending
investments for spectrum and 5G rollout. In response, Bharti (click here) and VIL (click here)
have batted for floor tariffs citing insufficient returns while Jio (click here) has backed the
demand for floor tariffs citing future investments needed in the sector However, as per news
reports, the enactment of the floor tariffs has been deferred in light of the ongoing
pandemic. While we believe that the regulator may not implement any floor tariffs in near
term, it may not oppose any fresh tariff hikes, if the telcos choose to do so, especially for
higher ARPU broadband customers. Also, in our view, it is likely that the telcos could go in for
a hike in tariff, given the impending investments for spectrum and 5G rollout.
Our calculation suggests (Exhibit 29) that the industry needs to reach an ARPU of around INR
200 for covering the cost of capital (12%) and an ARPU of INR 215 for a healthy pre-tax
RoCE (of 15%) based on actual investment until FY20 (~INR 5,495bn). However, if we also
consider the future investment requirements (taking total investments to ~ INR 8,000bn
cumulative till end FY25e), medium term ARPUs might need to reach INR 230-250 levels by
FY25E for a reasonable pre-tax RoCE of 12-15% (Exhibit 30). Players such as Bharti have
guided for a near-term ARPU target of INR 200 to earn its cost of capital and a medium-term
ARPU target of INR 300 for a reasonable pre-tax RoCE of 15%, keeping in mind the future
investments needs.
Estimated ARPU of INR 200-215 for a pre-tax RoCE of 12% and 15% based on actual investment for private telcos Exhibit 29. For 12% ROCE For 15% ROCE Comments
Required return 12% 15%
Total invested capital (INR bn) 5,495 5,495 Book value of net invested capital at the end of FY20
Required EBIT (INR bn) 659 824
Actual non-statutory opex (INR bn)* 1,338 1,338 4QFY20 annualised opex ex-License Fees and Spectrum Usage Charges [SUC]
License Fee + SUC (%) 13% 13% License Fee taken at 8% and SUC at 5%
Required revenue (INR bn) 2,295 2,485
Number of subscribers (mn) 962 962
ARPU (INR ) 199 215
Source: Company, JM Financial.* Pre-IND AS numbers used
0%
20%
40%
60%
80%
100%
FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E
Reve
nue m
ark
et
share
(%
)
Jio Bharti Airtel VIL Others
While floor tariff implementation
has been deferred, TRAI might not
oppose a fresh hike in tariff by
telcos, especially for broadband
customers
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 16
Estimated ARPU of INR230-250 for a pre-tax RoCE of 12% and 15% based on future investment for private telcos Exhibit 30. For 12% ROCE For 15% ROCE Comments
Required return 12% 15%
Total invested capital (INR bn) 8,012 8,012 Book value of net invested capital at the end of FY20 + estimated capex over FY21-25E
Required EBIT (INR bn) 961 1,201
Actual non-statutory opex (INR bn)* 1,338 1,338 4QFY20 annualised opex ex-License Fees and Spectrum Usage Charges [SUC]
License Fee + SUC (%) 13% 13% License Fee taken at 8% and SUC at 5%
Required revenue (INR bn) 2,642 2,918
Number of subscribers (mn) 962 962
ARPU (INR ) 229 253
Source: Company, JM Financial.* Pre-IND AS numbers used
Jio, Bharti and VIL want the floor tariff for data to be set at INR 20/GB, INR 30/GB and INR
35/GB respectively (from current INR 9-12/GB). Also, Bharti and VIL have recommended a
minimum subscription charge (MSC) to compensate for the maintenance of network even
when there is no usage of voice/data. Bharti has recommended a flat MSC of INR 75; VIL on
the other hand has recommended a MSC of INR 40 for voice-only subscribers, INR 50 for
data-only subscribers and INR 75 for bundled pack users.
Bharti and VIL wants to price voice at INR 60 for unlimited packs (average MOU of 1000 per
month). For metered voice, while Bharti would like to keep both onnet and offnet calls under
forbearance, VIL wants to keep offnet calls at INR 0.06/min and reiterated that onnet calls are
under forbearance. Jio reiterated that it would prefer that voice services be kept under
forbearance, while acknowledging that it was charging for off-net calls due to continuation
of IUC. Further, Jio wants any floor on voice calls, if implemented, to be technology-neutral.
While we do not expect a blanket acceptance of these recommendations by TRAI, given that
it could hit bottom of the pyramid customers. Based on the above recommendations by
Jio/Bharti/VIL we assume that only offnet calls could be priced at 6 paisa/minute with an MSC
of INR 75/28days for MBB subscribers; accordingly we have considered 3 probable scenarios
which suggest potential floor tariff could be around: a) INR 167 as per Jio’s suggestions
(Scenario 1); b) INR 211 as per Bharti’s suggestions (Scenario 2) and c) INR 231 as per VIL‘s
suggestions (Scenario 3). We observe that data tariffs would have the largest effect on overall
ARPU. It is highly likely that the telecom operators would choose to implement these tariff
hikes over a period of time, rather than a one-time increase, to reduce the burden on
consumers and ensure that usage metrics do not drop drastically.
Industry ARPU might rise to INR 167-230 levels in case of implementation of a floor tariff Exhibit 31. Scenario 1 Scenario 2 Scenario 3 Comments
Average FY20 subscribers (mn) 943 943 943
of which broadband subscribers (mn) 590 590 590
Jiophone subscribers (mn) 100 100 100
Subscribers for whom MSC is applicable (mn) [A] 490 490 490 We have assumed TRAI would allow charging of MSC on higher ARPU broadband users only
FY20 Data usage (bn GB) [B] 63 63 63 Actual data usage for the telcos for FY20
Drop in data usage due to floor tariff (%) [C] 5% 10% 13% Assumed drop in data usage due to increase in prices
Floor tariff for data (INR/GB) [D] 20 30 35 As suggested by companies
FY20 Voice usage (bn minutes) 7,188 7,188 7,188 Actual voice usage for the telcos for FY20
Offnet calls (bn minutes) [E] 3,594 3,594 3,594 Assumed that voice tariff is applicable only for offnet minutes
Drop in voice usage due to floor tariff (%) [F] 5% 5% 5% Assumed drop in voice usage due to removal of unlimited voice
Floor tariff for voice (paisa/minute) [G] 6 6 6 Floor tariff for voice taken at same level as IUC charges
MSC (INR) [H] 75 75 75 As suggested by companies
Data Revenues (INR bn) { [I]=[B]*(1-[C])*[D] } 1,200 1,706 1,935
Voice Revenues (INR bn) { [J]= [E]*(1-[F])*[G] } 205 205 205
MSC Revenues (INR bn) { [K] =[A]*[H] *12} 479 479 479 MSC revenues are calculated on a 28-day cycle for 365 days
Total Revenue {[I]+[J]+[K]} 1,884 2,389 2,618
ARPU (INR/month) 167 211 231
Source: Company, JM Financial.
Industry ARPUs need to rise to INR
230-250 levels by FY25E for a
reasonable pre-tax RoCE of 12-15%
considering the future investment
requirements
Industry ARPU might rise to INR
167-230 levels in case of
implementation of a floor tariff
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 17
Significant ARPU increase required to avoid a duopoly market
VIL requires a significant ARPU increase in order to meet its payment obligations and survive
without any further equity injection. Below, we have calculated the ARPU required for VIL to
meet its payment obligations in FY23E, in the absence of any additional equity injection. VIL
needs APRU to rise from the current INR 121 to INR +270 by FY23.
Required ARPU of INR +270 by FY23 for VIL to survive in the absence of any additional equity injection Exhibit 32.Cash outflow obligations FY23E Comments
Non-spectrum interest cost (INR bn) 17 Average gross debt of c.INR180bn at 9.5% interest rate; principal to be refinanced
Spectrum EMI (including interest) (INR bn) 158 Higher spectrum repayment (vs. INR 120bn currently) after moratorium
AGR EMI (INR bn) 66 Assumed net liability of INR 504bn, 15 years repayment period at 10% p.a. interest
Capex (INR bn) 82 Assumed capex in FY23E
Required Cash inflow (EBITDA) 323
EBITDA margin %(pre-IND AS) 40% We expect VIL to aggressively reduce costs, improving margins to 40%
Required revenues (INR bn) 817
Average subscriber base (mn) 245 Assumed average subscriber base in FY23E
Required ARPU (INR) 278
Source: Company, JM Financial.
A significant ARPU increase for VIL would, however signify ARPU uplift for other players also.
Jio would be the biggest beneficiary given its large subscriber base. However, if the required
tariff hike doesn’t come through then VIL might not be able to meet its payment obligations.
We have calculated the incremental value for Jio in a scenario of duopoly market to be INR
67/share. Key assumptions are:
a) Additional 114mn subscribers for Jio assuming 60% of VIL’s broadband subscribers would
shift to Jio and only 25% of VIL’s 2G subscribers would shift to Jio (as they would have to
invest in a Jiophone). Although increased subsidisation of Jiophone would enable Jio to gain
further market share, it would be ARPU dilutive;
b) Incremental capex of INR c.180bn. Although our interactions with management indicate
that incremental capex to support incoming VIL subscribers could be marginal, we have
conservatively taken incremental capex to the tune of 8% of revenues every year and taken
its present value; and
c) An EV/EBITDA multiple of c.10x, lower than that for Jio, given the uncertainty in churn for
these new customers
Our base case continues to be a 4 player market (3 private players + BSNL/MTNL), despite the
adverse AGR verdict as the payments could be spread over 15-20 years. In the latest hearing
held on 20Jul’ 20 Supreme Court has reserved verdict on the payment timeline, while
making it clear that there would not be any reductions in the payments due. While Bharti and
VIL have asked for a 15 year payment period, Tata Teleservices has asked for 7-10 years,
possibly since it does not have any future capex requirements since they have ceased their
wireless operations. Any shorter than expected timeline for repayment of AGR dues would
put VIL’s survivability under question, given that apart from AGR instalments, VIL would also
require to undertake periodic network capex in the future to maintain market share. The
verdict would be announced on 10Aug’20.
Optional value for RIL of INR67/share in case of duopoly market Exhibit 33.
Additional subscribers for Jio (mn) 114
FY22E Subscriber ARPU (INR)** 171
Incremental revenue (INR bn) 234
Incremental EBITDA margin 60%
Incremental EBITDA (INR bn) 140
EV / EBITDA (x) 10
Incremental EV (INR bn) 1,447
Incremental capex (INR bn) 181
Incremental Equity value (INR bn) 1,267
Probability of duopoly market 50%
Optional equity value for RIL (INR/share)* 67
Source: Company, JM Financial.*after accounting for 32.95% minority interest in JPL. ** We assume Jio would maintain ARPUs from incoming VIL users and would not resort to ARPU dilutions for aggressive market share gains.
VIL require ARPU to rise from the
current INR 121 to +INR 270 by
FY23 to survive in the absence of
any additional equity injection
Optional value for RIL of
INR67/share in case of duopoly
market
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JM Financial Institutional Securities Limited Page 18
Potential digital monetisation opportunities
Having comprehensively won the Telecom war, we expect Jio to train its eyes on the vast
untapped Digital opportunities. This foray into Digital services has been accelerated by
strategic investments by various marquee tech and private equity players in JPL. Covid-19 has
accelerated both data consumption due to virtual working and adoption of Digital apps. Jio is
ideally placed to capture a major share of this new and growing Digital pie given: a) the large
+390mn telecom subscriber base of Jio; b) network effects provided by participation of
marquee partners such as Facebook; and c) creation of a digital ecosystem, consisting of both
Jio and third-party apps, enabling cross-selling of solutions. We have looked at the value
arising from applications having greater visibility – namely, monetisation of video OTT apps,
audio OTT and ramp up of consumer IoT/smart sensors business. Cumulatively, these
contribute INR 105/share to our RIL target price.
Jio has evolved from a pure-play telecom provider to a tech enabler, after the reorganisation
of business into Jio Platform. RIL had undertaken the reorganisation of its telecom business,
Jio apps and acquired tech businesses into a wholly-owned platform (Jio Platform Limited,
JPL) in Oct’19.
Currently, JPL (standalone entity) houses the enterprise and consumer suite of apps as well as
the infrastructure business of Jio’s payment app (design, development and operation of the
app). Further, some tech and app investments made by RIL earlier have been transferred to
JPL as subsidiaries. Apart from direct subsidiaries, JPL has a few of RIL’s tech investments by
way of preference shares. Jio Infocomm Limited, the licensed company for telecom business
(wireless, FTTH and enterprise) is a wholly-owned subsidiary of JPL.
In line with expectations, the above re-organisation has enabled faster monetisation of the
digital business of RIL. JPL has already seen investments from Facebook and Google and a
multitude of private equity players. Given Jio’s large subscriber base, we believe the
participation of tech companies in the platform would create further network effects,
enabling a rapid scale-up of the digital business.
Jio Platform structure Exhibit 34.
Source: Company, JM Financial. Note: The cable operators Hathway and DEN are not part of the JPL platform. However, we expect the acquisition to be fully leveraged for rolling out of FTTH. Similarly KaiOS is not
part of the platform, but its OS is used in JioPhones
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JPL key tech investments over the past few years Exhibit 35.App/ tech Investments Description Invested amount /Committed capital (INR mn) Invested on
Haptik Artificial Intelligence based conversational platform 7,500* Apr-2019
Radysis India Private Limited Open telecom solutions to service providers 1,144 Dec-2018
Embibe Artificial Intelligence powered learning platform 13,500* Jun-2018
Tesseract AR/VR startup 284 May-2019
Reverie Technologies Regional language capabilities for devices 2,670* Mar-2019
Netradyne Fleet management software 2,764 Sep-2018
NEWJ Curation and production of video content 30 Nov-2018
Sankhya Sutra Labs Software Simulation Services 2,160* Mar-2019
KareXpert Digital Health Service Provided 250 May-2018
Asteria Aerospace Drone based solutions 1,481* Dec-2019
EasyGov G2C Platform 680* Feb-2019
Jio Estonia OU Software development and consultancy 740 Nov-2018
Jio Saavn Music App 68,260 Mar-2018
Total 101,463
Source: Company, JM Financial. * Includes committed capital. Committed capital calculated using 1 USD = INR 75.
Key entities in JPL and outside JPL Exhibit 36.Key Entities in JPL Key Entities outside JPL
Apps Tech Connectivity business Investments Apps / others
My Jio Haptik Wireless
JioTV Radisys Enterprise KaiOS JioMart
Jio Cinema Embibe FTTH Hathway, Den Jio Money
Jio Saavn Tesseract Grab a grub Jio POS Lite
Jio News Reverie Technologies
C-Square Jio Payments Bank
Jio Cloud Netradyne Fynd
Jio Health Hub NEWJ
Skytran
JioTV+ Sankhya Sutra Labs VAKT Holdings
Jio Call KareXpert
All media investments
Jio Chat Asteria Aerospace InvITs
Jio Security EasyGov
Jio Switch Jio Estonia OU
Jio Browser Payment platform infrastructure
Jio Games
Source: Company, JM Financial.
Minority investments in JPL to-date Exhibit 37.
Investor Amount (INR bn) Stake (%) Pre-money EV (INR tn)
Facebook 436 9.99% 4.62
Google 337 7.73% 4.62
Vista Equity Partners 114 2.32% 5.16
Saudi PIF 114 2.32% 5.16
KKR 114 2.32% 5.16
Silver Lake 102 2.08% 5.16
Mubadala Investment Company 91 1.85% 5.16
General Atlantic 66 1.34% 5.16
Abu Dhabi Investment Authority 57 1.16% 5.16
TPG 45 0.93% 5.16
L Catterton 19 0.39% 5.16
Intel Capital 19 0.39% 5.16
Qualcomm Ventures 7 0.15% 5.16
Total 1,521 32.95%
Source: Company, JM Financial.
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 20
JPL capabilities to cater to solutions across industries Exhibit 38.
Source: Company.
Total digital market opportunity
India is still at a nascent stage of the digital ecosystem’s development. Apart from e-
commerce, OTT platforms, digital lending solutions and consumer IoT, to name a few, are
expected to grow exponentially. As per a MeiTY study, by FY24-25E, nominal value of India’s
digital economy would grow 4-5x to USD795-1,015bn by FY25 (vs. USD200bn in FY18). The
current digital economy of USD200bn is largely made up of e-commerce, digital payments,
digital communication services and IT-BPM services. While the government expects these to
grow to USD 500-650bn by FY25E, with tailwinds from digital media and entertainment
services and a robust electronics manufacturing ecosystem, it envisions new and emerging
digital use cases to contribute USD 385-505bn to the digital economy by FY25E.
India’s digital economy likely to grow 4-5x to USD 795-1,015bn by FY25 (USD Exhibit 39.bn)
Source: MeiTY.
