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Reliance Industries – BUY
Weak 4Q; but marching ahead in tough macro
Financial summary (Rs bn)
Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii
Revenues (Rs bn) 3,917 5,671 5,967 7,886 8,673
Ebitda margins (%) 16.4 14.8 14.8 10.3 12.6
Pre-exceptional PAT (Rs bn) 350 396 438 364 557
Reported PAT (Rs bn) 361 396 394 364 557
Pre-exceptional EPS (Rs) 55.2 62.5 69.1 57.4 87.9
Growth (%) 17.0 13.1 10.6 (16.9) 53.1
PER (x) 26.6 23.5 21.2 25.5 16.7
ROE (%) 12.6 11.6 10.4 7.7 10.9
Net debt/equity (x) 0.7 0.7 0.7 0.6 0.6
EV/Ebitda (x) 16.9 13.6 13.2 14.2 10.6
Price/book (x) 3.2 2.4 2.0 1.9 1.7
OCF/Ebitda (x) 1.1 0.5 1.1 0.7 0.6
Source: Company, IIFL Research; Priced as on 30 April 2020
Harshvardhan Dole | [email protected] 91 22 4646 4660
Rishi Masand | [email protected] 91 22 4646 4652
|
CMP Rs1466
12-mth TP (Rs) 1673 (14%)
Market cap (US$m) 123,742
Enterprise value(US$m) 151,578
Bloomberg RIL IN
Sector Oil & Gas
Shareholding pattern (%)
Promoters 50.1 Pledged (as % of promoter share) 0.0
FIIs 23.1
DIIs 11.9
52Wk High/Low (Rs) 1618/876
Shares o/s (m) 6339
Daily volume (US$ m) 361.8
Dividend yield FY21ii (%) 0.3
Free float (%) 50.0
Price performance (%)
1M 3M 1Y
Absolute (Rs) 31.6 3.9 5.3
Absolute (US$) 43.2 (3.3) (2.0)
Rel. to Sensex 17.2 21.1 18.9
Cagr (%) 3 yrs 5 yrs
EPS 16.3 11.8
Stock performance
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Result update
Earnings downgrade
4 May 2020
RIL’s 4QFY20 consolidated PAT fell 39% YoY, owing to weaker
than expected O2C performance; GRMs at US$4.4/bbl were at
historic lows (weak spreads + inventory loss). JIO’s performance
was in line, while Retail saw significant deceleration in sales in
March (Covid-linked restrictions). Investors should see through
the challenging macro environment (we cut FY21/22ii EPS 11-
35%) and focus on Facebook + JIO synergies, carve out of O2C
business, induction of a 2nd investor at JIO, announced
deleveraging initiatives, etc. RIL is our sector top pick; retain BUY.
RIL’s 4Q – Weak quarter: RIL’s 4QFY20 standalone and consolidated
PAT fell 70% YoY and 39% YoY respectively, significantly below estimates.
The O2C business performance was adversely affected by volatility in
feedstock prices, weak demand & Rs42.45bn (US$4.4/bbl) inventory loss.
JIO’s revenue/PAT growth of 6% QoQ/72% QoQ was largely in-line; R-
Retail’s 33% YoY growth in Ebitda was partly on the back of Rs2.3bn gain
from adoption of IndAS-116; strong growth in the quarter’s first two
months was offset by the drag in March. The B2C businesses now account
for 41% share in Ebitda (ex-inventory loss) vs 30% YoY.
Marching ahead in a tough macro: While RIL continues to operate its
plants at rated capacity (competitive on cash costs), the margin outlook,
at least till FY21ii, remains weak. R-Retail plans to leverage JIO’s
infrastructure, to boost omni-channel sales (grocery, electronics and
fashion); it targets improving the last-mile connectivity infrastructure by
10x. In the mid-term, JIO’s growth strategy is to leverage its new
partnership with FB. Meanwhile, RIL plans to: 1) carve out the O2C
business (NCLT filing soon); 2) raise Rs531bn through a rights issue (1:15
at Rs1,257/share, 22-May launch); 3) shortlist a 2nd strategic investor at
JIO. Plans are to pare the entire net debt of Rs1.6trillion by CY20.
Cut estimates; retain BUY: We lower RIL’s FY21/22ii consolidated EPS
by 11-35%, to reflect weakness in the O2C segment and slower ramp up
in retail sales; JIO’s earnings remain largely unchanged. Our SoTP
ascribes US$55bn EV to the O2C business, based on normalised business
environment vs the existing uncertain macro; valuations for JIO and R-
Retail remain broadly unchanged, also it does not reflect the rights issue.
As such, investors would see through the challenging macro and focus on
the broader revenue model, deleveraging initiatives & O2C carve out.
