Buy Reliance Industries Ltd For Target Rs.1,605 by Motilal Oswal Financial Services Ltd
Multiple re-rating triggers in CY25; risk-reward compelling
Reliance Industries (RIL) has underperformed the broader benchmark equity indices over the past few years and delivered negative returns in CY24, a first in the past 10 years. We believe RIL’s recent underperformance has been driven by continued earnings downgrades due to growth moderation in Reliance Retail (RR) and weak refining and petchem cracks. After the steep correction (RIL: -17% in past six months), we believe the risk-reward is compelling as RIL now trades at our bear case valuation – Reliance Jio (RJio) at 10% discount to Bharti’s current valuation, high-single-digit growth in core retail revenue/EBITDA and no improvement in O2C earnings over FY24- 27E. Further, we believe a moderation in capex intensity, ~INR900b FCF generation over FY24-27E, and deleveraging are currently underappreciated. The start of gigafactories in New Energy (FY25 end), the potential listing of RJio (likely 2HCY25) and growth recovery in RR (FY26) are the key medium-term triggers for RIL. Reiterate BUY with a TP of INR1,605 (bear: INR1,215; bull: INR1,930).
* RJio, with a ~20% EBITDA CAGR over FY24-27E, is likely to be the biggest earnings growth driver for RIL over the medium term, driven by more frequent tariff hikes, market share gains, and FWA ramp-up.
* With streamlining of operations coming to an end, we believe RR will get back to low-teen revenue/EBITDA growth from FY26 onward, driven by footprint addition and ramp-up of new categories/formats.
* After two quarters of weakness, GRM improved in 3Q, though petchem cracks are likely to remain subdued in the medium term.
* We believe RIL’s capex likely peaked in FY24 with the completion of 5G rollouts. Capex could increase in New Energy but will likely be funded by robust cash flow generation by RIL standalone (INR600-700b annually).
* We expect RIL to generate cumulative FCF of ~INR900b over FY24-27, led by standalone and RJio, which should lead to further deleveraging
Reliance Jio: 5G monetization through FWA, tariff hike key triggers
* The flow-through of the Jul’24 tariff hike has been decent, with ARPU up ~12% over the last two quarters and full benefits likely to accrue by Mar’25.
* Further, we believe the subscriber churn for RJio was largely restricted to its inactive subscriber base as reflected in improvement in RJio’s VLR (peakactive) proportion to an all-time high of 97%.
* Given the consolidated market structure in the Indian telecom industry, higher data consumption, lower ARPU, and inadequate returns generated by telcos, we expect tariff hikes to be more frequent. We continue to build in a ~15% tariff hike (or INR50/month increase in base pack) in Dec’25.
* Despite Vi’s large capex plans, we believe RJio (and Bharti) will likely continue to gain market share at Vi’s expense.
* With the ramp-up of FWA (AirFiber) offerings, the pace of subscriber additions in Home Broadband accelerated to ~2m in 3QFY25.
* We expect RJio’s fixed broadband connections to reach ~35m by FY27 and the contribution from the Broadband business is likely to increase to ~12% by FY27 (vs. ~7% currently).
* With an estimated CAGR of ~17%/20% in revenue/EBITDA over FY24-27, RJio is likely to be the biggest growth driver for RIL in the medium term.
Reliance Retail: Growth recovery vital for re-rating
* Over the past few quarters, Reliance Retail (RR) has been streamlining its operations by closing unprofitable stores and adopting a more calibrated approach to the B2B business.
* RR’s slower footprint additions, combined with weaker discretionary spends in key categories, have resulted in moderation in revenue growth.
* Despite the boost from the tariff hike in connectivity and some recovery in 3Q on festive demand, RR posted modest ~3% YoY growth in net revenue in 9MFY25.
* However, driven by streamlining of operations, operating EBITDA margin has improved in 9M, despite rising share of low-margin connectivity business.
* With streamlining of operations nearing end, we expect RR to get back to midteen revenue/EBITDA growth from FY26 onward, driven by store footprint additions and ramp-up of new categories/formats.
* RR is the biggest contributor (~38%) to our SoTP valuations for RIL and a recovery in its growth is likely to be the biggest trigger for the stock.
* In our base case, we estimate a modest CAGR of 8.5%/12% in RR’s core retail/overall gross revenue over FY24-27 (significantly below 17-18% CAGR over FY20-24), with broadly stable EBITDA margin of 8.3% by FY27 (similar to 3QFY25).