As per MeiTY study, by FY24-25E,
India’s digital economy would grow
4-5x to USD795-1,015bn by FY25
(vs. USD200bn in FY18)
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 21
The new and emerging digital opportunities would be driven by tech-enabled healthcare
(USD 4-5bn), digitally enabled energy distribution (USD 10-15bn), government e-
marketplaces (USD 10-25bn), digital education platforms (USD 20-50bn), digital farmer
financing and agricultural market places (USD 50-65bn), online skill development (USD 65-
70bn), new digital financial services like flow based lending for enterprises (USD 90-120bn)
and digital supply chains including IoT (USD 135-155bn).
With over a billion mobile subscriptions (and growing), India is one of the largest markets in
the world. Smartphone penetration has also been on the rise, led by the availability of
affordable phones with best-in-class features. The current smartphone base, as per company
estimates, stands at 450mn. The total number of internet users has also been on the rise, and
as per TRAI’s latest report, stands at 719mn. The large base of smartphone and internet users
provides a platform for rapid growth in digital services and we expect RIL to capture a
significant portion of the market share.
a) Prepaid Payment Instruments (PPIs) has been growing in India at a rapid base due to the
digitisation of subscribers and regulatory thrust on digital spending. Using Big Data &
Analytics, ultimately these instruments could be utilised to lend digitally to the consumers,
based on their spending patterns and the requirements. According to a BCG report, the total
value of retail lending, for which consumers applied through online medium ,was USD 75bn
in FY18 and is expected to reach USD 350bn by FY23. This could grow further, given the
rapid advances in Big Data & Analytics.
b) Low cost of data, decreasing cost of sensors and consumer electronics and increasing
speed of computing have been catalysing the adoption of IoT, particularly among industries.
In the consumer segment, although a range of connected and smart devices are available in
India; the penetration is still at a nascent stage among consumers. We expect greater
adoption as cost of devices and sensors decrease further. Introduction of 5G, with its speed
and very low latency, is expected to provide another big boost to IoT. As per Industry
estimates, consumer IoT or Smart Devices market is expected to be a USD 8bn opportunity by
2024.
c) With increase in average data consumption, consumption through OTT has increased over
the last couple of years. Telco bundles of content, which are subsidised, have allowed users
to sample a wide variety of content. Simultaneously, as per a FICCI-EY report, 260mn
subscribers have accessed OTT video content through Telco bundles. Moreover, the total
number of SVOD (Subscription Video-on-Demand) is expected to reach 32mn by end of
2020, rising from just 7mn at the end of 2018. According to the consultancy firm, Media
Partners Asia, OTT market (excluding Telco bundles) is expected to touch USD 4bn by 2025,
with subscription accounting for USD 1.5bn and advertisement another USD 2.5bn. Also
consumer surveys by consultancy firm Ovum have indicated that around 47% of users said
the presence of bundled OTT content was a differentiating factor for them. We believe
monetisation of Telco bundles could significantly increase the market size for OTT platforms.
Jio’s potential digital monetisation opportunities
Jio’s digital apps and capabilities cater to a wide range of solutions. However, we consider a
few such as OTT platforms, IoT solutions and payment solutions that we believe could be
monetised easily.
a) Video-on-Demand platforms – JioTV, JioTV+, and Jio Cinema: Jio platform currently has
two major Video-on-Demand (VOD) platforms, namely JioTV and Jio Cinema. JioTV is a
content aggregator app for Live TV channels while Jio Cinema aggregates movies. Also Jio
Fiber users have access to JioTV+, an app which aggregates content across OTT platforms. At
present, Jio does not charge for these apps and are being used to give additional benefits to
Jio customers so as to retain them. We believe that Jio has already aggressively positioned
itself in the carriage space, with its captive user base of 388mn and investment in leading
Cable TV companies (Den, Hathway and GTPL Hathway). Even in the content space, RIL has
invested in content producers such as Balaji Telefilms, EROS and Roy Kapoor Films and has
also signed non-exclusive content deals with marquee Indian and foreign players such as
Disney, Zee network and Sun network, to name a few, besides its majority investment in
Network18.
Given the abundance of OTT players and the still nascent stage of the industry, we do not
foresee immediate meaningful monetisation of content. However, recently Jio made available
the Disney+ Hotstar VIP plan for select higher ARPU and longer validity plans. We believe this
We expect Jio to position its video
OTT offerings as a one-stop shop
for content and subsequently
monetize it
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 22
would be followed by further initiatives to monetise content. Over the medium term, Jio
could monetise its OTT platforms by positioning it as a one-stop solution for a vast spectrum
of content, ranging from web-series to movies, which would be sourced from its marquee
investee companies and content partners. Given the vast spectrum of content that could be
made available to the consumers through such an aggregation, we believe there could be
strong traction and monetisation of the Video-on-Demand platforms.
We have estimated an additional upside to the tune of INR 80/share due to monetisation of
content, with the underlying assumptions:
i) Out of its captive subscriber base of c.499mn in FY25E, we believe around 30% could opt
to choose content in JioTV/Jio Cinema given that users would be able to access content from
multiple platforms for the price of one platform;
ii) An ARPU of INR 100/month. Currently, some of the prominent Indian OTT platforms
charge their users INR 99/month for premium content (INR 84 ARPU excluding GST). Given
the multitude of content in JioTV/Jio Cinema, we believe INR 100/month would be a
sustainable ARPU in the medium term and could gradually increase; and
iii) EV/revenue multiple of 6x. This is at a discount to the Netflix (8x), since we believe Indian
consumers would be more price-sensitive
We have not considered a scenario of advertisement led monetisation for Jio Cinema (JioTV
streams live TV and already consist of broadcaster advertisements). Advertisement ARPUs
(including video and banner ads) are generally low and given RIL’s investments, we believe
monetisation through subscriptions is the most likely scenario. Moreover advertisements tend
to reduce user experience. However, we do acknowledge that monetisation of content
through a freemium model is a possibility and would be a further upside to our value.
Additional value unlocked through monetisation of content Exhibit 40.
Jio subscribers in FY25E (mn) 499
% of subs paying for OTT 30%
No. of OTT subscribers (mn) 150
ARPU (INR) 100
Revenue (INR bn) 180
One year forward EV/revenue (x) 6
Enterprise value* (INR bn) 1006
Discounted to Sep’21 at company WACC 786
Equity value upside for RIL (INR/share) 83
Source: Company, JM Financial. * Since the apps are already up and running with content, we believe any incremental debt / capex would
be negligible. **After accounting for 32.95% minority interest in JPL
b) Other apps in JPL’s portfolio: The other applications in the platform include JioSaavn, Jio
News, Jio Health Hub and Jio Cloud. Apart from JioSaavn, other apps are not yet monetised
and advertisement revenues, if any would be small, in our view. JioSaavn is the music
streaming app whose main competitors include Gaana, Spotify and YouTube Music. It runs a
freemium model, similar to Spotify, where subscribers can either choose an ad-free
subscription plan or use the service for free with ads. However, unlike Spotify, which derives
90% of its revenues from paid services, the paid user base of JioSaavn is still low, at 20%, as
per media reports. As per media reports, the service currently has 100 mn Monthly Active
Users (MAUs). We have estimated an additional upside to the tune of INR 8/share due to
JioSaavn. The underlying assumptions are:
i) Subscription ARPU of INR c.50/ month and advertisement ARPU of INR c.11/month;
ii) 20mn paying subscribers every month out of the total 100mn monthly users. Though the
subscriber base could scale up, given the multitude of other options in the market, we have
conservatively assumed it at the current levels;
iii) EV/Revenue multiple of 3x. This is at a discount to that for Spotify (4x), given the price
sensitive nature of Indian consumers
Significant traction seen in JioSaavn,
expect sustained monetization from
JioSaavn
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 23
Additional upside from monetisation of Audio OTT platform Exhibit 41.
Saavn users (mn) 100
Non-subscribing users (80% of total users) (mn) 80
Subscribing users (20% of total users)(mn) 20
ARPU for paid subscribers (INR) 50
Subscription revenue (INR bn) 12
Advertisement ARPU (INR) 11
Advertisement revenue (INR bn) 11
Total Revenue (INR bn) 23
One year forward EV/Revenue (x) 3
Enterprise value* (INR bn) 77
Equity value upside for RIL (INR/share)** 8
Source: Company, JM Financial. * Since the apps are already up and running with content, we believe any incremental debt / capex would
be negligible. **After accounting for 32.95% minority interest in JPL
c) Consumer IoT / Smart Devices: RIL had done several tuck-in acquisitions to increase its
capabilities in AI/IoT like Radysis (open source telecom solutions enabling next generation
technologies) and Haptik (conversational AI platform). Currently, these are being used for
B2B applications; for example, the Haptik chatbot was used in GoI’s corona helpdesk.
However, many of these acquisitions could be leveraged for consumer applications, giving Jio
an edge in consumer IoT. While the ARPU per device is likely to be low, with average ARPUs
of INR 10-15, the number of such devices is potentially high.
Acquisition of tech companies and the potential uses for consumer IoT/ Smart Devices Exhibit 42.Company Likely consumer use-cases
Radysis Radysis would help in rapid innovation and solution development across Enterprises and Consumer segments
Haptik Provides ability to develop AI enabled multilingual devices, strongly positioning Jio against Amazon Alexa and Google Assistant
Tesseract Enables immersive media and also better online shopping experience, where consumers can try on products from their homes
Reverie Develops multi-lingual capabilities for apps and devices
Embibe Helps provide personalised learning experience using AI
Source: Company, JM Financial.
We estimate the additional value of the consumer IoT business to be INR 13/ share based on
the following assumptions:
i) 600mn consumer IoT devices base by FY25E. Jio had estimated a potential market of 1bn
devices for its IoT business over the next three years. We believe, along with enterprise IoT,
there will be significant traction in consumer IoT business.
ii) ARPU of INR 15/month. At present other major IoT players like China Mobile have ARPU in
the range of INR 10-15/month;
iii) Moderate EBITDA margin of 20% and incremental capex of 2.5% of revenues; and
iv) EV/EBITDA multiple of 10x, lower than that for Telecom business, given that the churn
could be higher for this new business.
Optional upside for consumer IoT business Exhibit 43.
No. of consumer IoT devices on Jio by FY25E (mn) 600
ARPU (INR) 15
Revenue (INR bn) 108
EBITDA margin (%) 20%
EV/EBITDA (x) 10
Incremental EV (INR bn) 205
Discounted to Sep’21 at company WACC 162
Incremental capex (INR bn) 27
Incremental Equity Value (INR bn) 135
Equity value upside for RIL (INR/share)* 14
Source: Company, JM Financial. *After accounting for 32.95% minority interest in JPL
d) Digital lending opportunity: RIL recently launched its UPI payments feature in its MyJio app.
This is in addition to JioMoney, which is a mobile wallet app. While the wallet business could
not gain significant traction due to: i) already entrenched players such as PayTM; ii) need for
both payer and payee to have the same wallet; and iii) additional step of transferring to and
from the wallet to the bank account; also transfer from wallets to bank accounts incurred
charges. However, with the launch of RIL’s UPI, which is inter-operable with other UPI apps
and directly linked with the bank accounts, we believe that RIL could gain significant traction
Jio likely to leverage capabilities of
its tech investees to ramp up
consumer IoT/Smart devices
business
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 24
in the mobile payments space, given its large user base. Moreover, RIL also has a payments
bank license (Jio Payments Bank), which can be leveraged to enhance financial inclusion,
thereby further enhancing traction for its payment business. We believe that, over the
medium-to-long term, this could evolve into a digital lending platform. As per Jio, total UPI
payment is currently at 10% of GDP. We believe that given Reliance Retail’s e-commerce
venture JioMart and the large amount of consumer behavioural data from its telecom
business, RIL is advantageously positioned to scale up in this business. The recent launch of
JioPOSLite, in which users can recharge for others and earn commissions, also opens up the
possibility of scaling up P2P payment solutions. However, the traction in these apps is still low
for us to build in any meaningful upside from this opportunity, at this point of time.
Platform based business: A case of 1+1 > 2
From being a pure-play telecom operator four years ago, Jio has transformed itself into a truly
digital platform with a captive user base of c.+390mn, of which about c.290mn are higher-
ARPU smartphone subscribers. While the number of users is certainly impressive, that alone
cannot be the criterion to label a company as a platform-based one. For example, China
Mobile has c.950mn users, but is not considered a platform business. Even in India, Bharti
Airtel and VIL have a sizeable mobile broadband subscriber base of 160mn and 141mn,
respectively. However they are also not considered platform plays, despite the fact that these
telcos provide their own OTT applications to the subscribers. So what makes a platform
company different from a large Telco or one that provides an OTT platform?—the answer lies
in the creation of an ecosystem to connect diverse businesses.
Jio Platform currently has developed/is developing a suite of digital apps, which customers
have access to and provide them with varied value propositions. These are currently being
used as user retention tools for the captive telecom subscriber base. However, in the
medium-to-long term these could be monetised as standalone apps or app bundles. The
presence of a large number of apps also reduces search and transactional costs for users,
enabling Jio to cross-sell its offerings. For example, a probable scenario would be one in
which Jio Game users are provided with the option of paying through Jio Money/Jio UPI for
in-game purchases or Embibe providing learning outcomes for students and providing them
with the option of accessing learning materials through Jio Cloud. While at present the
visibility is low on these, we clearly see a situation where Jio evolves a ‘Super App’ like that of
WeChat in China. While the different digital apps in the Jio ecosystem may seem targeted at
different consumer interests, the synergy and cross – selling opportunities that they provide
can be truly immense, given the large subscriber base. Two key events have provided an
impetus to Jio in this journey to create a ‘Super App’, in our view.
a) Strategic partnership with Facebook: Jio can leverage Facebook’s domain expertise and
technical knowledge to build an app combining social media facilities, e-commerce, digital
payments etc. Given Whatsapp’s +400mn user base in India, this could potentially allow Jio
to integrate its offerings with Whatsapp and attract subscriber base of other telcos as well.
The use cases would be many, for example the partnership between JioMart and Whatsapp,
coupled with low cost smartphones, could enable Jio to reach the smaller kiranas with ease,
eventually converting them to users of Jio Money and providing financial services for these
kiranas in the long run. The supply chain can be extended to farmers and SMEs also, whereby
these kiranas could place orders through JioMart. As per RIL, through this partnership, it
would focus on India’s 60 million micro, small and medium businesses; 120 million farmers;
30 million small merchants and millions of small and medium enterprises in the informal
sector.
b) Jio opening up its Set-top box ecosystem, whereby third-party developers can launch and
monetise their offerings through Jio. We expect this to be a significant step in the journey to
become a ‘Super App’. While Jio has a range of enterprise and consumer digital apps
currently, it may not be in a position to organically cater to all consumer demands in the
future. Opening up of the Jio ecosystem to third-party developers would allow creation of a
large number of popular apps in the ecosystem, further attracting other app developers, thus
creating a strong moat for the ecosystem and enabling the creation of a ‘Super App’. For
developers, it could be an ideal opportunity to reach out to +390mn subscribers and
monetise their apps.
We expect development of a ‘Super
App’ in the long run, driven by the
creation of a Jio app ecosystem
Reliance Industries 30 July 2020
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Snapshots from Jio Developers website for third-party developers (1/2) Exhibit 44.
Source: Company website for developers.
Snapshots from Jio Developers website for third-party developers (2/2) Exhibit 45.
Source: Company website for developers.
Reliance Industries 30 July 2020
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Valuations and key assumptions for the Digital business
Focus now on growth in FTTH and Enterprise businesses
The ramp-up of the FTTH business has been slower than expected. After the beta testing
phase for customers, Jio has started charging customers over the past few months. We
believe that with the increase in data consumption expected due to virtual working, Jio
would start aggressively pursuing this opportunity. We are building in 3mn subscribers at the
end of FY21E (vs. 1mn subscribers at the end of FY20), reaching 24mn customers at the end
of FY25E. This is conservative, given the management’s target of 50mn homes and enterprise
in next 3 years. Given that Jio’s tariffs are in line with those of other players, unlike wireless
where Jio still maintains a discount, we believe that EBITDA margins should reach 50% in the
medium-to-long term. This is conservative in our view given that EBITDA margin for Bharti’s
Homes Services is c.50% with only 2.4mn customers.
On the 5G/enterprise front, we are building in revenues of INR 35bn in FY23E, growing to
INR 84bn by FY25E. Given the widespread network coverage, 5G ready infrastructure and
comfortable cash position, we believe Jio is poised to gain sizeable market share in the
5G/enterprise segment.
Strong FCF generation likely due to robust EBITDA growth and moderation in capex
We see the consolidated EBITDA margins improving to near 50% levels in the medium-to-
long term (vs. 38.8% in FY20) aided by operating leverage. Other key tailwinds for margin
would be: a) reduction in license fees from the current 8% levels; b) operational efficiencies
leading to lower employee expenses and SG&A costs; and c) a faster ramp-up of the high-
margin FTTH business.