harsh.dole@ii flcap.com
Reliance Industries – BUY
2
Figure 1: RIL’s 4QFY20 consolidated PAT was down 39% YoY
Consolidated (Rs m) 4QFY19 3QFY20 4QFY20 YoY QoQ
Net revenue 1,386,590 1,529,390 1,355,690 -2% -11%
Total operating costs 1,178,270 1,305,530 1,144,580 -3% -12%
Employee costs 33,450 38,800 37,130 11% -4%
Purchase of products 321,920 384,760 317,970 -1% -17%
Raw material consumption 604,560 669,950 577,820 -4% -14%
Other expenses 218,340 212,020 211,660 -3% 0%
EBITDA 208,320 223,860 211,110 1% -6%
EBITDA margin 15.0% 14.6% 15.6% 55bps 93bps
Depreciation 52,950 55,450 63,320 20% 14%
EBIT 155,370 168,410 147,790 -5% -12%
Other income 31,470 36,450 48,040 53% 32% Interest 48,940 54,040 60,640 24% 12% PBT 137,900 150,820 135,190 -2% -10% Tax 34,310 31,210 26,770 -22% -14% Share of Associates/Minority Int 30 (1,440) (2,270) Adj PAT 103,620 118,170 106,150 2% -10% Adj PAT margin 7.5% 7.7% 7.8% 36bps 10bps Extraordinary Income 0 (1,770) (42,670) Reported PAT 103,620 116,400 63,480 -39% -45% Reported EPS (Rs) 16.3 18.4 10.0 Source: Company, IIFL Research
Figure 2: Share of non-oil businesses in consolidated EBITDA is 41% now vs 30% YoY* Consol Segment EBITDA (Rs m) 4QFY19 3QFY20 4QFY20 YoY QoQ Petchem 93,610 72,520 59,380 -37% -18% Refining 49,640 65,300 66,140 33% 1% Oil & Gas 2,580 640 (460) NA NA Retail 19,230 27,270 25,560 33% -6% Jio 43,290 58,330 64,520 49% 11% Others (30) (200) (4,030) NA NA Total 208,320 223,860 211,110 1% -6% Source: Company, IIFL Research * ex-of inventory loss adjustment
Figure 3: RIL’s 4QFY20 standalone PAT was Rs25.8bn YoY, below estimates
(Rs m) 4QFY19 3QFY20 4QFY20 YoY QoQ
Net revenue 835,970 862,890 736,730 -12% -15%
Total operating costs 698,930 734,180 626,130 -10% -15%
Employee costs 14,050 14,260 15,060 7% 6%
Purchase of products 15,940 18,410 21,580 35% 17%
Raw material consumption 572,040 619,350 492,000 -14% -21%
Other expenses 96,900 82,160 97,490 1% 19%
EBITDA 137,040 128,710 110,600 -19% -14%
EBITDA margin 16.4% 14.9% 15.0% -138bps 10bps
Depreciation 24,650 25,510 26,850 9% 5%
EBIT 112,390 103,200 83,750 -25% -19%
Other income 28,830 39,540 42,290 47% 7% Interest 27,910 25,200 41,610 49% 65% PBT 113,310 117,540 84,430 -25% -28% Tax 27,750 21,690 16,180 -42% -25% Tax rate 24% 18% 19% -533bps 71bps Adj PAT 85,560 95,850 68,250 -20% -29% Adj PAT margin 10.2% 11.1% 9.3% -97bps -184bps EO items - - (42,450) Reported PAT 85,560 95,850 25,800 -70% -73% Reported PAT margin 10.2% 11.1% 3.5% -673bps -761bps Shares outstanding (m) 6,339 6,339 6,339 Reported EPS (Rs) 13.5 15.1 4.1 Source: Company, IIFL Research
Figure 4: RIL continued to outperform the benchmark Singapore GRMs
(US$/bbl) 4QFY19 3QFY20 4QFY20 YoY QoQ
Gasoil 14.0 15.4 11.9 -15% -23%
Gasoline 3.7 12.9 6.7 81% -48%
Naphtha -7.5 -2.2 -2.9 NA NA
FO -0.9 -19.7 -8.4 NA NA
RIL GRMs 8.2 9.2 8.9 9% -3%
Singapore GRMs 3.2 1.7 1.2 -63% -29% Source: Company, IIFL Research
harsh.dole@ii flcap.com
Reliance Industries – BUY
3
Weak O2C; resilient JIO and Retail
RIL’s 4QFY20 consolidated PAT fell 39% YoY – below consensus.
It booked inventory loss of Rs42.45bn (~US$4.4/bbl) in its
refining business (~US$40/bbl fall in oil prices), while
petrochem Ebitda fell 37% YoY. The sharp 49% YoY rise in JIO
Ebitda was in-line, while the 33% YoY growth in retail Ebitda
was partly on account of adoption of the IndAS-116 model
(lease accounting). The share of B2C businesses in overall
Ebitda now stands at 41% vs 30% earlier (ex-adjustment of
inventory losses).
Refining – Weak performance: RIL reported GRM of US$4.5/bbl in
4QFY20, one of the lowest in its history. Owing to ~70% slump in oil &
product prices during the quarter, the company incurred inventory loss
of Rs42.45bn (classified as extraordinary items in its P&L). We note that
the volatility in oil prices has been unprecedented and such (resultant)
losses are likely to be reported by other refining companies, too, in
India. As such, during the quarter, product spreads across the segment
were weak, as global demand collapsed by almost 25%. The Singapore
benchmark margin in the period was estimated at US$1.2/bbl and, to
that extent, RIL’s GRMs stand out well.
RIL, in 4QFY20, operated its refinery at 107% utilisation, maximising
production of the relatively high-margin products (gasoil) and
optimising crude purchases. Opex during the quarter was estimated at
US$2.1/bbl (vs US$2.3/bbl last quarter; Figure 6).
Figure 5: Refinery utilisation improved to 107%
Source: Company, IIFL Research
Figure 6: Opex/bbl was lower at US$2.1/bbl this quarter
Source: Reuters, Company, IIFL Research Note: Opex/bbl is not comparable pre 2QFY20, due to reclassification of certain expenses to the ‘others’ segment
80%
85%
90%
95%
100%
105%
110%
14
15
16
17
18
19
4QFY18 2QFY19 4QFY19 2QFY20 4QFY20
Crude processed Capacity utilization(mmt)
0.0
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Singapore GRM Differential over SG Opex/bbl($/bbl) ($/bbl)
harsh.dole@ii flcap.com
Reliance Industries – BUY
4
Petrochemicals – Mixed performance:
RIL’s Petchem Ebitda declined 37% YoY and 18% QoQ, despite
petrochemicals’ production remaining flat. Consequently, Ebit/tonne was
down 22% QoQ, at US$64/MT. Production of polymers was up 6% YoY
and almost flat QoQ, while that of polyester intermediaries (PX, PTA and
MEG) stayed broadly unchanged; the polyester production was also
unchanged.
