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How the growth levers are stacked

* RJio, the telecom vertical of Reliance Industries, is in a sweet spot as peers Bharti and VIL have taken a 20% tariff hike. We expect RJio to follow suit, garnering a 23%/7% upside on RJio / consol EBITDA. Further, improving traction in JioPhone Next should be an aiding factor.

* The Retail segment is seeing strong revival across categories during the festive season, accelerated store adds, and healthy scale in the Digital business – these factors should drive sharp growth from 3QFY22.

* GRMs are weakening amid a worsening COVID situation in Europe. However, the Petrochem segment should offset the impact on the back of good demand and continued delays in upcoming capacities.

* RIL is trading at EV/EBITDA and P/E of 12x and 19x, respectively, on an FY23E basis. The strong earning levers in the Consumer business should support the stock. Using SOTP, we value the stock at INR2,900 and reiterate Buy.

RJio in a sweet spot as tariff hike, JioPhone Next could push growth

RJio’s revenue growth has decelerated in the last few quarters to the mid-single digits v/s the double digits – given the moderation in subscriber adds. However, we see two key growth levers: a) tariff hikes – RJio may likely follow Bharti and VIL with a ~20% price hike in the Smartphone category. This is because it has achieved market leadership in this category, and the intent is to now monetize this large pool of subscribers to improve growth/profitability. This could revise our 2QFY22 annualized EBITDA by 16%. b.) JioPhone Next-led subscriber growth – The company is keen to target a large chunk of the 300m Feature Phone market through JioPhone Next. We believe the handset has limited distinguishing features; however, as the chip shortage eases, it should sharpen pricing in the Feature Phone segment and launch improved versions to revive subscriber additions. We have factored in core revenue / EBITDA growth of 15%/22% over FY20–24E to reach INR934b/INR485b, not considering a material price hike.

Retail seeing strong recovery; business shaping up well

The Retail market has seen strong revival from COVID-19, unlike the first phase, with the festive season seeing double-digit SSSG across categories. The steady addition of >900 stores in 1HFY22 should also see accelerated additions of nearly 1500–2,000 stores in 2HFY22. However, the big surprise has been the online business, which now contributes 20% to core revenues at an annualized revenue run-rate of INR210b (from being an insignificant contributor around eight quarters ago). It has achieved scale closer to the category leaders in the Grocery and Apparel segments, well supported by a) the supply chain of a deep physical retail network and b) aggressive expansion in warehousing capacity (2.5m added in 2QFY22. We expect 2HFY22 to drive >40% revenue growth over pre-COVID levels (2QFY20) on the back of revival amid COVID and contribution from 52% footprint addition over the last two years. Subsequently, we expect a revenue/EBITDA CAGR of 25%/28% to INR3,137b/INR248b over FY20–24E.

Refining margins under pressure; petrochem margins shoot up:

* After reaching USD7.5/bbl in Oct’21, the SG complex GRM has once again started to trend down. It has largely averaged at USD6/bbl in Nov’21, but been at USD3–4/bbl for the past few days. This is primarily attributable to the worsening COVID situation in Europe. As a result, EIA, in its latest update, has decreased the demand forecast for CY21 by 0.13mnbopd.

* However, petrochem appears to be faring well owing to good demand as well as continued delays in upcoming capacities. Despite naphtha prices rising 15% QoQ, PE and PP spreads, over naphtha, have risen 13% and 4% QoQ, while PVC spreads have risen 39%.

* However, while refining is expected to remain subservient to the fluctuating oil demand, higher petrochem margins would keep the profitability intact.

Valuation

* RIL, in the last year, has seen strong deleveraging on the back of value unlocking in the Consumer business, which has aided valuations.

* The Consumer biz – RJio and Reliance Retail are richly valued given their strong growth potential. We see price hikes in the Telecom business and revival in the Retail business – led by strong growth potential in JioMart – as key levers for the stock over the next two years.

* RIL is trading at 11.9x FY23E EV/EBITDA and 19.2x FY23E P/E. Using SOTP, we value the stock at INR2,900 and reiterate Buy.

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