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FY21 Annual Report analysis

* FY21 has been a landmark year for Reliance Industries Ltd (RIL). The new-age Retail and Digital businesses flourished despite the COVID-led disruption, led by the emergence of RIL’s disruptive and aggressive growth philosophy. As a result, this cushioned the impact on the overall business and provided the much needed capital raise and deleveraging.

* RIL’s Fossil Fuels business struggled with a 37% decline in EBITDA in FY21. However, the Retail biz, partially supported by the Online Retail and Digital businesses, came in much stronger, arresting the decline to just 9% on a consolidated basis to INR807b.

* RIL managed to raise INR2.6t in capital through an asset monetization and rights issue. We delve into the company’s Annual Report, highlighting the key initiatives and business outlooks for the various segments.

Digital Services

* At a time when most businesses were adversely impacted on account of COVID-19, RJio’s revenue/EBITDA grew 29%/43% in FY21, led by a strong 38m subscriber additions and 6% ARPU improvement.

* The exponential data growth seen in the past year further vindicated the product power and the importance of telecom services/players in a consolidated market.

* The company turned FCF-positive, led by improving EBITDA and reducing capex intensity, and ROEs edged up further. Nevertheless, the ROEs remain in single digits, underscoring weak monetization and the need for tariff hikes.

Reliance Retail

* Reliance Retail Ventures Ltd (RRVL)’s standalone revenue/EBITDA grew 1%/- 12%, while the core revenue/EBITDA is estimated to have seen 19%/21% decline due to the COVID impact.

* At a time when most retailers were rationalizing operations, Reliance Retail added 1,456 new stores and made aggressive inroads into the Online business. It achieved 10% revenue contribution in 4QFY21, presenting huge potential.

* RRVL’s standalone debt increased to INR147b (v/s INR47b in FY20) and FCF turned negative to -INR76 (v/s INR98b in FY20). ROEs declined to 21% (v/s 36% in FY20), but we expect a rebound as we come out of the COVID- lockdowns.

O2C segment | Following other businesses’ trajectories

* RIL restructured its Refining and Petrochemical segments into the O2C segment to attract strategic partnerships. As we had highlighted earlier, an incremental conversion of 10% in Oil-to-Chemicals (O2C) could add ~6%/3% to stand/conso EBITDA.

* Unprecedented demand destruction of 9.5mnbopd in 2020 led to weaker margins in refined products. Petrol and diesel cracks more than halved in FY21, while ATF declined to USD1.2/bbl in FY21 (from USD12.6/bbl in FY20).

* However, global PP & PE demand rose 3%, and supply constraints resulted in PP-naphtha/PE-naphtha margins expanding 22%/31%.

Capital raise of INR2.6t | Strengthening the balance sheet

* Total capex stood at INR797b, primarily toward the Digital, Retail, and O2C businesses, and also included the forex impact.

* As a result of an INR2.6t capital raise (INR1.52t from Jio Platforms, INR0.47t from Reliance retail, INR0.53t via rights issue and INR0.076t from RIL-BP JV), Our estimate suggests standalone net debt declined 47% YoY to INR935b in FY21 and consol net debt fell 71% YoY to INR539b.

* Although, at the end of FY21, as per our calculation – gross debt for standalone was at INR1,938b and consol. was at INR2,238b.

Valuation and view

RJIO: RJio plans to accelerate growth through JioPhone, Enterprise Data, and other digital avenues via the recent spate of launches, coupled with new digital app offerings. Thus, we assign an EV/EBITDA multiple of 20x on FY23 EBITDA, with TP of INR847/share (for its 66% stake). The higher multiple captures the digital revenue opportunity, potential tariff hikes, and opportunity in the Feature Phone market (not built into our estimates).

Retail: We value Reliance Retail’s core business at 35x FY23E EV/EBITDA and assign 4x to Connectivity, arriving at TP of INR755 – after excluding the recent 10% stake sale. Our premium valuation multiples capture the accelerated growth in new store openings, digital commerce, and the new JioMart platform.

O2C: Vaccination drives appear to be gaining momentum the world over, with large economies such as the US and India inoculating more than 4m daily. This is expected to soon revive demand for transportation fuels, thus boosting GRMs. Since the company has stopped disclosing GRMs separately, we build in EBITDA of USD107/134/mt for FY22/FY23E (vis-à-vis USD73–84/mt reported over 3Q– 4QFY21) – on the back of improvement in refining and petchem margins.

Using SOTP, we value the O2C business at FY23E EV/EBITDA of 7.5x, arriving at a valuation of INR764/share for the standalone business, and add INR68 for the E&P assets. We ascribe an equity valuation of a) INR847/share to RJio on FY23E 20x EV/EBITDA and b) INR755/share to Reliance Retail on FY23E 35x EV/EBITDA, factoring in the recent stake sale. Reiterate Buy, with TP of INR2,430/share.

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