With 99% coverage, the peak capex cycle for Jio is over. Any further network capex would
be only for capacity addition. Network capex decreased from INR 685bn in FY19 to INR
215bn in FY20, and we expect the capex intensity as a % of sales to moderate further.
However, we are building in a one-time spectrum renewal charge of USD 2.8bn in FY22E (for
erstwhile RCOM’s spectrum in the 800 MHz band). Given the impending auction for 5G, we
are building a cumulative capex of USD 6.1bn for 5G over FY23-25E. Moreover, we see capex
/ sales at 15% in the long term vs. 40% seen in FY20. Any larger than expected data
consumption leading to more pressure on the network, would be a key upside risk to our
capex numbers.
Increase in ARPU an operating leverage to improve Exhibit 46.margins
Source: Company, JM Financial.
Jio’s peak capex cycle is over, long term capex intensity Exhibit 47.seen at 15% of sales
Source: Company, JM Financial.
0%
20%
40%
60%
80%
FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E
Marg
ins
(%)
Jio EBITDA margin (%) Jio incremental EBITDA margin (%)
0%
80%
160%
240%
0
200
400
600
FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E
Caepx/ sa
les (%
)Capex
(IN
R b
n)
Capex (INR bn) Capex / sales (%) [RHS]
Factoring 24mn homes and
enterprise subscriber at the end of
FY25E, vs management’s target of
50mn in next 3 years
Expect EBITDA margin improving to
~50% in medium-to-long term (vs.
38.8% in FY20) aided by operating
leverage. Building a cumulative
capex of USD6.1bn for 5G over
FY23-25E; capex / sales estimated at
15% in the long term vs. 40% in
FY20
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 27
Key assumptions and financials for Jio Telecom business Exhibit 48.Particulars FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E
Wireless segment
Subscribers (mn, EoP) 187 307 388 445 457 472 485 499 509 514 519
AMDU (GB/month) 10.9 11.5 12.2 12.9 13.6 13.9 14.3 14.6 15.0 15.4
Average realisation per GB (INR) 12.2 11.3 12.2 13.2 14.0 14.9 15.8 16.8 17.9 18.6
ARPU (INR) 149 133 130 149 171 190 207 226 246 268 286
Revenues (INR bn) 202 393 543 746 923 1,058 1,190 1,334 1,489 1,646 1,771
5G/Enterprise
Revenues (INR bn)
0 0 35 56 83 117 159 211
FTTH segment
Subscribers (mn, EoP)
1.0 3.0 8.0 12.5 18.0 24.0 29.2 32.7 36.4
ARPU (INR)
750 765 780 796 812 828 845 862
Revenues (INR bn)
18 50 96 146 205 264 314 357
Key financials
Consolidated Revenue* (INR bn) 202 412 580 764 974 1,189 1,392 1,622 1,870 2,118 2,339
Consolidated Revenue growth (%)
105% 41% 32% 27% 22% 17% 17% 15% 13% 10%
Consolidated EBITDA* (INR bn) 67 153 225 332 463 567 667 781 904 1,029 1,141
Consolidated EBITDA growth (%)
128% 47% 47% 39% 23% 18% 17% 16% 14% 11%
Consolidated EBITDA margin (%) 33.4 37.2 38.8 43.4 47.5 47.7 48.0 48.1 48.3 48.6 48.8
Incremental EBITDA margin (%)
40.8 42.8 58.0 62.4 48.7 49.3 49.2 49.6 50.4 50.9
Capex (INR bn) (481) (685) (215) (191) (294) (275) (215) (243) (233) (235) (248)
FCF (INR bn) * (439) (589) (75) 49 66 168 306 365 469 562 635
Source: Company, JM Financial. * FY18, FY19 and FY20 Revenues and EBITDA also include other digital services
Digital business valuation
We value RIL’s 67.05% stake in JPL at an Equity value of INR ~950/share or INR 6trn
comprising of:
a) Telecom business at an enterprise value of INR 780/share or INR 4,952bn based on DCF
valuation (Exhibit 50); implied valuation of 14.3x Sep’21 EV/EBITDA;
b) Optional upside in Telecom business at an equity value of INR 67/share or INR 423bn
(Exhibit 33) based on 50% probability of duopoly market and Jio garnering 40% of VIL total
subscriber base without any ARPU dilution; and
c) Digital opportunities at an equity value of INR 105/share or INR 669bn (Exhibit 51) based
on potential monetisation of Video OTT apps, JioSaavn and Consumer IoT business.
The digital business is valued at INR ~950/share Exhibit 49.
Business segment Valuation
methodology
Valuation (INR
bn)
Valuation
(USD bn)
Valuation
(INR/share) Comments
Digital business (for RIL's 67.05% share)
6,044 81 952
a) Telecom business DCF 4,952 66 780 Based on DCF valuation; implied valuation of 14.3x
Sept'21 EV/EBITDA
b) Optional upside in Telecom business
423 6 67 50% probability of duopoly market; Jio garnering
40% of VIL subscriber without any ARPU dilution
c) Digital opportunities
669 9 105 Based on potential monetization of Video OTT apps,
JioSaavn and Consumer IoT business
Source: Company, JM Financial.
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 28
DCF value of RIL’s share of Telecom EV at INR 780/share Exhibit 50. FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E
DCF (INR bn)
EBIT X (1-tax rate) 181 272 338 402 481 566 654 733
Depreciation & Amortization 90 99 116 130 138 147 154 161
Changes in net working capital 3 6 6 5 6 6 7 6
Capex (191) (294) (275) (215) (243) (233) (235) (248)
Free cash flow to the firm [FCFF] 83 84 185 323 382 486 580 652
FCFF growth (%)
1% 121% 74% 18% 27% 19% 12%
Sep-21E
WACC 10.4%
PV of cash flows (FY22E-28E) (INR bn) 1,756
PV of terminal value (INR bn) 5,630
Terminal value as % of Enterprise Value 76%
Total Enterprise Value (INR bn) 7,386
RIL number of shares (mn) 6,349
Enterprise Value for RIL (INR/share) 780
Source: Company, JM Financial.
INR 172/share equity value for RIL from duopoly Exhibit 51.optionality and digital applications
Source: Company, JM Financial.
USD 21bn of equity value from duopoly optionality and Exhibit 52.digital applications
Source: Company, JM Financial.
Global telecom and digital comparable for Jio Exhibit 53. P/E FY20-22 EPS
CAGR CY21/FY22 RoE
EV/EBITDA
CY19/FY20 CY20/FY21 CY21/FY22 CY19/FY20 CY20/FY21 CY21/FY22
Rjio (JMFe) 130.9 49.9 28.6 109.7% 10.8% 34.1 22.3 16.0
Digital comparable
Tencent 34.1 39.4 31.8 24.8% 22.2% 21.2 27.1 22.6
Alibaba 60.9 35.2 29.2 32.7% 15.1% 32.4 29.0 22.5
Amazon 80.3 91.0 57.2 49.6% 23.7% 23.6 34.0 24.6
Alphabet 27.7 28.1 22.2 16.8% 15.7% 17.1 16.0 12.8
Facebook 25.1 27.6 21.1 29.8% 20.8% 17.5 15.8 12.4
Netflix 78.3 73.8 51.7 49.0% 30.2% 52.4 47.1 35.9
Apple 18.4 29.9 25.0 11.7% 134.9% 11.4 20.6 18.0
Telecom comparable
Bharti Airtel NM NM 141.4 106.8% 3.1% 10.1 12.6 10.0
Vodafone Idea NM NM NM -48.5% 393.2% 29.2 9.2 6.3
Vodafone Plc NM 20.4 22.4 NM 2.8% 7.3 6.2 6.4
AT&T 16.8 9.3 9.2 30.4% 11.6% 7.7 6.9 6.8
Verizon 11.5 12.1 11.7 2.9% 29.1% 7.5 7.4 7.2
China Mobile 11.2 9.2 8.9 2.1% 9.7% 2.9 2.2 2.2
XL Axiata 47.0 21.2 19.1 41.0% 5.7% 5.6 4.8 4.5
MTN Group 17.9 10.3 8.9 19.0% 15.5% 4.2 3.4 3.3
Source: Company, JM Financial. * Equity base includes minority investments to-date.
67
83 8
14172
0
20
40
60
80
100
120
140
160
180
200
Optional value -Telecom Duopoly
Video OTT Audio OTT ConsumerIoT/smart devices
Total
INR/s
hare
8
10
1 2
Optional value - Telecom Duopoly Video OTT
Audio OTT Consumer IoT/smart devices
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 29
Retail — driving omni-channel capabilities across segments
Reliance Retail has, in a short span of time, attained a strong leadership position in the Retail
segment, which reflects the ambition of the group of attaining leadership in every segment it
operates in. Reliance Retail was launched in 2006 with the opening of the first Reliance Fresh
store and the next two years witnessed launch of Reliance Digital and Reliance Trends.
Interestingly, it now leads in each of the three segments viz. Grocery, Fashion & Lifestyle and
Consumer Electronics and the fact that the feat was achieved in a decade is a testimony to
group’s ability for value creation. Even in FY20, these 3 segments contributed c.86% to the
Retail segment EBITDA and are expected to remain the major drivers of earnings in future.
The company exited the year FY20 with a total store count of 12,307 and a retail space in
operation of 28.7mn sq. ft. To put this in perspective, it is 3.7x the size of DMart in terms of
retail space while core-retail revenue and EBITDA are 3.7x and 4.1x that clocked by DMart.
The ambition for organised retail business is even larger now, as highlighted in FY20 AGM –
RIL expects to drive omni-channel capabilities across segments as well as extend JioMart to
Consumer Electronics and Fashion & Lifestyle – JioMart has started off in the grocery space at
present to begin with - similar to how Reliance Retail initially began. Given previous history of
successful execution, this could as well become a sizeable value-creation opportunity in the
future. For the near-term, we expect larger value-creation potential from the Grocery and
Consumer Electronics businesses over FY20-23 while Fashion & Lifestyle segment is likely to
take relatively more time to recover from the pandemic. But given that Fashion and Lifestyle is
intrinsically a much higher margin business, we forecast Core Retail EBITDA margin in FY23E
to be slightly below the level of FY20. This is expected to be entirely mix-led, as we expect
individual segments to all clock higher margins in FY23 vs FY20.
At an overall basis, we value the Reliance Retail business at 25x forward EBITDA to arrive at a
valuation of INR3.7tn (Sep’21 basis). On Jio Mart, we are presently factoring in only the
opportunity of digitisation of Kirana store where, we believe, the business has a real value
proposition. We are not yet factoring in any value from the other categories where the
market place capabilities can be extended to (like consumer electronics and apparels as brick
and mortar presence gives Jio Mart some edge in these segments). As explained in detail
later, we expect Jio Mart to garner at least 10% market share in the digitised General Trade
market (expecting it to be 50% of the total GT market by FY30) by FY30 and given the
profitability potential in this space, we are pegging the value of this business at INR1,600bn
by Mar’29 which implies INR732bn in present value terms.
Chronological milestones representing the progression of Reliance Retail over the past c.1.5 decade Exhibit 54.
Year Event
2006 Ventured into organised retail through Reliance Retail with its first Reliance Fresh store in Hyderabad
2007 Launched Reliance Digital, a consumer electronics retail chain
2008 Opened first fashion & lifestyle store under Reliance Trends and Reliance Footprint brand
2010 Crossed 1,000 stores mark. Announced partnerships with Zegna, QuikSilver & Steve Madden
2011 Launched wholesale cash-n-carry store chain - Reliance Market
2012 Reliance Trends became India’s largest fashion Retailer.
Announced partnerships with Iconix, Kenneth Cole, Thomas Pink and Brooks Brothers 2013 Reliance Market became India’s largest wholesales cash & carry store chain.
Reliance Retail achieved EBITDA break-even 2014 Launched Reliance Digital Express Mini, a chain of small stores dealing in mobility and communication devices
2015 Reliance Retail 2.0 unveiled with launch of multi-channel initiatives.
Announced partnership with BCBGMAXAZRIA, Juicy Couture and Cherokee 2016 Launched www.ajio.com a curated fashion e-commerce platform and www.Footprint360.com a multi-channel
e-commerce platform for Reliance Footprint 2017 Reliance Retail crossed USD 5bn revenue mark
Launched www.reliancetrends.com a multi-channel e-commerce platform for Reliance Trends
Announced partnership with Flormar, Bally and Scotch & Soda
Launched Project Eve, a mid-premium fashion and lifestyle destination store for women
2018 Crossed revenue milestone of USD 10bn
2019 Made first international foray with 100% acquisition of marquee British Toy retailer Hamleys.
2020 JioMart launched across all major cities for delivering essential grocery items.
JioMart goes live on Whatsapp after the deal between Facebook and Reliance Jio Source: Company, JM Financial
Focus on scale was accompanied by a strong delivery on throughputs: Reliance Retail was
established with the focus of attaining a sizeable scale which is quite evident from the fact
that its core retail revenue has nearly quintupled over FY16-20 despite having a revenue size
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 30
of INR190bn in FY16 – this represents revenue CAGR of 49%. While this can be also
attributed to its rapid expansion of store count but this has only doubled over the past 4
years. If we were to look at revenue per store, the same has more than trebled for both
grocery and consumer electronics and has grown by 34% for Fashion & Lifestyle segment.
This is quite commendable as rapid pace of expansion generally leads to a decline in
throughputs per store. The confluence of these factors helped the company deliver 8.9%
EBITDA margin in FY20. For the Retail business (including connectivity but excluding Petro
Retail), ROIC has scaled-up to 27.1% from mere 6.5% in FY16.
Store count has nearly doubled over FY16-20… Exhibit 55.
Source: Company, JM Financial
…while revenue has become 5x over the same period… Exhibit 56.
Source: Company, JM Financial
…driven by sharp scaling-up of throughputs per store… Exhibit 57.
Source: Company, JM Financial
…which is expected to improve further over next 3 years Exhibit 58.
except for Fashion and Lifestyle (being hit by pandemic)
Source: Company, JM Financial
Working capital rationalisation has also helped pare down debt and improve returns profile:
While scaling-up of revenue size coupled with improving operating margin is in itself
commendable, the company has also worked on driving efficient operations which would
help keep investments in business lower at least in relation to revenue. Noteworthy point
here is that Fixed Asset turnover has seen a marginal improvement from 7.2x in FY16 to 7.7x
in FY19 while a significant part of the improvement in the capital employed was driven by a
sharp reduction in working capital – revenue for the retail business in FY20 was 7x levels seen
in FY16 but net working capital was less than 2x over the same period. Entire improvement
was driven by inventory which fell from 104 days of sales in FY16 to 26 days in FY20.
The efficient management of working capital has also helped Reliance Retail report positive
operating cash flows in each of the 5 years over FY16-20 (both inclusive). On an average,
operating cash flows have been c.2x the net operating profit after tax over these 5 years –
this feat was possible partly on account of efficient working capital management during the
same period and was also aided by tax payments being nearly half that of tax provisions in
the PNL (possibly on carried forward losses in tax books). This has helped constrict net debt to
merely 16.5% of Invested capital – it was 10% in FY16 but 41% in FY19.
3,2453,616
7,573
10,415
11,784
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
FY16 FY17 FY18 FY19 FY20
Store Count (ex-petro) - nos
190273
437
735
9281,020
1,323
1,732
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Core Retail Revenue - INR bnExpecting to double over next 3 years
146
41 49
491
155
65
0
100
200
300
400
500
600
Grocery Consumer electronics Fashion and Lifestyle
Revenue/store - INR mn
FY16 FY203.4x
1.3x
3.7x
491
155
65
681
213
60
0
100
200
300
400
500
600
700
800
Grocery Consumer electronics Fashion and Lifestyle
Revenue/store - INR mn
FY20 FY23E
Medium-termfallout from pandemic
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 31
ROIC has improved significantly from 6.5% in FY16 to 27.1% in FY20 aided by Exhibit 59.higher OPM and better asset turns
Source: Company, JM Financial
Lower tax payments and efficient working capital management helped in strong Exhibit 60.cash flow generation with operating cash flow being 225% of Operating Profit after Tax
Source: Company, JM Financial
Working capital as % of sales has come to below mid-Exhibit 61.single digit levels…
Source: Company, JM Financial
…which has aided reduction in net debt in the past one Exhibit 62.year
Source: Company, JM Financial
Expecting core retail revenue trajectory to moderate to 23% CAGR over FY20-23 on slower
growth in apparels: We continue to believe that retail business would largely normalize once
the pandemic is reasonably controlled over the course of next 12 months. Interestingly
though, Reliance Retail’s diversified revenue stream holds it in good stead to counter the
problems arising as a result of this pandemic.
