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Quest to build future oriented ecosystem…

About the stock: Reliance Industries (RIL) is one of India’s biggest conglomerates with a presence in oil refining & marketing and petrochemicals, oil & gas exploration, retail, digital services and media, etc, making it a well-diversified business entity.

* On a consolidated basis, O2C and oil & gas contributed 62% to revenue, while retail, digital and others contributed 28%, 3% and 7%, respectively

* However, at the EBITDA level, O2C and oil & gas contributed 43% while retail, digital and others contributed 11%, 38% and 8%, respectively.

Key triggers for future price performance:

* Reliance Jio valuations catch up: While telecom/JioFiber and some minor receipts of the enterprise segment are captured in the Reliance Jio numbers, which we have estimated, there is also an increment value accretion from the ‘digital ecosystem’ that will be captured at the Jio Platforms (JPL) level

* Over a period of time, Jio has transformed into a keen investor in niche companies/start-ups that have a presence in digital technologies. The company has invested over ~US$1.9 billion over the last five years. We believe these investments provide an option value in the overall opportunity and complete the digital ecosystem creation objectives

* Reliance Retail’s aggressive store network expansion with consistent same store sales growth (SSSG) and improvement in operating profitability metrics has enabled it to demonstrate revenue and EBITDA CAGR of 50% and 58%, respectively, over FY16-21. Steady FCF generation would enable the company to maintain debt at lower levels and improve its ability to invest in future inorganic opportunities

* The oil to chemicals (O2C) business would be separated into a subsidiary (approval of regulatory authorities is expected to be completed soon). Stake sale to strategic global player will unlock value and enable RIL to invest in new energy verticals.

* New energy initiatives: The company plans to invest | 60000 crore on new energy and materials over the next three years. Additionally, RIL is expected to invest | 15000 crore in the value chain, partnerships and future technologies, including upstream and downstream industries leading to total investment of | 75000 crore in the new energy business.

What should investors do?

Long term prospects and dominant standing of RIL in each of its product & service portfolio, provides comfort for long term value creation.

* RIL’s consumer business will be the growth driver, going ahead. The company has a strong balance sheet post fund raising while its traditional business will continue to generate steady cash flows. We initiate coverage on the stock with a HOLD recommendation

Target Price and Valuation: On an SOTP basis, we value the stock at | 2480/share

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