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Trading at bear case, signaling valuation recovery

Reliance Industries’ stock price has seen a significant correction and is now trading at its bear case scenario, with limited downside from here. We expect a recovery driven by strong growth across its key segments. Jio Platforms is poised for monetization, with tariff hikes boosting ARPU and the upcoming Jio IPO providing a major valuation catalyst. Reliance Retail, which is currently lacking on near term growth, while facing competition, is well-positioned for a long-term growth through its omnichannel strategy and strategic acquisitions. The O2C segment remains robust despite global supply disruptions expecting refining margins to improve supported by global shutdowns and winter demand. The upstream oil and gas segment remains stable with ongoing deepwater projects and increasing domestic gas demand. Additionally, Reliance’s Rs750bn new energy investment, aiming for 100GW of renewable capacity by 2030, strengthens its position as a leader in India’s energy transition, providing significant long-term value. The consumer segment - Retail and JIO which are contributing over 55% to its FY27 EBITDA forms ~ 70% of the TP. We maintain BUY with a TP of Rs 1,500/shr.

Investment Rationale

* The O2C segment is positioned to capitalize on a recovery in refining margins despite recent challenges. The global product cracks had fallen due to supply disruptions, while the demand for petroleum products remains strong. The global shutdowns, strong product demand and net capacity additions being slow will keep the key product cracks elevated supporting GRMs. Reliance with it's competitive sourcing strategy, would continue to achieve a superior GRM ranging over USD10/bbl. It seems feasible, compared to the last seven-year average reported GRM of USD10.1/bbl and a Singapore GRM of USD5.5. In petrochemicals, Reliance’s margins have faced pressure but are expected to stabilize with a rebound in global oil demand, particularly from China. The company is expanding its capacity with 1.5mtpa of PVC and CPVC by FY27, 1mtpa of specialty polyester, and developing a carbon fiber plant at Hazira.

* The domestic upstream segment remained firm witnessing flattish production growth for KGD6 and marginal improvement in CBM partially offsetting lower gas prices. While KGD6 continues to contribute >30% of India’s gas production, in Q2FY25 it marginally declined to 28.5mmscmd and 20,832bbls/day of oil. Reliance commissioned six deepwater fields, including the MJ field on schedule, and improved CBM production with a 40-well campaign. Future projects include geothermal energy, coal gasification, natural hydrogen, and helium.

* Jio-BP Fuel Retail provides high-performance diesel at par with regular diesel and has expanded to 305 convenience stores with over 4,800 charge points. It is also India’s largest retailer of high methane compressed biogas.

* New Energy Initiatives: Reliance Industries' new energy expansion, supported by a Rs750bn investment, is a key step toward its goal of net carbon neutrality by 2035. The centerpiece is the Rs600bn Dhirubhai Ambani Green Energy Giga Complex in Jamnagar, covering 5,000 acres, with Rs150bn allocated to build a comprehensive renewable energy ecosystem. Reliance aims to deliver 100GW of renewable capacity by 2030, contributing ~20% to India's 500GW target. Key initiatives include 55 CBG plants by 2025 and the establishment of the world’s largest bioenergy R&D center. The 20GW solar gigafactory, starting with a 10GW capacity, will produce high-efficiency solar modules using advanced Heterojunction Technology (HJT) from REC Solar and Caelux where Reliance New energy owns a stake. Additionally, Reliance is investing in a 30GWh battery facility and a multi-GW electrolyzer plant, which is expected by end of CY25 and CY26, respectively. With a USD10bn investment in solar, green hydrogen, and battery storage, Reliance Industries is well-positioned to lead India’s energy transition.

* Monetization of Digital Services: Reliance Jio Platforms Limited (JPL) presents a robust investment case as it transitions from completing its 5G rollout to aggressively monetizing its infrastructure. In Q2FY25, a tariff hike led to a significant ARPU increase to Rs195.1, despite a subscriber base decline of 10.9mn to 478.8mn, driven by some SIM consolidation. Jio’s FTTH segment gaining traction, with AirFiber connections surpassing 2.8mn, boosting overall growth. The tariff hikes would improve FCF, setting the stage for sustained investments. JioBharat phones are targeting 2G-to-4G migration, bundling content subscriptions and driving net subscriber growth. Digital services, including IoT, cloud, and AI opportunities, are poised for a potential inflection point by CY25, further enhancing revenue diversification. The anticipated Jio IPO in end 2025 or early 2026 serves as a major valuation unlock expecting to garner significant investor interest and liquidity.

* Retail to be a critical driver: Reliance Retail's growth is marked by its balanced focus on omnichannel presence and strategic acquisitions, but challenges persist in achieving seamless integration across its diverse portfolio with fashion slowing the growth. While its physical network is supported by JioMart's digital reach, scaling partnerships with ~56,000 kirana stores highlights the complexity of bridging unorganized and organized retail. Strategic acquisitions, like Hamleys and Metro Cash & Carry, target niche opportunities but may require time to deliver consistent synergies. The revenue per store per quarter is at Rs 40mn which we expect to improve to over Rs50mn by FY27. Although offerings like Ajio, Tira, and the Shein partnership showcase efforts to diversify, competition from established players like Amazon and Nykaa remains intense. We believe that private labels and luxury brands would improve the blended EBITDA margins for the company. Reliance’s ability to optimize its vast ecosystem while maintaining efficiency and profitability in a highly fragmented market will be critical to sustaining momentum.

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