2%
2% 2%3%
5%6.5%
8.8%
15.9%
21.2%
27.1%
3.2
5.0
6.4 6.25.9
0
2
4
6
8
0%
6%
12%
18%
24%
30%
FY16 FY17 FY18 FY19 FY20
NOPAT margin - % ROIC - % Invested capital turns - RHS
287%
473%
39% 49%
275%
104% 96% 95%
0%
250%
500%
FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
CFO - % of NOPAT
Impacted due to working capital investments
5 Yr Avg:
31
19
39
100
58
17%
7% 8%
10%
4%
0
40
80
120
0%
6%
12%
18%
FY16 FY17 FY18 FY19 FY20
Working capital - INR bn WC - % of sales
6
-11
28
89
38
-20
0
20
40
60
80
100
FY16 FY17 FY18 FY19 FY20
Net Debt - INR bn
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 32
- Of the core-retail business revenues, 37% comes from the grocery segment which
would largely remain unaffected during the pandemic. We expect throughputs per
store to grow at 11% per annum which coupled with store expansion should help
drive a 30% revenue CAGR over FY20-23 (vs 41.5% over FY16-20)
- Consumer electronics on the other hand being partly discretionary in nature is
expected to face some headwinds in the short-term. Some parts of the business like
mobile phones and laptops continue to remain essential and to that extent would
be lesser impacted. Furthermore, lockdowns have also forced people to look for
more options for convenience leading to higher sales of some household durable
products like refrigerators, washing machines, microwaves etc. Overall, we expect
this segment to normalise soon and we are building in 11% CAGR in throughputs
and 22% CAGR in revenue over FY20-23 (vs. 64.4% over FY16-20).
- We expect Fashion & Lifestyle to be the worst hit amongst these three categories. In
our view, revival in apparels would be more gradual which is in-line with our belief
that normalisation of social gatherings to pre-Covid levels will take some time even
after the crisis is largely over. We are forecasting revenue per store for Apparels in
FY23 to be 7% lower than that seen in FY20 and we are building in 5% revenue
CAGR in this segment completely led by store expansion.
Overall we are factoring in 23% revenue CAGR over FY20-23 in the Core Retail business. We
expect EBITDA CAGR to be lower at 21.4% which would completely be on account of mix
change – high margin (23.9% in FY20) apparels business would be mere 9.1% of core retail
revenues relative to 14.6% FY20.
Overall business valuation estimated at INR3.7tn; JioMart’s GT venture would contribute
another 20% to the overall value: We are valuing Reliance Retail at 25x on 12M fwd EBITDA
to arrive at a valuation of INR3.7tn. This also implies EV/sales of 1.5x. The valuation compares
quite favourably to peers like Trent and Page which are quoting at 31-32x on EV/EBITDA
(FY22) and 5-6.5x on EV/Sales (FY22). This would also be a sharp discount to DMart’s
valuation of 44.6x on EV/EBITDA (FY22) and 3.5x on EV/Sales (FY22). We have used a lower
multiple as the business also includes low margin categories like connectivity and petro-
retailing and we are also factoring in a possibility of peers quoting at prices which are above
their respective fair values.
For JioMart, its current proposition of digitising the General Trade (Kirana stores) could really
develop in to a huge opportunity and we believe the underlying strengths in the business can
help develop a strong moat in this segment. However, if were to assume that JioMart is able
to garner at least 10% market share of digitized General Trade segment (would be c.50% of
GT market pegged at USD1,355bn in FY30 on our estimates) over the next 10 years and earn
a commission of 3% on sales, the company could clock a revenue of INR152bn on a GMV of
INR5,080bn. Furthermore, a 30% EBITDA margin would imply it could clock an operating
profit of about INR46bn in FY30. Using a 35x EV/EBITDA multiple we derive an Enterprise
Value of INR1,600bn in FY29 and would be worth INR732bn in present value terms as at
Sep’22.This implies JioMart has a potential to add another 20% to our valuation of Reliance
Retail.
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 33
Based on back-of-envelope assumptions, the JioMart New-commerce kirana store Exhibit 63.grocery initiative, if successfully scaled-up, could itself be worth another c.USD9-10bn – and add c.20% to current retail business valuation
FY30
General Trade (GT) market - USD bn 1,355
% of market assumed to be digitised 50%
GT market-size for E-commerce - USD bn 677
Estimated JioMart New-Commerce Market Share by FY30- % 10%
JioMart New-Commerce GMV from grocery -USD bn 68
JioMart New-Commerce GMV from grocery – INR bn 5,080
Commission - % 3.0%
Estimated JioMart New-Commerce Revenue - INR bn 152
EBITDA margin 30%
JioMart New-Commerce EBITDA - INR bn 46
Target EV/EBITDA multiple 35
JioMart New-Commerce Enterprise Value - INR bn (Mar’29 basis) 1,600
Discount Rate 11.0%
JioMart New-Commerce EV (discounted to Present Value) INR bn - Mar'21 basis 732
Source: Technopak Research & Analysis, JM Financial
Note: Our assumptions for JioMart are based on global peers in the same field like Alibaba
and JD.com. Alibaba earns a 4% distributor commission on GMV and has a 42% margin. We
have assumed lower commissions and margin as we are presently factoring in only the
grocery business. On valuations, JD.Com is presently quoting at 23x on FY21 EV/EBITDA
while Alibaba is around 27x. We are valuing JioMart at a premium as the growth would still
remain quite high even post achieving this scale.
Comparable listed peer valuations for Jio Mart Exhibit 64.
PE EV/EBITDA EV/Sales ROCE (pre-tax)
FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY22E
ADITYA BIRLA FASHION AND RETAIL 294.9 -35.0 72.4 27.3 110.3 17.5 1.4 1.7 1.2 10.3%
TITAN COMPANY 60.8 76.4 45.1 41.0 49.8 31.0 4.5 4.8 3.6 26.9%
TRENT 157.1 760.6 67.4 39.5 58.8 30.1 6.2 7.1 4.8 14.7%
PAGE INDUSTRIES 62.2 77.6 48.6 40.2 46.2 31.4 7.4 7.8 6.3 52.1%
AVENUE SUPERMARTS 100.5 98.3 67.4 64.0 67.3 44.9 5.2 4.9 3.6 17.2%
Source: Company, JM Financial.
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 34
Downstream margins outlook subdued; RIL relatively better placed
We expect refining and petchem margin outlook to be subdued in the near term given the
huge ~8% global oil demand contraction likely in CY20, ongoing capacity additions and the
resultant excess inventory build-up. However, RIL is relatively better placed to mitigate this
challenge due to its integrated and complex facility, locational advantage and its strength for
feedstock sourcing and product placement. Hence, we expect RIL to continue to operate its
plants at optimum utilisation despite near-term demand concerns. We expect RIL’s GRM at
USD 7.5/9.0/10.0/bbl in FY21/22/23 (vs. USD 8.9/bbl in FY20) and petchem EBITDA margin at
USD 192/221/243/tn in FY21/22/23 (vs. USD 218/tn in FY20). We value Refining and Petchem
business at an EV of INR 346/share and INR424/share, respectively, based on 7.5x
EV/EBITDA.
Refining margin recovery to be gradual along with recovery in oil demand
Global oil demand expected to return to pre-Covid levels only in CY22
The IEA - in its July’20 oil market report (click here) - expects CY20 oil demand at
92.1mmbpd, i.e. unprecedented contraction of 7.9mmbpd due to the pandemic (contraction
of 10.75mmbpd in 1HCY20, moderating to contraction of 5.1mmbpd in 2HCY20). Further,
CY21 oil demand is expected to grow only by 5.3mmbpd YoY to 97.4mmbpd, still
2.6mmbpd below CY19 level (of 100mmbpd) due to expectations of significantly lower
demand for Jet fuel and Kerosene until at least CY22. The IEA estimates jet fuel demand to
decline by 3mmbpd YoY in CY20 (from 8mmbpd in CY19) and only rise by 1mmbpd in
CY21, still ~2mmbpd below pre-crisis level. Data from the International Air Transport
Association show that passenger traffic in CY20 will be 55% vs. CY19. EIA’s expectation is
also along similar lines (click here for its July’20 short-term energy outlook)
IEA and EIA expects global oil demand to return to pre-Covid levels only in CY22 Exhibit 65.
CY14 CY15 CY16 CY17 CY18 CY19 CY20e CY21e
IEA
Global demand (mmbpd) 93.4 95.3 96.5 98.2 99.3 100.0 92.1 97.4
Demand growth (mmbpd, YoY) 1.9 1.1 1.7 1.1 0.7 -7.9 5.3
EIA
Global demand (mmbpd) 93.5 95.3 96.9 98.8 100.4 101.0 92.9 99.9
Demand growth (mmbpd, YoY) 1.8 1.6 1.9 1.6 0.6 -8.1 7.0
Source: IEA, EIA
Expectation of product-wise monthly global oil demand contraction trend in CY20 Exhibit 66.(mmbpd)
Source: IEA
IEA and EIA expects CY20 global oil
demand to decline by ~8mmbpd;
expects demand recovery to pre-
Covid levels only in CY22
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 35
Expectation of region wise break-up in global oil demand contraction in CY20 and Exhibit 67.recovery in CY21 (mmbpd)
Source: EIA
Global refining capacity additions continue due to lagged impact
Despite the massive demand contraction of ~7.9mmbpd in CY20, refining capacity is
expected to witness net additions in CY20 and CY21 due to the lagged impact of capacity
expansion decisions take 3-5 years ago. IEA expects net refining capacity addition of
1.5mmbpd in CY20-21; China to add 530kbpd of capacity, India to add ~140kbpd capacity
and Middle East to add 710kbpd capacity.
Region-wise capacity additions across the world over the years Exhibit 68.
Source: BP statistical review, IEA, JM Financial
GRM to stay subdued due to low capacity utilisation and oil product inventory build-up
Hence, global refining utilisation decline could record lows of ~75% in CY20 vs. the past
decade’s average of ~82%.
Global refining utilisation to decline to record low of ~75% in CY20 vs. past decade average of ~82% Exhibit 69.
Source: BP statistical review, IEA, JM Financial
kbpd CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20e CY21e
Americas 115 119 487 310 6 9 246 20 10
Europe & CIS 89 19 111 -150 20 235 172 0 0
Middle east 173 383 393 164 121 239 313 120 590
India 40 0 -12 313 79 272 0 19 120
China and Rest of Asia Pacific 865 865 865 865 865 865 789 341 280
Africa 14 9 0 0 -14 -5 6 0 0
Total 1,296 1,149 436 479 492 1,428 1,526 500 1,000
70%
74%
78%
82%
86%
-3.0
-1.5
0.0
1.5
3.0
CY
1980
CY
1981
CY
1982
CY
1983
CY
1984
CY
1985
CY
1986
CY
1987
CY
1988
CY
1989
CY
1990
CY
1991
CY
1992
CY
1993
CY
1994
CY
1995
CY
1996
CY
1997
CY
1998
CY
1999
CY
2000
CY
2001
CY
2002
CY
2003
CY
2004
CY
2005
CY
2006
CY
2007
CY
2008
CY
2009
CY
2010
CY
2011
CY
2012
CY
2013
CY
2014
CY
2015
CY
2016
CY
2017
CY
2018
CY
2019
CY
2020e
CY
2021e
Global refining capacity addition Global refinery utilisation rate (%) (RHS)
IEA expects net refining capacity
addition of 1.5mmbpd in CY20-21;
GRM to stay subdued due to low
capacity utilisation and oil product
inventory build-up
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 36
Further, this capacity glut has resulted in built up in oil products inventory. IEA expects large
implied product stock build-up of ~550mmbbl during Jan-May’20; published OECD product
inventory data for Apr’20 confirms the directional trend.
OECD oil products stocks jump due to demand contraction Exhibit 70.
mmbbl 1QCY18 2QCY18 3QCY18 4QCY18 1QCY19 2QCY19 3QCY19 4QCY19 1QCY20 Apr2020
OECD Americas 625 621 667 647 648 649 658 647 651 682
OECD Asia Oceania 200 203 220 212 214 216 232 212 213 210
OECD Europe 869 842 853 863 864 866 875 863 908 932
Total OECD oil product stocks 1,693 1,666 1,740 1,721 1,727 1,732 1,764 1,721 1,772 1,824
Source: IEA, JM Financial
Hence, Singapore Dubai GRM has collapsed to record low levels in the last few months
(reported negative USD1.0/bbl in 1QFY21), well below the cash cost of USD2-3/bbl for
refiners across various regions. The excess oil products inventory also needs to be eliminated
before we see GRM return to historical levels. Hence, we expect Singapore Dubai GRM to
average at USD 2.5/4.5/5.5/bbl in FY21/22/23 (vs. USD 3.2/bbl in FY20 and average of USD
6.2/bbl during FY11-FY20 and USD 5.5/bbl during FY01-FY20).
Product wise margin trend Exhibit 71.
Source: Company, Reuters, Bloomberg, JM Financial
S’pore Dubai GRM has collapsed to record low levels and below cash cost due to huge global demand contraction Exhibit 72.
Source: IEA, Reuters, JM Financial
Is low crude price a positive for refiners?
Crude price is a function of global a) oil product demand growth and b) global crude supply
growth. However, GRM is a function of global a) oil product demand growth and b) refining
capacity additions. Hence, while the demand side of equation is common for determination
of both crude price and GRM, the supply side of the equation is different for both. For crude
price, supply side is not purely determined by economics, as OPEC+ tries to artificially regulate
crude supply with an objective to put a floor to crude price given their dependency on oil
export revenues. However, for GRM, supply side is the net refining capacity addition (net of
permanent shutdowns) which is based on economic factors. However, refining capacity
addition has a 3-5 year lead time, which means capacity addition always comes with a lag
and hence leads to the cyclicality in the refining margin.
USD/bbl F Y11 F Y12 F Y13 F Y14 F Y15 F Y16 F Y17 F Y18 F Y19 F Y20 1QF Y21
Reuters Singapore complex margin 5.2 7.9 7.7 5.9 6.3 7.5 5.8 7.2 4.9 3.2 -1.0
Product -crack s
Gasoline-Dubai crack 8.3 11.5 15.4 12.7 14.5 19.2 13.9 14.6 8.0 6.7 0.9
Gasoil-Dubai crack 13.8 17.8 19.5 17.4 15.7 12.0 11.3 13.3 15.1 14.1 4.7
Jet kero-Dubai crack 14.8 18.3 18.9 16.7 15.9 12.5 11.5 13.3 14.6 12.6 -1.2
FO-Dubai crack -7.1 -2.6 -5.0 -10.5 -8.4 -6.7 -5.4 -4.0 -2.8 -8.1 -2.7
Naphtha -Dubai crack 0.4 -4.6 -5.0 -4.3 -1.5 2.9 0.1 0.3 -4.1 -5.5 -4.6
L ight heav y crude spread
Arab Light-Arab Heavy crude spread 3.2 3.6 3.6 4.2 4.3 3.0 2.8 2.2 2.3 2.2 0.5
Brent-Dubai crude spread 2.7 4.2 3.5 3.0 2.2 1.7 2.3 1.8 1.1 0.4 0.7
0
2
4
6
8
-8
-4
0
4
8
CY
01
CY
02
CY
03
CY
04
CY
05
CY
06
CY
07
CY
08
CY
09
CY
10
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11
CY
12
CY
13
CY
14
CY
15
CY
16
CY
17
CY
18
CY
19
CY
20
e
CY
21
e
US
D/b
bl
mm
bp
d
Refinery capacity addition (LHS) World oil demand growth (LHS) S'pore Dubai GRM (RHS) S'pore Dubai GRM 20 year average (RHS)
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 37
We looked at the past 3 instances of crude price crashes to understand this:
a) Crude price crash in CY08-09 was led by oil demand shock; hence, GRM also declined
sharply along with crude prices: During the global financial crisis in CY08-09, the crash in
crude price from high of USD 146/bbl to USD 38/bbl was purely due to oil demand shock -
global oil demand contracted by 0.6mmbpd in CY08 and by another 1.0mmbpd in CY09
(after strong annual growth of 1.1-3.1mmbpd reported during CY03-07). Further, as refining
capacity addition fell short of robust oil demand growth during 2004-07, the market saw a
golden refining cycle in 2004-07 (with Spore Dubai GRM at USD 6-8/bbl); hence lot of
refining capacity addition planned during that period was commissioned during the CY08-09
downturn, further aggravating the weakness in GRMs. Hence, GRM declined sharply from
USD 6-8/bbl in 2004-07 to USD 5.8/3.7/4.6/bbl in CY08/09/10.
b) Crude price crash during CY14-16 was due to crude supply shock; hence GRM was at
record high levels as oil demand growth continued to be robust: Crude price started to
gradually decline from +USD 100/bbl level prevailed since Feb 2011-13 and bottomed at USD
26/bbl in Feb 2016 purely due to crude supply shock as the market realised the potential risk
from a continuous rise in US shale oil production - US crude production grew sharply from
5.5mmbpd in CY10 to 9.4mmbpd in CY15. However, global oil demand was growing at a
record pace during the period– reported growth of 1.2/1.9/1.1/1.7/mmbpd in
CY14/CY15/CY16/CY17. On the other hand, refining capacity addition was muted at
1.4/0.5/0.5/0.6mmbpd in CY14/CY15/CY16/CY17. Hence, despite the crude price crash,
refining industry was in a golden cycle during the period with Spore Dubai GRM of USD
5.8/7.7/6.1/7.1/bbl in CY14/CY15/CY16/CY17.
c) Current crude price crash is due to huge unprecedented oil demand shock: The current
sharp fall in crude price is primarily due to an unprecedented large oil demand contraction.