The weakness in polyester intermediates was partially offset by
relatively better margins for downstream polyester-products & polymers
(PE-naphtha). There was weakness across product categories,
considering the weak demand outlook and the recent start-up of new
capacities in polymers and polyester intermediaries.
On QoQ basis, due to a large fall in crude prices, spreads rose slightly −
POY (to 16%), PSF (to 13%), PET (to 22%), PX (to -1%), PTA (to 8%),
MEG (to 12%), PP (to -2%), HDPE (to 32%) and PVC (to 6%). However,
the overall demand environment remains weak.
Figure 7: Production was largely flat
Production (mMT) 4QFY19 3QFY20 4QFY20 YoY Chg QoQ Chg
PFY, PSF, PET 0.71 0.71 0.69 -4% -4%
PX, PTA, MEG 2.76 2.84 2.81 2% -1%
PP, PE, PVC 1.44 1.53 1.54 6% 0% Source: Company, IIFL Research
Figure 8: Ebit/tonne (on production basis) was sharply lower
Source: Company, IIFL Research
Figure 9: PX margins are expected to remain under pressure due to supply additions
Source: IHS, ThaiOil, IIFL Research
0
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40
60
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100
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4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20
(US$/MT) Petchem ebit/ton
harsh.dole@ii flcap.com
Reliance Industries – BUY
5
R-Retail – Grocery saves day; improved disclosures a positive
RIL’s retail business faced significant challenges in March-2020, given
the lockdown imposed due to COVID-19. In 4QFY20, overall sales were
up 4% YoY, albeit down 6% QoQ. Only, the grocery and connectivity
segments saw 51% YoY and 24% YoY growth respectively, while
consumer electronics’ sales fell sharply by 44% YoY, given constraints in
the supply chain in March. Petro-retail sales were flat YoY, along with
fashion and lifestyle. As per disclosures, R-Retail was experiencing
growth across all the segments (Figure 13); however, the performance
was dragged by the unforeseen collapse in March.
In 4Q, RIL’s overall Ebitda margin expanded 130bps to 6.7% vs 5.2%
YoY and 6% QoQ. Notably, R-Retail adopted IndAS-116 for lease
accounting, which led to a gain of Rs2.3bn and boosted Ebitda margins
by almost 70bps. For 4Q, RIL has also disclosed Ebitda performance
from various sub-segments of the retail business (Figure 15); the
comparable numbers, however, have not been shared.
RIL’s core retail business now accounts for 86% of retail Ebitda and only
51% of sales. Retail area of 2.4m sqft was added in 4Q − 468 store
additions vs 415 store additions in 3Q. This resulted in total retail area
increasing to 28.7m sqft across 11,784 stores.
Figure 10: Retail revenue growth decelerated from 27% in 3Q to 4% in 4Q
(Rs m) 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20
Revenues 355,770 366,630 381,960 412,020 453,270 382,110
% growth 89% 52% 48% 27% 27% 4%
Ebitda 16,800 19,230 20,490 23,220 27,270 25,560
Ebitda margin (%) 4.7 5.2 5.4 5.6 6.0 6.7
Ebitda growth (%) 178% 77% 70% 67% 62% 33%
Ebit 15,120 17,210 17,770 20,350 23,890 20,620
Ebit margin (%) 4.2 4.7 4.7 4.9 5.3 5.4
Source: Company, IIFL Research
Figure 11: Retail added 2.4m sqft of retail space during the quarter
Source: Company, IIFL Research
Figure 12: Consumer Electronics and Fashion & Lifestyle affected by the COVID disruption
Source: Company, IIFL Research
9,907 10,415 10,644 10,901 11,316 11,784
20.6 22.0 23.0
24.5 26.3
28.7
0.0
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10,000
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11,000
11,500
12,000
3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20
No. of stores Retail area (mn sq ft) - RHS (mn sq ft)
18.9% 19.4% 26.3%
29.6% 31.7% 16.2%
9.1% 8.7% 8.6%
32.8% 32.1% 39.8%
9.6% 8.2% 9.1%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
4QFY19 3QFY20 4QFY20
Petro Retail Connectivity Fashion & Lifestyle
Consumer electronics Grocery (Sales mix)
harsh.dole@ii flcap.com
Reliance Industries – BUY
6
Figure 13: Segmental performance - Revenue
(Rs m) 4QFY19 4QFY20 YoY
Grocery 69,439 100,430 44.6%
% share 18.9 26.3 734bps
Consumer electronics 108,458 61,980 -42.9%
% share 29.6 16.2 -1336bps
Fashion & Lifestyle 33,354 32,920 -1.3%
% share 9.1 8.6 -48bps
Connectivity 120,168 151,930 26.4%
% share 32.8 39.8 698bps
Petro Retail 35,212 34,860 -1.0%
% share 9.6 9.1 -48bps
Total 366,630 382,120 4.2%
Source: Company, IIFL Research
Figure 14: Segmental performance – Revenue (Jan Feb)
Revenue (Rs m) Growth YoY
Consumer electronics 41%*
Fashion & Lifestyle 42%
Grocery 35%