* A quicker recovery in discretionary spends, a faster ramp-up in RIL’s consumer foray, and new category/format launches could be upside risks.
O2C: Refining margins likely bottomed in 2Q; petchem to remain soft
* IEA estimates the global refining capacity additions to be modest at 3.3mb/d over CY24-30, with downside risks from refinery closures. Further, beyond CY26, the net refinery capacity additions are expected to be sparse.
* While negligible refining capacity addition after CY26 (~0.5mb/d annually on average) would be beneficial for refining margins, global oil demand is also likely to be weak (modest 0.4mb/d increase over CY27-30 as per IEA) and would likely cap SG complex margins at USD6-6.5/bbl in the near term.
* We estimate RIL’s standalone GRM of USD8.9/9 per bbl in FY26/FY27. For every USD1/bbl change in GRM, RIL’s EBITDA changes by ~INR42b (~2% of FY26/27 consol EBITDA).
* Petchem cracks have remained weak and we do not expect a sharp recovery in the next few quarters as global capacity additions remain aggressive for products such as PE and PP, based on the commentary from South East Asian petchem players.
* After a subdued 1HFY25, RIL reported modest recovery in consolidated O2C EBITDA in 3QFY25. However, we note that our FY27 consol O2C EBITDA is largely similar to FY24 levels and could have upside risks from recovery in the petchem cycle and a higher contribution from petro retail marketing JV.
New Energy: Earnings to ramp up FY28 onward; ascribe INR75/sh value
* RIL’s New Energy business is reaching a transformative milestone, marked by the start of phase I of solar module manufacturing capacity in 4QFY25. This will be followed by the commencement of operations in cell manufacturing and phase II of module manufacturing in the next two quarters.
* RIL has invested USD3-4b so far in New Energy. We believe as the integrated solar PV and battery ventures commence, the balance USD6-7b will be invested over the next 2-3 years.
* Further, given its plan to set up 100GW of RE generation, the initially guided capex of USD10b is likely to be exceeded.
* We estimate total capex of INR1t for RIL’s two major verticals (Solar PVs and battery manufacturing) in its New Energy business.
* With operating cash flow generation of ~INR600-700b in the consol O2C+E&P business and low capex (INR150-200b), we believe robust O2C cash flows can continue to fund New Energy capex.
* We believe RIL’s Solar PV factory can generate EBITDA of INR81b at full utilization in FY29E. We estimate RoE/RoCE of 16%/9%, at full utilization.
* As such, we do not build in any contribution from New Energy until FY27, though we believe that with scale and cost/technology superiority, New Energy could be the key profit growth driver for RIL in the longer term.
Valuation and view
* We estimate a CAGR of ~10% in consolidated EBITDA and PAT each over FY24- 27, driven by a double-digit EBITDA CAGR in RJio (wireless tariff hikes and FWA ramp-up) and mid-teen growth in RR over FY26-27. After a subdued FY25, we expect earnings to recover for the O2C segment, driven by improvement in refining margins. However, our FY27E consolidated EBITDA for O2C and E&P is broadly similar to FY24 levels, which could have upside risks.
* We model an annual consolidated capex of INR1.25-1.3t for RIL as the moderation in RJio capex is likely to be offset by higher capex in New Energy forays. However, we believe the peak of capex is behind, which should lead to FCF generation (~INR900b over FY24-27) and a decline in consol. net debt.
* For RR, we ascribe a blended EV/EBITDA multiple of 32.5x (35x for core retail and 6.5x for connectivity), based on average valuations for retail peers (DMart, Trent, Metro Brands and Vedant Fashions) to arrive at an EV of ~INR10.1t (~USD120b) for RRVL and an attributable value of INR610/share for RIL’s stake in RRVL.
* We value RJio on DCF implied ~12.5x FY27E EV/EBITDA to arrive at our enterprise valuation of INR12.1t (USD134b) and assign ~USD10b valuation to other offerings under JPL. Factoring in net debt and 33.5% minority stake, the attributable value for RIL comes to INR515/share.
* Using the SoTP method, we value the O2C/E&P segments at 7.5x/6x Mar’27E EV/EBITDA to arrive at an enterprise value of INR444/sh for the standalone business. We ascribe an equity valuation of INR515/sh and INR610/sh to RIL’s stake in JPL and RRVL, respectively. We assign INR75/sh (~INR1t equity value) to the New Energy business and INR26/sh to RIL’s stake in Disney JV (based on transaction value). Reiterate BUY with a TP of INR1,605.
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
