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Hold Reliance Industries Ltd For Target Rs.2,330

RIL AGM - Embarks on yet another transformational journey

* RIL’s CY21 AGM announced the induction of Saudi Aramco Chairman Rumayyan as an independent director, progress of Aramco partnership and a road map for the new energy business involving solar, battery, hydrogen and fuel cells with Rs750bn 3-year capex plan.

* As expected, RIL unveiled affordable smartphone ‘JioPhone Next’, jointly developed with Google. It will go on sale from September 10, 2021. CMD also expressed confidence on Reliance Retail’s hyper-growth trajectory (to become 3x in revenues in 3-5 years).

* The update on Aramco deal is constructive though we believe valuation could be different from earlier USD75bn EV, and we await it (we value O2C at a liberal 8.5x EBITDA). The material clean energy capex implies RIL’s seriousness and is a long-term positive.

* We raise: 1) FY22-24E EPS by 2-4%, factoring in higher petchem and gas income; and 2) EV/EBITDA multiple of Retail to 36x from 31x. We embed 10% premium to cash to account new energy upside. Raise TP to Rs2,330 (Jun’22E) from Rs2,060 (Mar’22E). Retain Hold.

Aramco deal formalization expected this year; 3-year new energy capex of Rs750bn:

CMD Mukesh Ambani stated that Aramco deal is in progress, with the partnership expected to be formalized this year. In our view, the induction of Rumayyan, although as an independent director, implies a budding relationship between the two players. However, NCLT approval for O2C restructuring is pending and valuation may not have been finalized yet. The final valuation could be different from the original USD75bn EV. We value O2C at 8.5x Jun’23E EV/EBITDA (the upper range) with USD67bn target EV. CMD also said that E&P would be a source of significant value and sustained earnings growth over the decade. The new energy business has a three-part plan: 1) build four giga factories; 2) provide infra and materials to support; and 3) project management, construction & finance division. The factories will be for making: 1) integrated solar PV modules; 2) advanced energy storage batteries; 3) electrolyser for green hydrogen; and 4) hydrogen fuel-cells. RIL is expected to participate in PLI schemes.

New JioPhone jointly developed with Google; Retail on hyper-growth trajectory:

We await additional details on JioPhone Next, such as specs and pricing, though factoring in Jio’s aggression and underlying fundamentals of being affordable, the price point should be at a steep discount to current handset ASPs. Its success will also depend on bundled services and features. Jio and Google Cloud have also entered into a strategic relationship to power 5G in enterprise and consumer segments. In Retail, the focus is on five growth initiatives: 1) store additions, 2) continued acquisitions, 3) investments in research-tech, 4) strengthening sourcing ecosystem for new commerce and 5) building supply-chain infra. Our forecasts factor in 28% revenue CAGR though inorganic growth is an upside risk.

Valuation:

We value RIL on a SOTP basis with a revised TP of Rs2,330. Maintain Hold/EW.

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