Connectivity 32%
Petro Retail 10%
Total 33%
Source: Company, IIFL Research
* Excluding devices
Figure 15: RIL provided new disclosures on segment-wise Ebitda breakdown
Ebitda (Rs m) 4QFY19 4QFY20 YoY FY19 FY20 YoY
Consumer electronics 5,420 4,310 -20% 18,946 27,850 47%
Fashion & Lifestyle 6,950 9,750 40% 21,329 32,420 52%
Grocery 3,790 7,830 107% 11,370 22,530 98%
Connectivity 2,640 3,370 28% 8,910 12,370 39%
Petro Retail 430 300 -30% 1,350 1,360 1%
Total 19,230 25,560 33% 61,905 96,530 56%
Source: Company, IIFL Research
Figure 16: … providing clarity on respective segment ebitda margins
Ebitda margin 4QFY19 4QFY20 FY19 FY20
Consumer electronics 4.9% 7.0% 4.7% 6.2%
Fashion & Lifestyle 21.2% 29.6% 19.9% 23.9%
Grocery 5.7% 7.8% 4.9% 6.5%
Connectivity 2.2% 2.2% 2.0% 2.2%
Petro Retail 1.2% 0.9% 1.0% 1.0%
Source: Company, IIFL Research
Figure 17: Core Ebitda margin expanded 360bps YoY
Source: Company, IIFL Research
7.2% 7.6% 8.1% 8.1%
8.8%
11.2%
4.7% 5.2% 5.4% 5.6% 6.0%
6.7%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20
Core Retail Ebitda margin (%) Blended Ebitda margin (%)
harsh.dole@ii flcap.com
Reliance Industries – BUY
7
R-JIO: Marginal miss, but given the circumstances, we'll take it
JIO’s 10.6% QoQ Ebitda growth to Rs61.8bn was slightly below
estimates (Rs63bn), primarily due to somewhat weak ARPU growth.
Reported revenue growth of 6.2% included tailwinds from IUC, which
we estimate to be ~150bps. Though we expected December-2019 tariff
hikes to have benefitted JIO to a lower extent in 4Q vs. peers,
considering JIO’s higher share of subs on longer-validity plans, the
estimated service ARPU remaining flat QoQ was a negative surprise.
Overall opex was in-line. PAT grew 73% QoQ to Rs23.3bn, helped by
interest expense decline post infusion of Rs1.08trn equity from RIL.
JIO’s debt as of end-FY20 stood at Rs262bn and it had Rs188bn
deferred spectrum liabilities. Under the circumstances, this is a decent
result from JIO, and 1Q should see further acceleration.
Net adds of 17.5m in 4Q were in-line (3Q: 15m). Note that in 3Q, for
most of October and November, JIO’s pricing discount to peers was
lower, which resulted in Bharti (and VIL to a lower extent) gaining at
JIO’s expense. 4Q marks some normalisation and would have been
better by ~8% if the last week of March had not been marred by the
COVID-19 related lockdown.
Reported ARPU (which includes IUC) rose 1.7% QoQ to Rs130.6. JIO
mentioned that its outgoing to total off-net minutes was 48-49% in 4Q,
marking an improvement from the estimated 55% for 3Q. Based on
JIO’s disclosures of total minutes, we estimate that ~1.5% of the ARPU
increase was on account of the minutes-mix change. This indicates a
largely-flat QoQ service ARPU.
JIO has a higher proportion of its subs on long-term plans (3, 6 and 12-
month validity plans). Thus, the ARPU increase for JIO from the Dec-
2019 tariff hike will be spread till 2QFY21, in our view. JIO’s ARPU also
saw the full-quarter impact from the elevated Jio Phone additions (due
to the handset being offered at Rs699) in 3Q. Further, there was ~1ppt
hit on QoQ ARPU growth due to one less day in 4Q. While we had
budgeted for all these factors in our estimates, the flat service ARPU
was a bit lower than our estimates.
Total revenue grew 6.2% QoQ (est. ~4.7% service revenue growth).
This does not include any significant contribution from the FTTH
business, as JIO has just started charging a part of its 1m FTTH sub
base.
With the work-from-home (WFH) condition imposed by the COVID-19
related lockdown, many households are realising the need for a good-
quality internet connection. We expect JIO to accelerate FTTH
deployment once the lockdown is lifted.
JIO’s overall data traffic grew 7.5% QoQ at 141PB/day in 4Q. Data
usage per sub rose, from 11.1GB in 3Q to 11.3GB in 4Q. Daily traffic
has risen to 170PB during the lockdown. Ebitda grew 10.6% QoQ
JIO’s off-net OG:IC ratio, which stood at 62:38 on 10-Oct (the day it
started charging for IUC), had improved to 48:52 by Dec 31, 2019. JIO
maintained that the 48:52 ratio through 4Q. Net-net, we estimate that
JIO’s IUC Ebitda in 4Q was ~Rs850m vs. Rs2.6bn net IUC payout in 3Q
and Rs6.5bn payout in 2Q.
Other cost line items saw some sharp movements. Employee costs
jumped up 23% QoQ due to the bonus payouts for 2019. Other
expenses spiked up 48% QoQ, largely due to higher FX loss. S&D costs
were down 36% due to lower gross additions. Network opex remained
in check (3% QoQ growth). JIO’s gross debt at 4Q was Rs232bn.
