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The retail arm of Reliance Industries Ltd (RIL) has been a key driver of the group’s valuations lately. As its December quarter (Q3) numbers show, Reliance Retail Ltd’s growth has not lost steam despite becoming the largest retailer in India.
Recently, the firm topped the list of 50 fastest-growing retailers during FY13-18 in Deloitte’s Global Powers of Retailing 2020 index.
Reliance Retail’s overall revenue, including petro retailing and connectivity, increased by 27.4% year-on-year in Q3. Pure retail revenue, which includes revenue from consumer electronics, fashion and lifestyle, and grocery, have risen nearly 36%. This is far above the growth of 9.6% reported by listed retail firms on average.
On the profitability front, too, the picture isn’t bad. “Compared to the 65% year-on-year Ebitda rise reported by Reliance, the top retailers registered 5-28% year-on-year growth in Ebitda (adjusted for IndAS) with all, barring Shoppers Stop, recording double-digit growth," wrote analysts at CLSA in a report on 25 February. The aggregate average sector Ebitda (earnings before interest, tax, depreciation and amortization), excluding Reliance’s numbers, stands at 19.5%.
Of course, the Street has taken note of Reliance Retail’s impressive performance. Analysts are now assigning a respectable chunk of value to the retail pie in the total sum-of-the-parts enterprise value (EV) estimates of RIL. For perspective: The retail business accounts for about 26% of the total EV estimates of Kotak Institutional Equities. In value terms, this amounts to ₹3.4 trillion.
While this bodes well, investors will have to keep an eye on the debt of the retail business. Analysts at Jefferies India Pvt. Ltd wrote in a report on 19 January: “Higher working-capital weighed on the consumer segments with retail debt up about ₹1,500 crore quarter-on-quarter to about ₹17,000 crore."
The firm has witnessed a spurt in growth in the past two years. However, it remains to be seen how long the vast outperformance over the industry lasts. Investors will do well to keep an eye on profit margins, given the sharp rise in margins to nearly 10% of revenue in the core retail business.