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Add Reliance Industries Ltd For Target Rs.2,755

Reliance Industries (RIL), in its latest AGM (on 29 Aug’22), has announced a slew of new initiatives across businesses, along with the rolling out of 5G network from Oct 2022 in key cities (pan-India rollout by Dec’23). It announced a massive new investment worth ~Rs1.1trn in digital services space (in addition to ~Rs0.9trn for spectrum). RIL also announced a material Rs750bn worth of investment in aggressive capacity expansion across PTA/PET/Vinyl PFY and PSF chains. Retail business is also seeing continuous momentum, with sustained growth in both offline and online parts of the business. RIL also announced its formal entry in the FMCG segment. Its ‘Green Energy’ plans are also progressing, with the first 10GW giga solar factory targeted for commissioning by CY24 and further (10GW) to 20GW by CY26. RIL’s aggressive plans for Jio/OTC and green energy create a clear roadmap for growth over FY22-27E, but the sharply higher capex reinforces our cautious stance on returns from the business, with muted FCF yield, depressed return ratios and strong multiples limiting upsides from here. We reiterate ADD on the stock with a revised TP of Rs2,755/sh.

* Clarification on Jio 5G rollout plans: RIL announced a material Rs2trn investment as a part of the 5G rollout, with Rs0.9trn on spectrum and a further Rs1.12trn on infra to rollout a standalone 5G network, coupled with optic fibre network of >1.1mn sqkm (peer Bharti has 0.4mn sqkm). Jio is looking to deploy a standalone 5G network, which will have benefits of low latency, massive M2M communication, 5G voice, edge computing, network slicing and Metaverse. Its 5G network will be powered with standalone 5G, strong spectrum mix with largest holding in sub-GHz spectrum and advance carrier aggregation.

* OTC to see material petrochemical expansion: RIL threw up a surprise on downstream chemicals front, with a material Rs750bn investment in the expansion of capacity for PTA (3mt), Polyester Filament Yarn (PFY) and Polyester Staple Fibre (PSF) of 1mt, PVC (1.5mt) and EDC + PVC capacity expansion in UAE as part of the ADNOC/ADQ JV. Post the completion by CY26, RIL will be amongst the top 5 producers of PVC in the world.

* New energy plans on track: RIL is in the process of setting up a manufacturing ecosystem for its four planned Giga factories in Solar, Energy Storage, Fuel cells and Green Hydrogen. It also announced a new giga factory for power electronics and software systems to support the requirements of the other four factories. The company is targeting start up by CY24 for the first 10GW solar capacity and 20GW by CY26.

* Minor changes to estimates, maintain ADD: We make minor reductions to FY23-24E EPS by ~1% and TP by ~2% to factor higher capex and hence, higher depreciation costs and higher interest costs. We remain cautious on upsides with our concerns on low return ratios, muted FCF yields and limited potential for any return of cash to shareholders keeping risk-reward balanced. Reiterate ADD.

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