JIO incurred Rs30bn capex in 4Q and Rs195bn capex in FY20. IIFL’s
Telecom team estimates that FY20 capex included the ~Rs55bn opex
capitalisation. Also, note that under the InvIT structure, capex incurred
by the tower and fibre SPVs is outside JIO and RIL. But even after
factoring this in, capex intensity has clearly come off in FY20.
harsh.dole@ii flcap.com
Reliance Industries – BUY
8
Figure 18: R-JIO’s 4QFY20 PAT grew ~178% YoY
(Rs m) 4QFY19 3QFY20 4QFY20 YoY QoQ
Revenue 117,150 139,680 148,350 26.6% 6.2%
Costs
Licence fee + SUC 11,800 14,830 15,760 33.6% 6.3%
Access charges 17,080 14,420 13,670 -20.0% -5.2%
Network opex 34,010 44,230 45,600 34.1% 3.1%
S&D costs 3,290 3,560 2,270 -31.0% -36.2%
Other costs 3,130 3,670 5,430 73.5% 48.0%
Employee costs 4,580 3,140 3,870 -15.5% 23.2%
Total opex 73,890 83,850 86,600 17.2% 3.3%
Ebitda 43,260 55,830 61,750 42.7% 10.6%
Ebitda margin 36.9% 40.0% 41.6% 470 bps 165 bps
Depreciation and amortisation 17,440 17,960 21,680 24.3% 20.7%
Ebit 25,820 37,870 40,070 55.2% 5.8%
Interest expense 12,940 19,530 11,330 -12.4% -42.0%
Other income 30 180 260 766.7% 44.4%
Exceptional item 0 -1,770 310
PBT 12,910 16,750 29,310 127.0% 75.0%
Tax 4,510 3,250 6,000 33.0% 84.6%
PAT 8,400 13,500 23,310 177.5% 72.7%
EoP sub base (m) 306.7 370.0 387.5 26.3% 4.7%
ARPU (Rs) 133 128 131 -1.9% 1.7%
Data traffic (mn GB) 9,560 12,080 12,840 34.3% 6.3%
Data traffic per day (PB) 106.2 131.3 141.1 32.8% 7.5%
GB/month per sub 10.9 11.1 11.3 4.0% 1.8%
Voice minutes (bn min) 724 826 876 21.0% 6.0%
MOU per sub (min) 823 760 771 -6.3% 1.4%
Source: Company, IIFL Research
Figure 19: Capex intensity has clearly come off
Source: Company, IIFL Research
E&P – Small share now: Production in KG-D6 continued to decline,
with gross production now at 0.9mmscmd. Domestic EBIT was virtually
nil. The shale gas segment continues to report losses (~Rs4.9bn EBIT
loss). The R-Cluster development project remains on track for first gas
by June-2020, with 5mmscmd of gas from the field having been bid out
recently, at a slope of 8.5-8.6% Brent. All in all, RIL expects 25-
30mmscmd of gas from the three fields by 2022/23, with distribution
being 40:20:40 across the R-cluster, MJ cluster and the satellite cluster.
-50
50
150
250
350
450
1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20
RIL capex Jio CapexRs bn
harsh.dole@ii flcap.com
Reliance Industries – BUY
9
Marching ahead amid challenging times
The macro environment in general remains challenging, given
the ongoing COVID pandemic. The resultant slowing economic
activity weighs high on RIL’s O2C (oil-to-chemicals) business
and on R-Retail, while JIO seems to be relatively unaffected.
Despite collapse in oil and petchem consumption, RIL continues
to operate its plants near rated capacity, given cost
competitiveness; however, spreads would be under pressure. In
the retail business, it plans to grow omni-channel sales by
leveraging JIO’s network. Also in the offing are i) a rights issue
(Rs531bn); ii) potential induction of another strategic investor
in JIO; iii) carving out of the O2C business (Aramco due
diligence underway).
O2C business: challenging macro
RIL’s O2C business is significantly exposed to the macro landscape; as
such, the global oil demand is down 25-30% and petrochemical
consumption has also slowed down, as key industries such as
automobiles and downstream polyester either remain shut or operate
well below their rated capacity. Globally, high-cost refiners and
petrochemical units have announced production cuts and, if the demand
outlook remains weak, the cuts are likely to intensify. Back home, PSU
refiners have also announced production cuts, while polymer plants of
GAIL, etc remain non-operational.
RIL, against this backdrop, has operated its plants at rated capacity and
not announced any major cuts even now. This is perhaps due to: 1) the
strategic location of its refinery and plants (ports), which enable it to
focus on exports; 2) its refinery complexity is one of the highest across
the region, thereby giving it flexibility to take advantage of swings in oil
prices and alter the product slate for maximising margins; 3) refinery-
petrochemical integration; and 4) diversified feedstock for its crackers
(naphtha, ethane and propane imports, etc), which placed it favourably
vs other crackers globally.
While these advantages would allow RIL to operate its units near rated
capacity, its operations are not insulated from the weakness in margins.
As such, at a time when demand remains low, we see weakness across
the commodity chain, which would weigh high on its financial
performance, although we note that such a weak performance would be
significantly better than domestic and some regional peers’.
The RIL Board, meanwhile, has approved the carving out of its O2C
business, including the fuel retailing JV with BP, into a separate
company – Reliance O2C Limited. With this step, RIL has inched closer
to inducting a strategic investor in its core O2C business; separately,
RIL stated that ARAMCO’s due diligence is underway, though no definite
timelines for its conclusion were stated.