Hence, GRM will continue to be weak for few quarters till we return to normalcy in global oil
demand.
However, the weakness in GRM is likely to be partly offset by following benefits on account
of low crude price (as witnessed during 2014-16): a) lower fuel and loss cost for refiners
(given fuel & loss is ~6-10% across refiners); b) high crude price discounts from Middle East
crude suppliers to large Asian buyers in their desperation to maintain market share amidst
crude supply glut and c) lower working capital requirements.
GRM decline in CY08-09 & CY20 due to demand led fall Exhibit 73.in crude, unlike supply led fall in crude in CY14-16
-2.5
0.0
2.5
5.0
7.5
10.0
0
35
70
105
140
1Q
FY
09
1Q
FY
10
1Q
FY
11
1Q
FY
12
1Q
FY
13
1Q
FY
14
1Q
FY
15
1Q
FY
16
1Q
FY
17
1Q
FY
18
1Q
FY
19
1Q
FY
20
1Q
FY
21
US
D/b
bl
US
D/b
bl
Brent (LHS) Spore Dubai GRM (RHS)
Source: Reuters, Bloomberg
GRM decline in CY08-09 & CY20 due to demand led fall Exhibit 74.in crude, unlike supply led fall in crude in CY14-16
0.0
2.5
5.0
7.5
10.0
0
35
70
105
140
FY
02
FY
04
FY
06
FY
08
FY
10
FY
12
FY
14
FY
16
FY
18
FY
20
US
D/b
bl
US
D/b
bl
Brent Spore Dubai GRM (RHS)
Source: Reuters, Bloomberg
Current crude price collapse is due
to unprecedented oil demand
contraction; hence GRM to stay
weak till demand normalises
Low crude price to benefit refiners
via reduction in fuel & loss cost and
working capital needs and increase
crude price discounts from crude
suppliers
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 38
RIL relatively better placed to tide the crisis
Light-heavy crude spread has moderated over past 1-2 years due to shortage of a heavy
crude supply (produced mostly by Middle East countries) and rise in supply of light crude
(produced by the US). This has had some moderating impacting in GRM premium for
complex refiners such as RIL. However, RIL has largely been able to offset this via its superior
crude sourcing strategies.
Brent – Dubai crude spread continue to be lower (USD/bbl) Exhibit 75.
Source: Bloomberg, JM Financial.
Arab light – Arab heavy continue to be lower (USD/bbl) Exhibit 76.
Source: Bloomberg, JM Financial.
OPEC and non-OPEC countries monthly crude production trend (mmbpd) Exhibit 77.
Source: IEA, EIA JM Financial
RIL’s GRM premium should see some gains due to commercialisation of its ~USD 6bn petcoke
gasification project by end FY20. Assuming stabilisation of petcoke gasification project by
end FY21, we have factored in additional GRM contribution of ~USD 0.5/bbl in FY21 and
USD1.0/bbl in FY22. However this is lower than original expectations and guidance as project
economics have deteriorated since its conceptualisation (in 2012-13) due to the following
reasons: a) Petcoke gasifier capacity is at 10mmtpa as opposed to 6mmtpa initially planned;
b) Spot LNG prices have collapsed to USD2-3/mmbtu from high of USD 14-15/mmbtu
prevailing pre-2014; and c) Petcoke prices have only seen only a moderate decline (following
the global coal prices) vs. 2014 levels.
Countries CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20
OPEC
Saudi Arabia 8.1 9.0 9.5 9.4 9.5 10.1 10.4 10.0 10.3 9.8 9.7 9.7 9.7 11.9 8.5 7.6
Iran 3.7 3.6 3.0 2.7 2.8 2.9 3.6 3.8 3.8 2.4 2.1 2.1 2.0 2.0 2.0 2.0
Venezuela 2.5 2.5 2.5 2.5 2.5 2.5 2.2 2.0 1.5 0.9 0.8 0.8 0.7 0.6 0.6 0.3
Nigeria 2.1 2.2 2.1 2.0 1.9 1.9 1.5 1.5 1.6 1.7 1.7 1.7 1.8 1.8 1.5 1.4
Libya 1.6 0.5 1.4 0.9 0.5 0.4 0.4 0.8 1.0 1.1 0.8 0.1 0.1 0.1 0.1 0.1
Iraq 2.4 2.7 3.0 3.1 3.3 4.0 4.4 4.5 4.5 4.7 4.5 4.6 4.6 4.5 4.2 3.7
UAE 2.3 2.5 2.7 2.8 2.8 2.9 3.1 2.9 2.9 3.1 3.1 3.2 3.5 3.9 2.5 2.4
Kuw ait 2.0 2.2 2.5 2.6 2.6 2.7 2.9 2.7 2.7 2.7 2.7 2.7 2.9 3.1 2.2 2.1
Angola 1.7 1.7 1.8 1.7 1.7 1.8 1.7 1.6 1.5 1.4 1.4 1.4 1.4 1.3 1.3 1.2
Other OPEC 3.1 3.0 3.0 2.9 2.8 3.3 2.7 2.5 2.3 2.2 2.1 2.1 1.9 1.7 1.3 1.4
Total OPEC crude 29.5 29.9 31.3 30.5 30.3 32.4 32.8 32.4 32.0 30.0 28.9 28.3 28.6 30.8 24.1 22.2
Non-OPEC
Russia 10.5 10.6 10.7 10.9 10.9 11.1 11.3 11.4 11.4 11.6 11.6 11.3 11.3 11.4 8.6 8.5
US 5.5 5.7 6.5 7.5 8.8 9.4 8.9 9.3 10.4 12.3 13.0 13.0 13.0 12.3 11.5 10.9
RIL relatively better placed to tide
the crisis due to its integrated and
complex facility, locational
advantage and superior crude
sourcing/ product placement
strategies
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 39
Asia spot LNG prices have come down to record lows of Exhibit 78.~USD2-3/mmbtu
0
3
6
9
12Ju
l-1
5
Nov-1
5
Ma
r-16
Ju
l-1
6
Nov-1
6
Ma
r-17
Ju
l-1
7
Nov-1
7
Ma
r-18
Ju
l-1
8
Nov-1
8
Ma
r-19
Ju
l-1
9
Nov-1
9
Ma
r-20
Ju
l-2
0
US
D/m
mb
tu
Source: JM Financial, Bloomberg
Coal prices though have corrected from recent peak, is Exhibit 79.flattish from 2014 levels
40
65
90
115
140
Ju
l-1
5
Ja
n-1
6
Ju
l-1
6
Ja
n-1
7
Ju
l-1
7
Ja
n-1
8
Ju
l-1
8
Ja
n-1
9
Ju
l-1
9
Ja
n-2
0
Ju
l-2
0
US
D/to
nn
e
Source: JM Financial, Bloomberg
RIL GRM premium over Spore Dubai GRM to be capped due to moderation in light heavy crude spread (USD/bbl) Exhibit 80.
0.0
2.0
4.0
6.0
8.0
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
RIL GRM premium over Singapore Dubai GRM Arab Light- Arab Heavy Spread Brent-Dubai Spread
Source: JM Financial, Company
Further, RIL, due to its locational advantage and superior product placement strategies, was
able to operate its refineries (and its petchem units) at more than 90% utilisation during the
lockdown from Mar’20 to May’20, during which domestic demand saw contraction of 20-
45%. This compared with utilisation declining to 50-80% for other refiners.
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 40
RIL’s refinery continues to operate at +90% utilisation during lockdown Exhibit 81.
40%
60%
80%
100%
120%
Nov'1
9
Dec'1
9
Ja
n'2
0
Fe
b'2
0
Ma
r'2
0
Ap
r'2
0
Ma
y'2
0
IOCL BPCL HPCL RIL Essar
Source: PPAC, JM Financial
As discussed earlier, we expect Singapore Dubai GRM to average at USD 2.5/4.5/5.5/bbl in
FY21/22/23 (vs. USD 3.2/bbl in FY20 and average of USD 6.2/bbl during FY11-FY20 and USD
5.5/bbl during FY01-FY20). We are building in RIL’s steady state GRM premium at USD
4.5/bbl over our Singapore Dubai GRM assumption; hence we expect RIL’s GRM at USD
7.5/9.0/10.0/bbl in FY21/22/23 (vs. USD 8.9/bbl in FY20). We value Refining business at an EV
of INR 346/share based on 7.5x EV/EBITDA.
RIL’s GRM composition (USD/bbl) Exhibit 82.
Source: JM Financial, Company
RIL’s refining segment — key assumptions and estimates Exhibit 83.
Source: JM Financial, Company
FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E
EBITDA (INR Bn) 268 286 290 261 245 198 271 316 322 329
Volumes (mmtpa)
Crude throughput 69.6 70.1 69.8 68.3 70.6 65.7 70.6 70.7 70.7 70.8
Margins (USD/bbl)
S'pore Dubai GRM 7.5 5.8 7.2 4.9 3.2 2.5 4.5 5.5 5.5 5.5
RIL's total GRM premium 3.3 5.2 4.4 4.3 5.7 5.0 4.5 4.5 4.5 4.5
a) RIL normal GRM premium 3.3 5.2 4.4 4.3 5.7 5.0 4.0 3.8 3.5 3.5
b) Petcoke gasif ication addition to GRM 0.0 0.0 0.5 0.8 1.0 1.0
RIL's GRM 10.8 11.0 11.6 9.2 8.9 7.5 9.0 10.0 10.0 10.0
Refining cash opex 2.8 2.7 2.8 1.8 2.3 2.0 2.0 2.0 2.0 2.0
Refining EBITDA 8.0 8.3 8.8 7.4 6.6 5.5 7.0 8.0 8.0 8.0
Expect RIL’s GRM at USD
7.5/9.0/10.1/bbl in FY21/22/23;
value Refining business at an EV of
INR 346/share based on 7.5x
EV/EBITDA
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 41
Petchem margins subdued due to oversupply amid demand contraction
RIL has 3.6mmtpa capacity to produce ethylene, which is used as a primary feedstock for the
production of PE, MEG, and PVC. Global ethylene capacity additions (of 6mmtpa/7mmtpa in
CY18/CY19) continue to outpace demand growth (of 4mmtpa/6mmtpa in CY18/CY19).
Further, ethylene capacity of around 8mmtpa is expected to come online in 2HCY20. This is
likely to continue to exert downward pressure on ethylene prices despite assuming demand
posts a 4% CAGR (or ~6mmt annually) over CY2019-21 like witnessed in CY2016-19.
Asia’s ethylene and propylene capacity additions schedule (mmtpa) Exhibit 84.
Source: Platts, JM Financial
Recovery in PE-Naphtha spreads temporary: Crude prices fell steeply (~30%) in the first half
of CY20 given the unprecedented ~11% contraction in global oil demand in 1HCY20. As a
result, Naphtha prices shrank (~35-40%) to USD400/mt during 1HCY20. This enabled several
idled Naphtha based PE producers to compete against the low cost ethane based US
producers. Global PE demand in CY20 saw slight improvement due to sudden spike in
demand from the medical and food packaging sector on account of coronavirus pandemic.
However, going forward, we expect the PE demand to normalise and PE prices to head
downwards due to already apparent oversupply scenario coupled with significant capacity
additions in US (~0.8mmtpa) and China (~2mmtpa).
Naphtha prices (USD/MT) fell ~35-40% during 1HCY20 Exhibit 85.
Source: Bloomberg, JM Financial
PP demand struggling due to slowdown in automotive sector: Polypropylene (PP) is widely
used to manufacture various automobile components and its demand has been hit sharply by
weak economic cycles and Covid-19 led disruptions. We expect PP demand to recover
gradually; however, impending one LPG cracker and 4 PDH plants (expected by 2HCY20) are
likely to create demand-supply imbalance.
Company Ethylene Propylene Expected start date
China
Sinopec SABIC Tianjin 1.0 0.5 Jul'20
BASF YPC 0.7 0.3 Jul'20
Sinopec SK Wuhan 0.8 0.4 Oct'20
CNOOC & Shell 1.0 0.6 Q4-20
South Korea
SK Energy 0.7 0.4 Nov'20
Lotte Chemical 1.2 0.5 Dec'20
YNCC 0.6 0.3 4QCY20
Taiwan
Formosa 1.2 0.6 Aug-Sep-20
Indonesia
Chandra Asri 0.9 0.4 Jul-Aug 20
Total 8.0 3.9
100
250
400
550
700
Jan-
19
Feb-
19
Mar
-19
Apr
-19
May
-19
Jun-
19
Jul-1
9
Aug
-19
Sep
-19
Oct
-19
Nov
-19
Dec
-19
Jan-
20
Feb-
20
Mar
-20
Apr
-20
May
-20
Jun-
20
Jul-2
0
Petchem margins to remain weak in
near-term due to oversupply amid
sharp demand contraction
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 42
PP capacity additions in CY2020 Exhibit 86.
Source: Platts, JM Financial
PX markets to exacerbate further due to oversupply: During FY20, PX-Naphtha margins were
hampered by start-up of new large PX units in China. The supply glut in the global PX market
was caused by capacity addition of 12mmt against consumption of merely 3mmt. Going
forward, we expect margins to continue to remain under pressure due to a) additional
capacity of around 2.6mmtpa coming online in CY20-21; b) uncertainty in demand caused by
the Covid-19; and c) gradual easing of excess inventories.
PX capacity additions in CY2020-21 Exhibit 87.
Source: Platts, JM Financial
High inventory, huge capacity additions to hurt PTA margins: The polyester market has seen a
large amount of demand destruction due to the pandemic and this has taken the PTA
inventories in China to a mammoth ~3.5mmt in May’20 (vs. normal average of ~1-1.5mmt).
Despite huge inventories, the PTA market has been flooded with supply as Chinese producers
continued to operate at 85-95% capacity since Apr’20. Moreover, in 2HCY20, around
7.2mmtpa of new PTA capacity additions would come online (taking PTA capacity to
59.8mmtpa in China and 79.8mmtpa in Asia). Hence, we believe PTA margins are likely to
remain subdued due to huge oversupply amid demand concerns.
PTA capacity additions in CY2020-21 Exhibit 88.
Source: Platts, JM Financial
RIL’s petchem margins are likely to see only a gradual recovery: Petchem margins are likely to
remain weak in the near term due to steep demand contraction and the huge capacity
additions in China and US across polymers and fibre intermediates. We have assumed RIL’s
petchem EBITDA margin to be lower at USD 192/tn in FY21E, USD 221/tn in FY22E and
USD243/tn in FY23E (vs USD 218/tn in FY20). We value RIL’s Petchem segment at an EV of
INR 424/share based on 7.5x EV/EBITDA, in-line with the implied Saudi Aramco deal.
RIL's petchem segment - key assumptions and estimate Exhibit 89.
Source: Company, JM Financial.
Company Type Capacity (ktpa) Expected start date
Fujian Meide PDH 660 4QCY20
Zhejiang Huahong PDH 450 4QCY20
Oriental Energy PDH 660 2HCY20
Hyosung Chemical PDH 300 Aug'20
Yantai Wanhua Chemical LPG cacker 130 4QCY20
Total 2,200
Company Product Capacity (ktpa)
Shangond Dongjying PX 1,000
Sinochem Quanzhou PX 800
Aramco Jazan PX 850
Total 2,650
Company Product Capacity (ktpa) Expected start date
Hengli Petrochemcial PTA 2,500 Jul'20
Xinfengming Group PTA 2,200 Sep'20
Fujian Baihong Group PTA 2,200 Oct'20
Others 300
Total 7,200
FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E
EBITDA (INR Bn) 137 165 259 379 309 266 337 381 401 421
Margin
EBITDA/ton (USD/ton) 155 176 234 273 218 192 221 243 248 253
Sales volumes (mmtpa)
Polymers 4.6 4.5 4.9 5.8 6.0 5.6 6.1 6.2 6.3 6.3
Polyesters 2.2 2.3 2.6 2.9 2.9 2.7 3.0 3.0 3.0 3.1
Fiber intermediaries 6.4 6.9 9.3 10.9 10.8 10.0 11.0 11.2 11.3 11.4
Total 13.5 13.9 17.1 19.8 20.0 18.6 20.5 20.7 20.9 21.1
Assumed RIL’s petchem EBITDA
margin to be lower at USD 192-
243/tn in FY21-22E (vs USD 218/tn
in FY20); value Petchem segment at
an EV of INR 424/share based on
7.5x EV/EBITDA
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 43
Global refining peer valuation table Exhibit 90.