Figure 20: RIL’s refining units are relatively better placed due to higher complexity
Source: Worldwide Refinery Survey and Complexity Analysis 2019 from the Oil & Gas Journal
harsh.dole@ii flcap.com
Reliance Industries – BUY
10
Figure 21: Feedstock flexibility allows RIL to position itself favourably on the cost curve
Source: Industry
Reliance Retail – Focus on growing omni channel sales
During the Microsoft meet after its 4Q earnings results, RIL highlighted,
in detail, it plans to leverage JIO’s technology platform, to scale up the
retailing operations. The strategy entails: 1) ramping up customer reach
by leveraging JIO and Retail’s customer ecosystem; 2) building a brand
portfolio; 3) strengthening digital platforms, marketplace, and omni-
channel capabilities across the businesses (in particular fashion,
electronics and grocery); 4) scaling up capacity to deliver goods to the
customer premise (last mile); 5) rapidly scaling up physical stores and
smart points, post COVID. As such, management commentary
underscored taking aggressive steps to capture market share amid
these challenging times.
We recently tested ordering groceries on Whatsapp-JioMart and you can
read more about our experience in our note here.
Figure 22: R-Retail plans to leverage R-JIO’s vast network for growing its business
Source: Company, IIFL Research
R-JIO – Optionalities is in the JIO-FB deal
JIO’s flat service ARPU QoQ was marginally below estimates. We await
the results of peers, to determine the RMS movements in 4Q. We
expect revenue growth to improve in 1Q, as the benefits of tariff hikes
flow through. For now, we maintain our projections and US$67bn EV
estimate. We remain positive on the long-term outlook of the industry
and expect the government to allow deferred payment on AGR dues, to
ensure VIL’s survival. For VIL to sustain, we believe more tariff hikes in
the next 2-3 years are inevitable. JIO will also gain from VIL’s stretched
financials. There could be optionalities in JIO/RIL, from indirect benefits
of the FB-WhatsApp deal, which may improve stickiness.
harsh.dole@ii flcap.com
Reliance Industries – BUY
11
Targeting to be debt-free by CY20; rights issue
RIL’s CFO, during the analyst briefing, stated that firm measures are in
place for making RIL net debt-free in CY20; this would be through a
combination of: 1) cash inflow (of Rs435bn) from the Facebook deal; 2)
Rs70bn cash flow expected from the deal with BP (fuel retailing); 3)
proposed rights issue (Rs531bn); and 4) induction of another strategic
investor in R-JIO, on the lines of Facebook. It, however, does not
consider the proposed investment by ARAMCO in its O2C business.
Figure 23: RIL’s adjusted net debt stands at Rs2.3trillion, as of 4QFY20
Source: Company, IIFL Research
While RIL’s reported net debt is Rs1.6trillion, it does not take into
account the Rs250bn deferred spectrum liability of JIO and Rs500bn of
vendor financing. Further, the cash & cash equivalents (Rs175bn)
include Rs370bn NCDs invested in the two InvITs (tower and fibre). RIL
expects to close the tower InvIT deal with Brookfield by the end of the
quarter and realise Rs120bn thereof; conclusion of the fibre InvIT deal
would enable it to monetise the balance amount invested. As such,
these NCDs are tradable and carry a coupon of 9%, as per RIL
management.
Separately, while announcing the rights issue (1:15), RIL has plans to
raise Rs531bn, at a price of Rs1,257/share. The rights issue is to open
by 22-May 2020 and would require investors to pay 25% on application
and the balance in one or more calls. As such, the promoters have
expressed intent to subscribe to their share of the rights issue (50%)
and also to any quantum unsubscribed by the retail category. At this
price, as per the RIL CFO, the rights issue is marginally EPS accretive
(Figure 24).
Figure 24: As per RIL, the rights issue price is marginally EPS accretive
Source: Company
Figure 25: Sensitivity of rights issue and pricing to EPS, as per RIL
Source: Company
harsh.dole@ii flcap.com
Reliance Industries – BUY
12
Revise estimates; top-pick; BUY
We cut RIL’s consolidated EPS by 35%/11% for FY21/22ii, to
reflect: i) weakness in the O2C segment; ii) some logistical
challenges in scaling up the retail business in FY21, given the
expected country-wide restrictions in 1H. Any recovery in O2C
earnings would largely be contingent on recovery in global
demand. Growing share of non-oil businesses would, however,
provide some hedge to consolidated earnings.
Cut earnings to reflect weak O2C
The macro landscape though challenging, remains dynamic, with
product and feedstock prices experiencing severe volatility; as such,
slowing economic activity in India as well as globally would weigh high
on RIL’s O2C business as well as on its retail initiative. Our earnings
assumptions are based on further moderation in GRMs, petchem Ebitda
and slower ramp up in the R-Retail business. We now factor in US$7/bbl
GRM in FY21ii, which partly recovers to US$8.5/bbl in FY22ii; we do not
take any material benefit of the petcoke gasification project (US$7.5bn
capex), which is intended to lower the cash cost and improve the
energy security of the Jamnagar complex. On these assumptions, we
cut RIL’s consolidated FY21/22ii EPS by 11-35%. On a lower base, we
forecast RIL’s consolidated Ebitda and PAT, to register 11.3% and 19%
annual growth respectively, through FY20-22ii. Such growth does not
take into account the impact of the proposed rights issue or any
corporate restructuring.
Figure 26: We expect some recovery in O2C Ebitda FY22ii onwards
Consol EBITDA(Rs bn) FY19 FY20ii FY21ii FY22ii
Refining 230 245* 176 229
Petchem 376 309 238 295
Domestic E&P 12 7 6 17
Shale Gas 4 -4 -4 -3
Retailing 62 97 96 132
Jio 151 216 298 422
Others 3 12 0 0
Total 839 882 811 1,093 Source: Company, IIFL Research; Note: * excluding inventory loss of Rs42.5bn
We note that earnings are sensitive to GRMs and to changes in the
underlying petrochemical Ebitda/MT. For FY21, a US$1/bbl change leads
to an 8-9% swing in EPS, while a US$50/MT change in blended
petrochemical Ebitda implies a swing of ~15% in RIL’s consolidated
EPS. Similarly, a Rs10 change in ARPU for R-JIO leads to a 7% change
in RIL’s earnings.