Source: JM Financial, Bloomberg
Global petchem peer valuation table Exhibit 91.
Source: JM Financial, Bloomberg
Company FY21CY20 FY22CY21 FY21CY20 FY22CY21 FY21CY20 FY22CY21 FY21CY20 FY22CY21 FY21CY20 FY22CY21
US peers
Holly Corporation 11.4 6.3 5.4 8.0 NM 18.7 0.8 0.8 -1.9 5.1
Valero Energy 16.0 6.9 3.2 6.1 NM 15.9 1.3 1.3 -5.3 5.0
Marathon Petroleum 13.1 7.6 10.0 NM NM 21.2 1.1 1.2 -5.1 4.0
US peers average 13.5 6.9 6.2 7.0 NM 18.6 1.1 1.1 -4.1 4.7
European peers
Galp Energia 7.3 5.4 13.4 15.0 39.9 14.8 2.0 2.0 4.3 13.1
Motor Oil Hellas 6.5 5.1 5.6 6.2 10.0 6.4 1.3 1.2 10.7 17.0
New Zealand Refining 9.1 5.9 21.0 28.4 NM NM 0.3 0.3 -7.0 -4.6
PKN Orlen 4.0 3.2 10.2 10.1 9.3 6.5 0.6 0.6 6.6 8.8
Saras 4.3 2.8 3.2 4.1 NM 7.5 0.5 0.5 -0.9 6.7
MOL Hungarian oil & gas plc 4.8 3.6 13.1 14.5 21.3 6.0 0.8 0.8 2.2 7.5
OMV Ag 5.5 3.9 21.2 24.7 16.4 7.8 0.8 0.7 4.5 9.1
European peers average 5.9 4.3 12.5 14.7 19.4 8.1 0.9 0.9 2.9 8.2
Asian peers
GS Holdings 6.2 6.6 9.2 11.9 4.5 4.9 0.4 0.3 8.2 7.3
SK Energy Co Ltd 9.2 8.6 -0.4 6.1 18.3 18.9 0.8 0.7 -8.8 3.8
MRPL 15.0 6.0 3.6 5.8 NM 5.4 0.9 0.8 1.0 12.9
CPCL 16.0 7.3 2.3 3.9 NM 4.0 0.5 0.5 1.7 20.2
BPCL 12.4 9.4 6.4 6.5 15.0 10.5 2.2 2.0 14.8 19.2
HPCL 7.7 5.9 4.7 4.9 7.9 5.6 1.0 0.9 14.8 13.1
IOCL 7.2 5.9 7.9 7.7 7.7 5.7 0.8 0.7 9.7 11.1
RIL 17.8 13.5 17.3 18.5 30.2 21.1 2.5 2.2 8.9 11.1
Asian peers average 11.4 8.0 5.6 7.9 13.9 10.6 1.1 1.0 4.6 11.4
Global peers average 9.6 6.4 8.3 10.4 16.4 11.1 1.0 1.0 2.6 9.2
Global peers median 8.4 6.0 6.4 7.1 15.0 7.6 0.8 0.8 2.2 8.8
EV/EBITDA (x) EBITDA Margins (%) P/E (x) P/B (x) ROE (%)
Company FY21/CY20 FY22/CY21 FY21/CY20 FY22/CY21 FY21/CY20 FY22/CY21 FY21/CY20 FY22/CY21 FY21/CY20 FY22/CY21
Global (ex Asia) peers
DoW 9.8 7.8 12.9 15.1 53.8 19.7 2.7 2.9 4.8 12.6
Du Pont 11.8 11.3 23.6 24.9 18.6 16.4 1.0 1.0 4.3 5.3
Wacker Chemie 9.5 6.9 11.5 14.9 72.3 26.4 2.1 2.0 3.3 8.8
Johnson Matthey 9.5 8.1 15.7 17.3 15.8 11.9 1.5 1.4 9.6 12.0
LANXESS 6.8 5.9 13.5 14.7 14.9 11.5 1.3 1.2 8.3 9.4
BASF 9.8 8.2 12.2 13.7 21.4 14.4 1.1 1.1 3.8 6.9
Indorama ventures 9.7 8.4 10.7 11.4 15.0 10.3 1.0 1.0 7.1 9.4
SABIC 12.6 9.9 21.4 24.1 86.6 30.5 1.7 1.6 1.9 5.5
Honam Petrochemical 5.2 3.6 10.2 13.3 16.3 7.8 0.4 0.4 2.6 5.5
Eastman Chemical Co 9.3 8.5 21.0 21.6 12.9 11.0 1.7 1.6 12.7 14.2
AKZO Nobel 13.5 11.8 15.7 16.9 24.4 19.5 2.6 2.5 8.9 12.0
Global (ex Asia) peers average 9.8 8.2 15.3 17.1 32.0 16.3 1.6 1.5 6.1 9.2
Asian peers
Mitsubishi Gas Chem 7.8 6.4 10.1 11.6 20.0 12.9 0.7 0.7 3.4 5.4
Sinopec Shanghai Petrochemical 11.9 7.5 3.0 4.4 13.0 7.7 0.6 0.6 5.9 7.4
LG Chem 12.3 9.5 12.1 13.0 47.0 27.3 2.2 2.1 4.7 7.7
Formosa Chemicals & Fibre Corp 15.9 14.4 10.8 10.4 23.6 18.0 1.2 1.2 4.3 5.8
Nan Ya Plastics 18.8 17.2 10.5 10.6 24.1 18.3 1.3 1.3 5.0 7.9
Formosa Plastics 18.2 15.3 15.0 15.8 21.9 15.0 1.4 1.4 6.5 9.2
Hanw ha 8.9 7.9 11.2 11.5 15.5 10.3 0.7 0.7 4.6 6.4
Asahi Kasei Corp 6.9 5.8 11.9 13.4 13.0 10.1 0.8 0.8 5.9 7.8
Toray Industries 8.9 7.6 9.7 10.6 21.1 12.7 0.7 0.7 3.8 5.1
Kuraray Co 6.0 5.3 17.6 19.1 19.0 12.9 0.7 0.7 3.4 5.3
Teijin Ltd 6.2 5.5 12.0 12.6 13.8 10.3 0.8 0.7 5.3 7.2
Mitsui Chemicals 8.3 6.4 9.5 11.5 21.5 10.5 0.8 0.7 3.8 7.7
RIL 17.8 13.5 17.3 18.5 30.2 21.1 2.5 2.2 8.9 11.1
Asian peers average 11.4 9.4 11.6 12.5 21.8 14.4 1.1 1.0 5.0 7.2
Global peers average 10.6 8.7 13.1 14.5 26.5 15.3 1.3 1.3 5.4 17.6
Global peers median 9.5 7.9 12.0 13.5 20.6 12.9 1.1 1.1 4.8 7.7
P/E (x) P/B (x) ROE (%)EV/EBITDA (x) EBITDA Margins (%)
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 44
Debt concerns behind us; entering strong FCF generation phase
We take comfort from RIL’s deleveraging efforts via stake sale in JPL and rights issue to
become zero-net-debt ahead of its Mar’21 target. Though RIL- Aramco deal for a proposed
20% stake in RIL’s O2C has been delayed due to challenging energy market outlook, we still
see a possibility of this deal going through in future given its strategic importance for Saudi
Arabia to secure its future crude markets. RIL is entering strong FCF generation phase with
major capex phase behind us and expectation of strong 17-18% EPS CAGR over the next 3-5
years led by growth potential in the Digital and Retail businesses. We expect RIL’s FCF yield to
improve from 2% in FY20 to 7% in FY25 as RIL will generate FCF of INR 235bn in FY21,
which will grow to INR 993bn by FY25.
Stake sale in JPL helped achieve zero net debt target ahead of timeline
We take comfort from RIL’s effort to address balance sheet concerns as it expedited its
deleveraging exercise via stake sale in JPL and rights issue to become zero net debt ahead of
its Mar’21 target. RIL’s reported net debt at end FY20 was INR 1,610bn. However, in FY21 so
far, RIL has managed to raise INR 2,128bn via: a) INR 1,520bn via stake sale of 32.95% in
JPL; b) INR 531bn via rights issue (including 75% of proceeds to be received in FY22); c) INR
76bn from BP for 49% stake sale in petro-retail JV. Hence, RIL has effectively become zero
net debt ahead of its Mar’21 target. However, there also exists other liability of ~INR 950bn
at end FY20 (which includes capex for creditors, spectrum dues and other current and non-
current liability). Hence, net debt including other liabilities has declined to INR 432bn (from
INR 2,560bn at end FY20).
Further, despite some delay due to challenging energy market conditions, RIL continues to
pursue with Saudi Aramco (Aramco) for its proposed 20% stake in its O2C (oil to chemical)
business at an enterprise value of USD 15bn. RIL is simultaneously working with NCLT to
carve out O2C business into a separate subsidiary to facilitate this partnership and expects
this process to complete by early 2021. This deal, once finalised, should result in potential
inflows of ~USD 15bn (or INR 1,125bn) and further strengthen its balance sheet.
Details of RIL’s historical consolidated debt, capex and cash flow break-up Exhibit 92.
Source: JM Financial, Company. Note: FY20 debt calculations is after accounting for both Fibre and Tower InvIT, * Interest accrued but not due on deferred payment liabilities and creditors for capex, **Advances from customer and statutory dues, *** Balance with tax authorities and prepaid expense, deposits etc
INR bn FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Gross debt
Non-current long term borrow ing 710 1,010 1,205 1,416 1,521 1,442 2,075 1,976
Current portion of long term borrow ing 179 49 123 155 129 372 156 449
Working capital borrow ing 184 328 276 235 315 374 644 938
Reported Gross debt (a)1,072 1,387 1,604 1,807 1,966 2,188 2,875 3,363
Less: Cash and cash equivalent (b) 844 906 878 900 772 781 1,330 1,753
Reported Net debt (c=a-b)228 481 725 907 1,194 1,407 1,545 1,610
Other liabilities that should be considered as debt
Other non-current f inancial liabilities* 0 8 15 22 90 85 100 113
Deferred payment liabilities (Spectrum) 0 0 74 133 201 202 188 188
Other current f inancial liabilities (Creditor for capex) 58 121 307 741 916 880 580 500
Other current liabilities** 0 0 34 100 209 432 529 476
Less: Other current assets *** 18 33 -85 -163 -199 -328 -368 -328
Other liabilities (d) 75 162 345 833 1,218 1,272 1,030 950
Total gross debt (incl other liabilities) (e=a+d)1,148 1,549 1,949 2,639 3,184 3,459 3,905 4,313
Total Net debt (incl other liabilities) (f=c-d)304 643 1,070 1,740 2,412 2,679 2,574 2,560
Equity 1,821 1,987 2,087 2,316 2,637 2,935 3,871 4,533
EBITDA 351 379 415 507 525 712 877 922
PAT 209 225 236 299 299 361 398 399
CFO 369 433 344 381 496 715 423 981
FCF 62 -168 -290 -88 -286 -25 -513 216
Capex 323 691 1,002 1,130 1,147 793 1,235 805
Net Debt to Equity (x) 0.2 0.3 0.5 0.8 0.9 0.9 0.7 0.6
Net Debt to EBITDA (x) 0.9 1.7 2.6 3.4 4.6 3.8 2.9 2.8
RIL achieved zero net debt ahead of
its Mar’21 target via stake sale in
JPL and rights issue
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 45
RIL’s net debt flow chart based on recent and proposed stake sale (INR bn) Exhibit 93.
Source: Company, JM Financial
RIL-Aramco deal delayed, but still likely given its strategic importance for Saudi Arabia
RIL- Aramco deal for a proposed 20% stake in RIL’s O2C has been delayed due to sharp fall
in crude oil prices post covid-19 outbreak. This has led to Saudi Aramco’s FCF declining to
USD 15bn in 1QCY20 (vs USD 17bn in 1QCY19) and is expected to come under further
pressure due to weak crude price outlook. However, to ensure its commitment of annual
dividend of USD 75bn (as announced ahead of its IPO) amid weakness in global oil demand
outlook, Aramco would like for some stability in the oil market before finalizing the deal.
Earlier, Aramco had also extended payment period for its 70% stake purchase in SABIC for
USD 69bn and also cut its capex for CY20 to USD 25-30bn (from earlier guidance of USD 35-
40bn) to provide a cushion against weak oil prices.
However, we still see a possibility of this deal going through in future given its strategic
importance for Saudi Arabia to secure its future crude markets. As part of the agreement, RIL
is likely to increase its crude offtake from Aramco to 500kbpd on long term basis (from
existing ~280kbpd). This is consistent with Aramco’s strategy to invest in downstream assets
in growing Asian countries to secure their future crude markets. Aramco’s downstream
business is the largest customer for its upstream business’ crude production, consuming 38%
of its crude production in 2018 as per its IPO document.
Saudi Aramco historical financials Exhibit 94.
Source: Company, JM Financial
2,560 436337
747
76 531
432
-1125-693
-1,500
-900
-300
300
900
1,500
2,100
2,700
To
tal n
et
deb
t at
end
FY
20
Sta
ke
sa
le in
JP
L to
Fa
ce
bo
ok
Sta
ke
sa
le in
JP
L to
Go
ogle
Sta
ke
sa
le t
o o
the
rin
ve
sto
rs in
JP
L
RIL
-BP
fu
el JV
Rig
hts
issu
e
To
tal n
et
deb
t aft
er
abo
ve
dea
ls
Po
tentia
l S
aud
i A
ram
co
dea
l
To
tal n
et
deb
t if A
ram
co
dea
l is
execu
ted
1,610 950
950
Re
po
rte
d n
et d
eb
ta
t e
nd
FY
20
Oth
er
lia
bilitie
sco
ns
ide
red
as
de
bt
USD bn CY16 CY17 CY18 CY19 1QCY20
PAT 13 76 111 88 17
Balance sheet
Cash and cash eq. 13 22 49 47 63
PP&E 169 200 233 262 266
Total assets 251 294 359 398 393
Total borrwoings 14 21 27 47 49
Total liabilites 55 74 85 119 75
Total equity 196 220 274 279 288
Cash flow
Operating cash flow 29 89 121 111 22
Investing cash flow -31 -32 -35 -47 5
Financing cash flow 1 -48 -59 -65 -12
Capex -28 -33 -35 -33 -7
Free cash flow 2 56 86 78 15
Ratios
ROACE 6.6% 33.8% 41.1% 28.4% 26.3%
Net Debt/Equity 0.6% -0.4% -8.6% -0.2% -4.9%
RIL- Aramco deal delayed due to
challenging energy market outlook;
we still see a possibility of this deal
going through given its strategic
importance for Saudi Arabia to
secure its future crude markets
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 46
RIL’s major capex phase behind us; entering strong FCF generation phase
RIL ended a major capex phase - incurring INR 6,680bn during FY14-FY20 - primarily to build
its Digital business and also for capacity expansion in its O2C business. With major capex
completed, we expect it to moderate to a more normalised level of ~ INR 400-500bn p.a.
going forward. Further, we expect RIL’s EPS to post a strong 17-18% CAGR over next 3-5
years led by growth potential in the Digital and Retail business. Hence, we estimate RIL’s FCF
yield to improve from 2% in FY20 to 7% in FY25 as RIL will generate free cash flow of INR
235bn in FY21, which will grow to INR 993bn by FY25.
RIL’s major capex phase is behind us (INR bn) Exhibit 95.
101
269 246
327
706
1,003
1,135 1,149
757
1,200
731
418
516 493429 452
0
250
500
750
1,000
1,250
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
E
FY22
E
FY23
E
FY24
E
FY25
E
RIL's major capex phase is behind us
Source: Company, JM Financial
RIL’s segment-wise capex break-up – major capex phase is behind us (INR bn) Exhibit 96.
0
250
500
750
1,000
1,250
FY
17
FY
18
FY
19
FY
20
FY
21
E
FY
22
E
FY
23
E
FY
24
E
FY
25
E
Refining Petchem E&P Retail Digital Others
1,149
757
1,200
731
418
516 493429 452
Source: Company, JM Financial
RIL’s Net Debt - Equity on a steep declining trend Exhibit 97.
0.36
0.23
0.090.17
0.32
0.51
0.75
0.910.91
0.67
0.56
0.17
-0.01-0.09
-0.16
-0.23
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
E
FY
22
E
FY
23
E
FY
24
E
FY
25
E
Source: Company, JM Financial
RIL’s FCF and FCF yield to rise sharply Exhibit 98.
-5%
-1%
3%
7%
11%
-550
0
550
1,100
1,650
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
E
FY
22
E
FY
23
E
FY
24
E
FY
25
E
(%)
INR
bn
FCF (INR bn) FCF yield (%) (RHS)
Source: Company, JM Financial
RIL’s major capex phase ended in
FY20; entering strong FCF
generation phase
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 47
Key assumptions and estimates
RIL – key assumption and estimate Exhibit 99.
Source: Company, JM Financial.
FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E
Brent crude price (USD/bbl) 47.5 49.0 57.6 70.2 60.9 40.0 50.0 50.0 50.0 50.0
Exchange rate (INR/USD) 65.5 65.5 64.5 69.9 70.9 74.5 74.5 76.0 77.5 79.1
Refining
EBITDA (INR Bn) 268 286 290 261 245 198 271 316 322 329
Crude throughput 69.6 70.1 69.8 68.3 70.6 65.7 70.6 70.7 70.7 70.8
Margins (USD/bbl)
S'pore Dubai GRM 7.5 5.8 7.2 4.9 3.2 2.5 4.5 5.5 5.5 5.5
RIL's total GRM premium 3.3 5.2 4.4 4.3 5.7 5.0 4.5 4.5 4.5 4.5
a) RIL normal GRM premium 3.3 5.2 4.4 4.3 5.7 5.0 4.0 3.8 3.5 3.5
b) Petcoke gasif ication addition to GRM 0.0 0.0 0.5 0.8 1.0 1.0
RIL's total GRM 10.8 11.0 11.6 9.2 8.9 7.5 9.0 10.0 10.0 10.0
Refining cash opex 2.8 2.7 2.8 1.8 2.3 2.0 2.0 2.0 2.0 2.0
Refining EBITDA 8.0 8.3 8.8 7.4 6.6 5.5 7.0 8.0 8.0 8.0
Petrochemicals
EBITDA (INR Bn) 137 165 259 379 309 266 337 381 401 421
EBITDA/ton (USD/ton) 155 176 234 273 218 192 221 243 248 253
Sales volumes (mmtpa)
Polymers 4.6 4.5 4.9 5.8 6.0 5.6 6.1 6.2 6.3 6.3
Polyesters 2.2 2.3 2.6 2.9 2.9 2.7 3.0 3.0 3.0 3.1
Fiber intermediaries 6.4 6.9 9.3 10.9 10.8 10.0 11.0 11.2 11.3 11.4
Total 13.5 13.9 17.1 19.8 20.0 18.6 20.5 20.7 20.9 21.1
E&P
EBITDA (INR Bn) 69 13 17 16 4 7 34 62 81 87
Gas production (mmscmd) 32 25 21 14 11 7 21 26 30 30
Gas realisation (USD/mmbtu) 4.7 3.8 4.3 5.1 5.3 5.5 5.4 6.4 6.4 6.4
Digital
EBITDA (INR Bn) 67 153 225 332 463 567 667 781
EBITDA marrgin (%) 33.4% 37.2% 38.8% 43.4% 47.5% 47.7% 48.0% 48.1%
Wireless segment
Subscribers (mn - EoP) 187 307 388 445 457 472 485 499
ARPU (INR) 149 133 130 149 171 190 207 226
5G/Enterprise
Revenues (INR bn) 0 0 35 56 83
FTTH segment
Subscribers (mn - EoP) 3 8 13 18 24
ARPU (INR) 750 765 780 796 812
Retail
EBITDA (INR Bn) 9 12 25 62 97 90 127 170 220 283
EBITDA margin (%) 4.1% 3.5% 3.7% 4.7% 5.9% 5.0% 5.9% 6.3% 6.7% 7.2%
Net Store additions (#) 960 483 4,004 2,863 1,376 195 990 890 890 930
Gross revenue per average store (INR) 55 56 73 112 131 137 155 180 207 237
- YoY grow th (%) -3% 1% 31% 54% 17% 4% 13% 16% 15% 14%
EBITDA break-up (INR Bn)
Refining 268 286 290 261 245 198 271 316 322 329
Petchem 137 165 259 379 309 266 337 381 401 421
E&P 69 13 17 16 4 7 34 62 81 87
Digital 67 153 225 332 463 567 667 781
Retail 9 12 25 62 97 90 127 170 220 283
Financial Services & Others 25 51 54 6 42 3 4 5 5 6
Total 507 526 712 877 922 895 1,235 1,500 1,697 1,907
Energy business 474 463 565 656 557 470 641 759 804 837
Non-energy business (incl others) 33 62 146 221 364 425 593 742 892 1,070
EBITDA proportion
Refining 53% 54% 41% 30% 27% 22% 22% 21% 19% 17%
Petchem 27% 31% 36% 43% 34% 30% 27% 25% 24% 22%
E&P 14% 2% 2% 2% 0% 1% 3% 4% 5% 5%
Digital 0% 0% 9% 17% 24% 37% 37% 38% 39% 41%
Retail 2% 2% 4% 7% 10% 10% 10% 11% 13% 15%
Financial Services & Others 5% 10% 8% 1% 5% 0% 0% 0% 0% 0%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Energy business 93% 88% 79% 75% 60% 53% 52% 51% 47% 44%
Non-energy business (incl others) 7% 12% 21% 25% 40% 47% 48% 49% 53% 56%
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 48
RIL’s historical EBITDA bridge –majorly led by Petchem expansion and ramp-up in Digital and Retail business Exhibit 100.
Source: Company, JM Financial.
RIL's EBITDA bridge – Digital and Retail business to be key driver of EBITDA growth Exhibit 101.
882
-47 -43
3
-7
107 0 89573 71 28 37
131 1 1,234 4545 27 43
105 1 1,500
-50
250
550
850
1,150
1,450
FY
20
EB
ITD
A
Refin
ing
Pe
tch
em
E&
P
Reta
il
Dig
ita
l
Oth
ers
FY
21
EB
ITD
A
Refin
ing
Pe
tch
em
E&
P
Reta
il
Dig
ita
l
Oth
ers
FY
22
EB
ITD
A
Refin
ing
Pe
tch
em
E&
P
Reta
il
Dig
ita
l
Oth
ers
FY
23
EB
ITD
A
INR
B
n
Source: Company, JM Financial
RIL’s EBITDA contribution from various business segments Exhibit 102.
0%
12%
24%
36%
48%
60%
0%
20%
40%
60%
80%
100%
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
E
FY
22
E
FY
23
E
FY
24
E
FY
25
E
Refining Petchem E&P Retail Digital Others % EBITDA contribution from Consumer business (RHS)
Source: Company, JM Financial.
462 4
94 4 14
68
-3
642
-29
120
0
37
86
-14
841
-16-69
-13
35
7232 882
-100
150
400
650
900
FY
17 E
BIT
DA
Re
finin
g
Pe
tch
em
E&
P
Re
tail
Dig
ital
Oth
ers
FY
18 E
BIT
DA
Re
finin
g
Pe
tch
em
E&
P
Re
tail
Dig
ital
Oth
ers
FY
19 E
BIT
DA
Refin
ing
Pe
tch
em
E&
P
Re
tail
Dig
ital
Oth
ers
FY
20 E
BIT
DA
INR
Bn
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 49
Initiate coverage with a BUY rating with TP of INR 2 ,500
Our Target Price for RIL of INR 2,500/share (Sept’ 2021 basis) is computed on a sum-of-the-
parts (SOTP) valuation method:
a) Petchem segment at an EV of INR 424/share based on 7.5x forward EV/EBITDA, in-line with
the implied Saudi Aramco deal multiple;
b) Refining segment at an EV of INR 346/share based on 7.5x forward EV/EBITDA, in-line with
the implied Saudi Aramco deal multiple;
c) E&P segment at an EV of INR 68/share based on 9.0x forward EV/EBITDA; higher multiple
as EBITDA is likely to jump due to a rise in gas production from new fields;
d) Digital segment (RIL’s 67.05% stake in JPL) at an EV of INR 952/share comprising: i)
Telecom business at INR 780/share based on DCF valuation; implied valuation of 14.3x
Sept’21 EV/EBITDA; ii) Option value of duopoly market at INR 67/share; and iii) Digital
opportunities at INR 105/share based on potential monetisation of Video OTT apps, audio
OTT and Consumer IoT business.
e) Retail business at an EV of INR 584/share based on 25x forward EBITDA. Further, we value
Jio Mart at an EV of INR 115/share, factoring the opportunity of digitisation of Kirana store.
RIL is entering a strong FCF generation phase with major capex completed and expectation of
strong 17-18% EPS CAGR over the next 3-5 years led by Digital and Retail businesses. Hence,
we initiate with a BUY rating and TP of INR 2,500/share (Sep’21 basis). We have also
computed a 3-year Target Price (Sept’23 basis), which comes to INR 3,350/share, implying a
potential ~17% CAGR return. Given the sharp +100% rally in the share price in the last 4
months, there could be near-term weakness given that EPS growth is likely to be muted in
the next 1-2 quarters. However, we suggest using this opportunity to BUY as our 3-year TP
implies a potential return CAGR of ~17%.
We also take comfort from the company’s effort to address balance sheet concerns by
expediting its deleveraging exercise and getting to zero net debt ahead of its end FY21
target. At CMP, stock is trading at FY22E P/E of 23.3x (3 yr avg: 18.6x), FY22E P/B of 2.3x (3
yr avg: 1.7x) and FY22E EV/EBITDA of 11.3x (3 yr avg: 10.8x).
RIL Sum-of-the-parts valuation - our Sept’ 2021 Target Price for RIL is INR 2,500/share Exhibit 103.
Source: JM Financial Note: We have used 6,349mn shares for our target price computation (including 423mn Rights shares but excluding 413mn Treasury shares)
Business segment
Valuation
methodology
EBITDA
(INR Bn)
Valuation
multiple
Valuation
(INR bn)
Valuation
(USD bn)
Valuation
(INR/share) Comments
Energy business 5,322 71 838
Petchem EV/ EBITDA 359 7.5 2,692 36 424
Valued at 7.5x EV/EBITDA; in-line with multiple
implied by Saudi Aramco deal
Refining EV/ EBITDA 293 7.5 2,198 30 346
Valued at 7.5x EV/EBITDA; in-line with multiple
implied by Saudi Aramco deal
E&P EV/ EBITDA 48 9.0 431 6 68
Valued at 9x EV/EBITDA; higher multiple used as
EBITDA to jump 3x
Digital business (for RIL's 67.05% share) 6,044 81 952
a) Telecom business DCF 4,952 66 780
Based on DCF valuation; implied valuation of
14.3x Sept'21 EV/EBITDA
b) Optional upside in Telecom business 423 6 67
50% probability of duopoly market; Jio garnering
40% of VIL subscriber without any ARPU dilution
c) Digital opportunities 669 9 105
Based on potential monetization of Video OTT
apps, JioSaavn and Consumer IoT business
Retail business EV/ EBITDA 4,437 60 699
a) Retail business 3,706 50 584
Valued at 25x EV/EBITDA, based on peers
valuation range
b) JioMart New commerce business 732 10 115
Valuing kirana digitisation opportunity assuming
Jio Mart gets ~10% market share in General
Trade ecommerce market by FY30
Total Enterprise Value 15,803 212 2,489
Less: Net Debt -70 -1 -11
Factoring: a) Rs1,521bn from 32.95% stake sale
in JPL; b) Rs76bn from BP; and c) rights issue
proceeds of INR531bn
Total Equity Value 15,873 213 2,500
CMP 2,097
% upside 19%
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 50
RIL Sum-of-the-parts valuation - our Sept’ 2023 Target Price for RIL is INR 3,350/share Exhibit 104.
Source: JM Financial Note: We have used 6,349mn shares for our target price computation (including 423mn Rights shares but excluding 413mn Treasury shares)
Risks along with EPS and valuation sensitivity
a) Refining margin sensitivity: Every USD 1/bbl increase/decrease in GRM has a
positive/negative impact of 2% of our valuation, 5% of our FY22E EPS, and 3% of our FY22E
EBITDA. An unexpected decline in refining margin could have a negative impact on RIL’s
earnings and valuation.
b) Petchem margin sensitivity: Every USD 20/ton increase/decrease in EBITDA margins has a
positive/negative impact of 2% of our valuation, 4% of our FY22E EPS, and 2% of our FY22E
EBITDA. An unexpected slide in petchem EBITDA margins could hurt RIL’s earnings and
valuation.
c) Retail margin sensitivity: Every 50bps increase/decrease in retail EBITDA margins has a
positive/negative impact of 1% of our valuation, FY22E EPS, and FY22E EBITDA. Any
downside to retail profitability could have a negative impact on RIL’s earnings and valuation.
d) ARPU and subscriber sensitivity: Every INR 10 increase/decrease in ARPU has a
positive/negative impact of 2% of our valuation, 3% our FY22E EPS, and 2% of our FY22E
EBITDA. Every 20mn increase/decrease in subscribers has a positive/negative impact of 1% of
our valuation, 1% our FY22E EPS, and 1% of our FY22E EBITDA. Lower than expected ARPU
and subscriber growth could have a negative impact on RIL’s earnings and valuation.
RIL Earnings and valuation sensitivity Exhibit 105.
Source: JM Financial
Business segment
Valuation
methodology
EBITDA
(INR Bn)
Valuation
multiple
Valuation
(INR bn)
Valuation
(USD bn)
Valuation
(INR/share) Comments
Energy business 5,988 80 942
Petchem EV/ EBITDA 411 7.5 3,081 41 485
Valued at 7.5x EV/EBITDA; in-line with multiple
implied by Saudi Aramco deal
Refining EV/ EBITDA 326 7.5 2,443 33 385
Valued at 7.5x EV/EBITDA; in-line with multiple
implied by Saudi Aramco deal
E&P EV/ EBITDA 84 5.5 464 6 72 Valued at 5.5x EV/EBITDA
Digital business (for RIL's 67.05% share) 7,169 96 1,129
a) Telecom business DCF 5,835 78 919
Based on DCF valuation; implied valuation of 12x
Sept'23 EV/EBITDA
b) Optional upside in Telecom business 515 7 81
50% probability of duopoly market; Jio garnering
40% of VIL subscriber without any ARPU dilution
c) Digital opportunities 819 11 129
Based on potential monetization of Video OTT
apps, JioSaavn and Consumer IoT business
Retail business EV/ EBITDA 7,191 97 1,133
a) Retail business 6,289 84 991
Valued at 25x EV/EBITDA, based on peers
valuation range
b) JioMart New commerce business 901 12 142
Valuing kirana digitisation opportunity assuming
Jio Mart gets ~10% market share in General
Trade ecommerce market by FY30
Total Enterprise Value 20,347 273 3,204
Less: Net Debt -931 -12 -147 Net debt at end end Sept'2023
Total Equity Value 21,278 286 3,350
CMP 2,097
% upside 60%
Change
FY22e Base case
assumption INR bn % change INR % change INR % change
GRM (USD/bbl) 9.0 +/- USD 1/bbl 39 3% 4.2 5% 50 2%
Petchem EBITDA margins (USD/ton) 221 +/- USD 20/tn 31 2% 3.3 4% 42 2%
Retail EBITDA margins (%) 5.9% +/- 0.5% 11 1% 1.2 1% 21 1%
Jio w ireless ARPU 171 +/- INR 10 26 2% 2.9 3% 39 2%
Jio w ireless subscriber (mn) 457 +/-20mn 10 1% 1.1 1% 28 1%
Base case 1,235 90 2,500
Impact on FY22 EBITDA Impact on FY22 EPS Impact on TP
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 51
Bull vs Bear case valuation
Our bull case valuation for RIL at INR 2,685/share factors in the following upside scenarios:
a) Higher refining margins: FY22E GRM rise to USD 10.0/bbl (i.e. up USD 1.0/bbl from our
base case assumption); this could increase our valuations by INR 50/share.
b) Higher petchem margins: RIL’s FY22E Petchem EBITDA margins rising by USD 15/ton vs our
base case assumption; this could increase our valuations by INR 31/share.
c) Higher Jio ARPU: RIL’s FY25E ARPU doubling to ~INR 260 from INR 130 at the end of FY20
(vs. our base case of INR 226). This could add ~INR 171/share to our base value. However, in
such a scenario chances of a VIL exit would be negligible and RIL would lose the option value
of a duopoly, resulting in a net increase of INR 104/share.