Re-iterate BUY
While we lower RIL’s consolidated earnings, driven by weakness in the
O2C business, we largely maintain its valuation. We believe that given
the carving out of the business and the on-going discussion with
ARAMCO, one would need to value the business on normalised earnings,
rather than the depressed earnings trajectory as a result of the COVID
pandemic. We value RIL’s O2C business at an EV of US$55bn, based on
past 10-year average GRMs and 5-year average of petrochemical
margins. We value the retail business at 22x FY22ii Ebitda; our SoTP-
based calculations do not consider the impact of the proposed rights
issue. RIL is our sector top-pick. Figure 27: Our SOTP-based price on FY22ii implies 14% upside
US$ bn Rs bn Rs/share Comments
Refining 27 2,055 324 GRM of US$9.5x/bbl
Petrochemical 28 2,101 332 Blended Ebitda/MT of US$250
E&P 1 102 16
Jio 69 5,181 817 IIFL Telecom team valuation
Retail 39 2,897 457 22x FY22ii Ebitda (D-Mart @ 44.6x)
Other Investments
1 86 14 At BV
Treasury stock 6 484 76 20% discount to the market value
EV 172 12,908 2,036
Less: Net debt 31 2,306 364 Incl. vendor financing & Spectrum Liability for JIO
Equity Value 141 10,602 1,673
Source: Company, IIFL Research
harsh.dole@ii flcap.com
Reliance Industries – BUY
13
Figure 28: US$1/bbl change in GRM = Rs46/share for RIL’s fair value
Source: IIFL Research
Figure 29: Our O2C EV is < indicated valuation for ARAMCO deal (US$75bn)
Source: IIFL Research
harsh.dole@ii flcap.com
Reliance Industries – BUY
14
Management
P/E EV/Ebitda
Background: Reliance Industries Limited (RIL) is one of India’s largest private sector enterprises, a vertically-integrated company with business
interests in the energy and materials value chain. The group’s activities span across E&P, petroleum refining and marketing, petrochemicals (polyester,
fibre intermediates, plastics and chemicals), retail, shale gas and telecom services. RIL was founded in 1958 by Dhirubhai Ambani, as a textiles trading
firm in Mumbai. Today, RIL operates the largest single refinery complex (68mmtpa) at Jamnagar and one of the most complex refineries (Complexity
index 21.1) in the world. It is among the top-ten largest producers of major petrochemical products (PP, PX, PTA, MEG) and the largest polyester
producer in the world.
Company snapshot
Name Designation
Mukesh Ambani Chairman and Managing Director
Alok Agarwal CFO
V Srikanth Joint CFO
Source: Company
3.0
5.0
7.0
9.0
11.0
13.0
15.0
Apr-09 Jun-11 Sep-13 Nov-15 Feb-18 Apr-20
12m fwd EV/EBITDA Avg +/- 1SD
(x)
Assumptions Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii
Refining throughput (mbbl) 511.6 500.6 517.5 499.9 499.9
Refining GRM (US$/bbl) 11.6 9.2 8.9 7.0 8.5
Petchem volumes (mmt) 13.2 14.6 14.7 14.8 14.9
Petchem EBIT margin (US$/mmt)
249.2 316.3 245.5 165.9 214.5
INR/US$ 64.6 69.9 71.0 75.0 75.0
Source: IIFL Research
6.0
9.0
12.0
15.0
18.0
21.0
24.0
Apr-09 Jun-11 Sep-13 Nov-15 Feb-18 Apr-20
12m fwd PE Avg +/- 1SD
(x)
Petchem, 45%
Refining, 27%
Others, 10%
Jio, 18%
EBITDA break-up - FY19
RIL Capacities mmtpa
Refining DTA Refinery 33.0
SEZ Refinery 35.2
Petrochemicals PE 2.3
PP 2.9
Paraxylene 4.8
PTA 4.9
PFY and PSF 2.1
PET 1.1
Source: Company, IIFL Research
harsh.dole@ii flcap.com
Reliance Industries – BUY
15
Financial summary Income statement summary (Rs bn) Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii Revenues 3,917 5,671 5,967 7,886 8,673 Ebitda 642 839 882 811 1,093 Depreciation and amortisation (167) (209) (222) (231) (254) Ebit 475 630 660 580 839 Non-operating income 89 86 140 137 133 Financial expense (81) (165) (220) (226) (224) PBT 483 551 579 491 748 Exceptionals 11 0 (44) 0 0 Reported PBT 494 551 535 491 748 Tax expense (133) (154) (137) (123) (187) PAT 360 397 398 368 561 Minorities, Associates etc. 1 (1) (4) (4) (4) Attributable PAT 361 396 394 364 557
Ratio analysis Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii Per share data (Rs) Pre-exceptional EPS 55.2 62.5 69.1 57.4 87.9 DPS 6.0 6.5 6.5 4.8 5.9 BVPS 463.0 610.7 715.1 767.0 847.9 Growth ratios (%) Revenues 28.3 44.8 5.2 32.2 10.0 Ebitda 38.9 30.8 5.1 (8.1) 34.8 EPS 17.0 13.1 10.6 (16.9) 53.1 Profitability ratios (%) Ebitda margin 16.4 14.8 14.8 10.3 12.6 Ebit margin 12.1 11.1 11.1 7.4 9.7 Tax rate 27.0 27.9 25.7 25.0 25.0 Net profit margin 9.2 7.0 6.7 4.7 6.5 Return ratios (%) ROE 12.6 11.6 10.4 7.7 10.9 ROCE 10.3 9.8 9.4 8.2 10.5 Solvency ratios (x) Net debt-equity 0.7 0.7 0.7 0.6 0.6 Net debt to Ebitda 3.3 3.3 3.5 3.7 2.7 Interest coverage 5.9 3.8 3.0 2.6 3.7 Source: Company, IIFL Research
Balance sheet summary (Rs bn) Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii Cash & cash equivalents 43 75 309 331 267
Inventories 608 676 739 977 1,074
Receivables 176 301 197 260 286
Other current assets 599 839 1,229 1,624 1,965
Creditors 2,668 2,654 3,105 3,693 3,858