Our bear case valuation for RIL is INR 1,849/share factors in the following concerns:
a) Lower refining margins: RIL’s FY22E GRM decline to USD 7.0/bbl (i.e. down USD 2.0/bbl
from our base case assumption); this could hit our valuations by INR 103/share.
b) Lower petchem margins: RIL’s FY22E Petchem EBITDA margins declining by USD 30/ton vs
our base case assumption; this could hit our valuation by INR 64/share.
c) NIL value to JioMart New commerce business: Challenges in ramping-up New commerce
business amid heightened competition, this could hit our valuations by INR 115/share.
d) Lower Jio ARPU: RIL’s ARPU is stagnant over FY21-23e similar to FY20 levels of INR 130 (vs.
our base case of INR 190 in FY23), could hit our valuation by INR 264/share, but assuming VIL
survives based on fresh equity infusion.
e) Nil value for Digital opportunities: Challenges in monetisation of various Digital
opportunities, could hit our valuations by INR 105/share.
Bull-Bear case September 2021 valuation range for RIL (INR) Exhibit 106.
1,849103
64115
264105
2,500 50 31104 2,685
1,200
1,600
2,000
2,400
2,800
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Source: JM Financial
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 52
Relative Valuation
RIL’s valuation has historically been driven by its potential for high earnings growth. RIL’s EPS
during FY92-FY08 posted an ~18%-20% CAGR, but slowed considerably over FY09-FY16 to
~7% CAGR, despite commissioning of the RPL refinery, and gas production from KG D6.
However, RIL’s EPS growth has picked up since FY17 and has posted a 13% CAGR during
FY17-FY20 due to earning contribution from commissioning of +USD 50bn projects. We
expect EPS growth trajectory to continue with a 17-18% CAGR in the next 3-5 years led by
strong earnings growth in both Digital and Retail business. Hence, strong EPS growth
trajectory is likely to continue to support RIL’s valuation.
1 year forward P/E chart – RIL valuation re-rating led by EPS growth from Digital and Retail business Exhibit 107.
0
550
1,100
1,650
2,200
Jul-04 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14 Jul-16 Jul-18 Jul-20
25x
16x
8x
FY09-16 EPS CAGR of 7%
FY17-20 EPS CAGR of 13%; FY20-23e EPS CAGR at 18%
Source: Bloomberg, JM Financial
1-year forward P/B chart Exhibit 108.
0
550
1,100
1,650
2,200
Jul-04 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14 Jul-16 Jul-18 Jul-20
2.0x
1.5x
1.0x
Re-rating led by EPS grow th due to commissioning of +USD50bn projects aided by
strong performance in Digital and Retail business
Source: Bloomberg, JM Financial
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 53
1-year forward EV/EBITDA chart Exhibit 109.
0
550
1,100
1,650
2,200
Jul-04 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14 Jul-16 Jul-18 Jul-20
14x
10x
8x
Re-rating led by EPS grow th due to commissioning of +USD50bn projects aided by strong performance in
Digital and Retail business
Source: Bloomberg, JM Financial
RIL’s underperformance v/s the Sensex has narrowed over past 2 years Exhibit 110.
0
8
16
24
32
Jul-06 Jul-08 Jul-10 Jul-12 Jul-14 Jul-16 Jul-18 Jul-20
RIL 1 yr forward PE Sensex 1 yr forward PE
Over past 3 years, RIL had made up for past under-performance due to grow th momentum in Digital and Retail busines
Source: Bloomberg, JM Financial
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 54
Company profile
Reliance Industries Limited (RIL) is a Fortune 500 company and the largest Indian company in
terms of market cap. RIL was founded in 1966 by Mr. Dhirubhai Ambani as a small textile
manufacturer unit under the name Reliance Textiles Engineers Pvt. Limited. In 1985, the
company changed its name to Reliance Industries Limited. Over the years, the company has
diversified into other businesses like Petchem, Refining, Telecom, Retail and Media &
Entertainment.
The energy business of RIL includes Refining and Marketing, Petrochemicals, and Oil & Gas
Exploration and Production. In 2006, the company entered into organized retail under the
brand name ‘Reliance Fresh’. Reliance Retail is the largest retailer in India and has established
its business across five key consumption baskets of Consumer Electronics, Fashion & Lifestyle
Grocery, Petro Retail and Connectivity. Reliance Jio, the telecom business, was launched in
2016 as a 4G only network. In just over 3 years, Jio has become the largest telecom service
provider in term of subscribers and revenues. The company also has an associated suite of ‘Jio
app’ catering to various consumer needs. Media & Entertainment assets include Network 18’s
portfolio of 56 channels, across news and entertainment genres and 16 international
channels. Apart from this, Network 18 includes filmed entertainment and digital news and
entertainment platforms. Other assets include publishing business, distribution platform and
cable TV providers. RIL has also started focussing on financial services driven by its digital
payment solutions and payment bank.
Board of Directors
- Mr. Mukesh Ambani – Chairman and Management Director
- Mrs. Nita M. Ambani – Non-Executive, Non Independent Director
- Mr. Hital R. Meswani – Executive Director
- Mr. Nikhil R. Meswani – Executive Director
- Mr. P.M.S Prasad – Executive Director
- Mr. P.K. Kapil – Executive Director
- Mr. R.A.Mashelkar – Independent Director
- Mr. Adil Zainulbhai – Independent Director
- Mr.Dipak C. Jain – Independent Director
- Mr. Yogendra P. Trivedi – Independent Director
- Mr. Raminder S. Gujral – Independent Director
- Mr. Shumeet Banerji – Independent Director
- Mrs. Arundhati Bhattacharya – Independent Director
- Mr. K.V. Chowdary – Non-Executive Director
- Mr. Pawan Kumar Kapil – Executive Director
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 55
Financial Tables (Consolidated)
Income Statement (INR mn)
Y/E March FY19A FY20A FY21E FY22E FY23E
Net Sales 56,92,090 59,67,430 51,27,431 66,04,605 74,87,221
Sales Growth 45.3% 4.8% -14.1% 28.8% 13.4%
Other Operating Income 0 0 0 0 0
Total Revenue 56,92,090 59,67,430 51,27,431 66,04,605 74,87,221
Cost of Goods Sold/Op. Exp 39,44,870 40,52,400 34,81,968 44,85,097 50,84,469
Personnel Cost 1,24,880 1,40,750 1,47,788 1,55,177 1,62,936
Other Expenses 7,80,670 8,92,110 6,02,176 7,29,608 7,39,660
EBITDA 8,41,670 8,82,170 8,95,500 12,34,724 15,00,156
EBITDA Margin 14.8% 14.8% 17.5% 18.7% 20.0%
EBITDA Growth 31.2% 4.8% 1.5% 37.9% 21.5%
Depn. & Amort. 2,09,340 2,22,030 2,61,691 3,09,805 3,40,177
EBIT 6,32,330 6,60,140 6,33,809 9,24,919 11,59,978
Other Income 83,860 1,39,560 1,40,416 1,32,495 1,35,660
Finance Cost 1,64,950 2,20,270 1,72,081 1,11,794 86,255
PBT before Excep. & Forex 5,51,240 5,79,430 6,02,143 9,45,620 12,09,383
Excep. & Forex Inc./Loss(-) 0 -44,440 0 0 0
PBT 5,51,240 5,34,990 6,02,143 9,45,620 12,09,383
Taxes 1,53,900 1,37,260 1,61,060 2,51,879 3,19,212
Extraordinary Inc./Loss(-) 0 0 0 0 0
Assoc. Profit/Min. Int.(-) -1,030 -1,070 49,319 85,931 1,07,539
Reported Net Profit 3,98,370 3,98,800 3,91,765 6,07,810 7,82,632
Adjusted Net Profit 3,98,370 4,43,240 3,91,765 6,07,810 7,82,632
Net Margin 7.0% 7.4% 7.6% 9.2% 10.5%
Diluted Share Cap. (mn) 5,926.0 6,339.0 6,444.7 6,761.6 6,761.6
Diluted EPS (INR) 67.2 69.9 60.8 89.9 115.7
Diluted EPS Growth 10.4% 4.0% -13.1% 47.9% 28.8%
Total Dividend + Tax 46,410 49,650 38,668 54,093 74,378
Dividend Per Share (INR) 6.5 6.5 6.0 8.0 11.0
Source: Company, JM Financial
Cash Flow Statement (INR mn)
Y/E March FY19A FY20A FY21E FY22E FY23E
Profit before Tax 5,51,240 5,34,990 6,02,144 9,45,620 12,09,383
Depn. & Amort. 2,09,340 2,22,030 2,61,691 3,09,805 3,40,177
Net Interest Exp. / Inc. (-) 1,10,380 1,14,530 31,666 -20,701 -49,405
Inc (-) / Dec in WCap. -2,87,820 2,19,040 -1,09,364 59,189 4,792
Others -37,770 -25,990 0 0 0
Taxes Paid -1,21,910 -83,860 -1,41,667 -2,22,229 -2,81,525
Operating Cash Flow 4,23,460 9,80,740 6,44,469 10,71,683 12,23,423
Capex -9,36,260 -7,65,170 -4,09,281 -6,08,017 -5,90,178
Free Cash Flow -5,12,800 2,15,570 2,35,188 4,63,666 6,33,245
Inc (-) / Dec in Investments -38,210 -17,110 4,79,086 -34,336 -79,003
Others 29,400 25,340 1,40,416 1,32,495 1,35,660
Investing Cash Flow -9,45,070 -7,56,940 2,10,221 -5,09,858 -5,33,521
Inc / Dec (-) in Capital 2,320 1,300 5,53,586 4,00,738 626
Dividend + Tax thereon 0 0 0 0 0
Inc / Dec (-) in Loans 8,64,560 3,55,810 -7,47,766 -6,98,486 -2,62,578
Others -3,07,820 -3,82,520 -2,10,749 -1,65,887 -1,60,633
Financing Cash Flow 5,59,060 -25,410 -4,04,929 -4,63,635 -4,22,585
Inc / Dec (-) in Cash 37,450 1,98,390 4,49,761 98,191 2,67,317
Opening Cash Balance 73,360 1,10,810 3,09,200 7,58,961 8,57,152
Closing Cash Balance 1,10,810 3,09,200 7,58,961 8,57,152 11,24,469
Source: Company, JM Financial
Balance Sheet (INR mn)
Y/E March FY19A FY20A FY21E FY22E FY23E
Shareholders’ Fund 38,71,120 45,33,310 52,98,537 62,52,992 69,61,873
Share Capital 59,260 63,390 64,447 67,616 67,616
Reserves & Surplus 38,11,860 44,69,920 52,34,090 61,85,376 68,94,256
Preference Share Capital 0 0 0 0 0
Minority Interest 82,800 80,160 2,70,935 3,56,867 4,64,406
Total Loans 27,19,420 29,14,170 22,61,012 16,52,401 14,75,202
Def. Tax Liab. / Assets (-) 4,51,470 5,12,230 5,31,623 5,61,272 5,98,959
Total - Equity & Liab. 71,24,810 80,39,870 83,62,107 88,23,532 95,00,439
Net Fixed Assets 57,78,370 64,17,640 65,65,230 68,63,442 71,13,442
Gross Fixed Assets 58,47,100 74,29,350 78,44,224 84,57,722 90,53,271
Intangible Assets 1,19,970 1,02,590 1,02,590 1,02,590 1,02,590
Less: Depn. & Amort. 19,83,330 22,05,360 24,67,051 27,76,856 31,17,033
Capital WIP 17,94,630 10,91,060 10,85,467 10,79,986 10,74,614
Investments 23,56,350 27,67,670 23,06,690 23,33,301 24,01,160
Current Assets 18,41,580 24,44,840 29,01,037 31,92,174 35,69,259
Inventories 6,75,610 7,39,030 7,26,425 8,70,610 9,41,014
Sundry Debtors 3,00,890 1,96,560 2,33,707 2,74,744 3,02,965
Cash & Bank Balances 1,10,810 3,09,200 7,58,961 8,57,152 11,24,469
Loans & Advances 59,970 2,24,010 2,06,694 2,12,490 2,20,102
Other Current Assets 6,94,300 9,76,040 9,75,250 9,77,178 9,80,710
Current Liab. & Prov. 28,51,490 35,90,280 34,10,850 35,65,386 35,83,423
Current Liabilities 10,83,090 9,67,990 8,83,169 11,27,579 12,30,995
Provisions & Others 17,68,400 26,22,290 25,27,682 24,37,807 23,52,428
Net Current Assets -10,09,910 -11,45,440 -5,09,814 -3,73,211 -14,164
Total – Assets 71,24,810 80,39,870 83,62,107 88,23,532 95,00,439
Source: Company, JM Financial
Dupont Analysis
Y/E March FY19A FY20A FY21E FY22E FY23E
Net Margin 7.0% 7.4% 7.6% 9.2% 10.5%
Asset Turnover (x) 0.9 0.8 0.6 0.8 0.8
Leverage Factor (x) 1.9 1.8 1.7 1.5 1.4
RoE 11.7% 10.5% 8.0% 10.5% 11.8%
Key Ratios
Y/E March FY19A FY20A FY21E FY22E FY23E
BV/Share (INR) 653.2 715.1 822.2 924.8 1,029.6
ROIC 11.2% 11.3% 10.1% 13.8% 16.3%
ROE 11.7% 10.5% 8.0% 10.5% 11.8%
Net Debt/Equity (x) 0.5 0.4 0.0 -0.1 -0.2
P/E (x) 31.2 30.0 34.5 23.3 18.1
P/B (x) 3.2 2.9 2.6 2.3 2.0
EV/EBITDA (x) 19.2 18.3 16.3 11.3 9.0
EV/Sales (x) 2.8 2.7 2.8 2.1 1.8
Debtor days 19 12 17 15 15
Inventory days 43 45 52 48 46
Creditor days 82 69 76 77 75
Source: Company, JM Financial
Reliance Industries 30 July 2020
JM Financial Institutional Securities Limited Page 56
APPENDIX I
JM Financial Inst itut ional Securit ies Limited
Corporate Identity Number: U67100MH2017PLC296081 Member of BSE Ltd., National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.
SEBI Registration Nos.: Stock Broker - INZ000163434, Research Analyst – INH000000610 Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.
Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: jmfinancial.research@jmfl.com | www.jmfl.com
Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: sunny.shah@jmfl.com
Definition of ratings
Rating Meaning
Buy Total expected returns of more than 15%. Total expected return includes dividend yields.
Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.
Sell Price expected to move downwards by more than 10%
Research Analyst(s) Certification
The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that:
All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and
No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research
report.
Important Disclosures
This research report has been prepared by JM Financial Institutional Securities Limited (JM Financial Institutional Securities) to provide information about the
company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the purpose of information of the select
recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written
consent of JM Financial Institutional Securities. This report has been prepared independent of the companies covered herein.
JM Financial Institutional Securities is registered with the Securities and Exchange Board of India (SEBI) as a Research Analyst and a Stock Broker having trading
memberships of the BSE Ltd. (BSE), National Stock Exchange of India Ltd. (NSE) and Metropolitan Stock Exchange of India Ltd. (MSEI). No material disciplinary
action has been taken by SEBI against JM Financial Institutional Securities in the past two financial years which may impact the investment decision making of the
investor.
JM Financial Institutional Securities renders stock broking services primarily to institutional investors and provides the research services to its institutional
clients/investors. JM Financial Institutional Securities and its associates are part of a multi-service, integrated investment banking, investment management,
brokerage and financing group. JM Financial Institutional Securities and/or its associates might have provided or may provide services in respect of managing
offerings of securities, corporate finance, investment banking, mergers & acquisitions, broking, financing or any other advisory services to the company(ies)
covered herein. JM Financial Institutional Securities and/or its associates might have received during the past twelve months or may receive compensation from
the company(ies) mentioned in this report for rendering any of the above services.
JM Financial Institutional Securities and/or its associates, their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell
the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other
compensation or act as a market maker in the financial instruments of the company(ies) covered under this report or (c) act as an advisor or lender/borrower to,
or may have any financial interest in, such company(ies) or (d) considering the nature of business/activities that JM Financial Institutional Securities is engaged in,
it may have potential conflict of interest at the time of publication of this report on the subject company(ies).
Neither JM Financial Institutional Securities nor its associates or the Research Analyst(s) named in this report or his/her relatives individually own one per cent or
more securities of the company(ies) covered under this report, at the relevant date as specified in the SEBI (Research Analysts) Regulations, 2014.
The Research Analyst(s) principally responsible for the preparation of this research report and members of their household are prohibited from buying or selling
debt or equity securities, including but not limited to any option, right, warrant, future, long or short position issued by company(ies) covered under this report.
The Research Analyst(s) principally responsible for the preparation of this research report or their relatives (as defined under SEBI (Research Analysts) Regulations,
2014); (a) do not have any financial interest in the company(ies) covered under this report or (b) did not receive any compensation from the company(ies) covered
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