Other current liabilities 41 42 37 49 53
Net current assets (1,283) (805) (668) (550) (320) Fixed assets 5,851 5,658 6,315 6,471 6,709
Intangibles 58 120 103 103 103
Investments 829 2,355 2,768 2,768 2,768
Other long-term assets 0 0 0 0 0
Total net assets 5,454 7,328 8,518 8,791 9,260
Borrowings 2,188 2,875 3,363 3,303 3,253
Other long-term liabilities 332 582 621 627 632 Shareholders equity 2,935 3,871 4,533 4,862 5,375 Total liabilities 5,454 7,328 8,518 8,791 9,260
Cash flow summary (Rs bn) Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii Ebit 475 630 660 580 839 Tax paid (98) (122) (84) (123) (187) Depreciation and amortization 167 209 222 231 254 Net working capital change 185 (251) 219 (96) (294) Other operating items (14) (8) (37) 1 1 Operating cash flow before interest 715 457 981 593 613 Financial expense (177) (233) (285) (226) (224) Non-operating income 23 16 16 137 133 Operating cash flow after interest 561 240 711 504 522 Capital expenditure (730) (928) (756) (387) (492) Long-term investments 23 (78) 141 0 0 Others (7) (25) (173) 0 0 Free cash flow (152) (791) (77) 117 30 Equity raising 5 2 1 0 0 Borrowings 199 865 356 (60) (50) Dividend (39) (43) (46) (35) (44) Net chg in cash and equivalents 12 33 234 21 (63) Source: Company, IIFL Research
harsh.dole@ii flcap.com
Reliance Industries – BUY
16
Disclosure: Published in 2020, © IIFL Securities Limited (Formerly ‘India Infoline Limited’) 2020
India Infoline Group (hereinafter referred as IIFL) is engaged in diversified financial services business including equity broking, DP services, merchant banking, portfolio management services, distribution of Mutual
Fund, insurance products and other investment products and also loans and finance business. India Infoline Ltd (“hereinafter referred as IIL”) is a part of the IIFL and is a member of the National Stock Exchange of India Limited (“NSE”) and the BSE Limited (“BSE”). IIL is also a Depository Participant registered with NSDL & CDSL, a SEBI registered merchant banker and a SEBI registered portfolio manager. IIL is a large broking
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a) This research report (“Report”) is for the personal information of the authorized recipient(s) and is not for public distribution and should not be reproduced or redistributed to any other person or in any form without IIL’s prior permission. The information provided in the Report is from publicly available data, which we believe, are reliable. While reasonable endeavors have been made to present reliable data in the
Report so far as it relates to current and historical information, but IIL does not guarantee the accuracy or completeness of the data in the Report. Accordingly, IIL or any of its connected persons including its
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harsh.dole@ii flcap.com
Reliance Industries – BUY
17
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Name, Qualification and Certification of Research Analyst: Harshvardhan Dole(B.Tech, PGBDA), Rishi Masand(MS Finance)
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Key to our recommendation structure
BUY - Stock expected to give a return 10%+ more than average return on a debt instrument over a 1-year horizon.
SELL - Stock expected to give a return 10%+ below the average return on a debt instrument over a 1-year horizon.
Add - Stock expected to give a return 0-10% over the average return on a debt instrument over a 1-year horizon.
Reduce - Stock expected to give a return 0-10% below the average return on a debt instrument over a 1-year horizon.
Distribution of Ratings: Out of 230 stocks rated in the IIFL coverage universe, 111 have BUY ratings, 10 have SELL ratings, 85 have ADD ratings and 23 have REDUCE ratings
Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment. Whichever valuation method is used there
is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such
demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in
certain industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social
conditions. This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.
harsh.dole@ii flcap.com
Reliance Industries – BUY
18
0
500
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Price TP/Reco changed date(Rs)
Reliance Industries: 3 year price and rating history Date Close price
(Rs)
Target price
(Rs)
Rating
28 Apr 2020 1417 1710 BUY
20 Jan 2020 1581 1725 BUY 02 Dec 2019 1551 1592 BUY
22 Oct 2019 1416 1588 BUY
22 Jul 2019 1249 1530 BUY
22 Apr 2019 1386 1508 BUY
08 Feb 2019 1290 1396 BUY
30 Nov 2018 1169 1430 BUY 19 Oct 2018 1151 1312 BUY
30 Jul 2018 1130 1285 BUY
24 Jul 2018 1120 1250 BUY
17 Jul 2018 1076 1113 BUY
Date Close price
(Rs)
Target price
(Rs) Rating
16 Oct 2017 876 940 BUY
24 Jul 2017 1585 1745 BUY 16 Jun 2017 1384 1475 BUY