Buy Reliance Industries for the Target Rs 1,550 by Motilal Oswal Financial Services Ltd
Rebound in energy profitability offsets softer performance in Retail
* Reliance Industries (RIL) posted a strong 1QFY27, with its consolidated EBITDA rising 8% QoQ to INR475b (+11% YoY, vs. our est. INR461b). The beat on our estimates was driven by a strong rebound in energy (O2C+ E&P) profitability.
* Reliance Retail’s (RRVL) reported net revenue grew 8% YoY (weaker vs. our est. of 11% YoY). Adjusted for the RCPL demerger, underlying revenue growth was robust at ~12% YoY. However, operating EBITDA declined 2% YoY (5% miss) due to the rising scale-up of lower-margin hyper-local grocery offerings.
* RJio standalone revenue/EBITDA growth of ~2.5-3% QoQ was broadly in line. Digital segment EBITDA growth of 6% QoQ (16% YoY, 3% ahead) was driven by the ramp-up of digital services under JPL and likely higher other income.
* Consol. O2C EBITDA grew 17% QoQ (up 17% YoY, 7% ahead), driven by stronger transportation fuel cracks and favorable ethane cracking economics, while consol. E&P EBITDA grew 19% QoQ (flat YoY, 15% ahead), supported by improved oil/condensate realizations and cost normalization.
* RIL’s 1Q attributable adjusted PAT grew 16% YoY to INR210b (+23% QoQ, 16% beat), driven by higher EBITDA and lower minority interest (losses in Jio-BP).
* Committed capex at INR387b increased sharply (vs. INR299b YoY, though stable QoQ), while reported net debt was largely stable QoQ at INR1.23t.
* Our FY27-28E EBITDA is broadly unchanged as higher O2C earnings are offset by lossesin Jio-BP, while we raise FY27E PAT by ~7%, driven by higher other income and lower minority interest. We build in a CAGR of ~9-10% in RIL’s consolidated EBITDA/PAT over FY26-28.
* We reiterate our BUY rating with a revised TP of INR1,550 (earlier INR1,690), as we now apply a ~25% holdco discount to RIL’s ~66.4% stake in JPL
RRVL- Soft 1QFY27; targets doubling operating EBITDA over three years
* RRVL’s net revenue grew ~8% YoY to INR797b (vs. our estimate of 11%). Adjusting for the RCPL demerger, underlying revenue growth was healthy at 11.6% YoY, driven by broad-based double-digit growth across key categories.
* Store additions remained calibrated, with nine net additions (252 gross additions), while retail area inched up ~1% YoY to 78.4msf (flat QoQ).
* The hyper-local offering, JioMart, continued to scale rapidly, with average daily orders rising 116% YoY as the company expanded its two-hour delivery network to ~5,500 pin codes, supported by over 2,500 connected stores. Digital commerce now contributes ~13%+ to RRVL’s B2C grocery revenue.
* Operating EBITDA declined ~2% YoY to INR59.4b (~5% miss), as investments in digital commerce and a higher salience of lower-margin JioMart weighed on profitability. EBITDA margin contracted ~75bp YoY to 7.4%.
* Management has laid out an ambitious target of doubling operating EBITDA over the next three years. Scaling up digital commerce under JioMart remains the key focus area for FY27, with scale expected to translate into value over FY28-29. The focus remains on improving repeat purchases, order density, availability, delivery costs, and contribution margins, not just order volume.
* Our FY27-28E EBITDA is broadly unchanged, while we cut FY27-28 PAT by 8-9% due to higher depreciation and interest expense. We expect a CAGR of ~11%/9% in RRVL’s revenue/EBITDA over FY26-29.
* RCPL gross revenue at INR86b grew ~2.1x YoY, led by Campa and Independence.
Valuation and view
* Our FY27-28E EBITDA is largely unchanged as stronger O2C earnings are offset by losses in the retail fuel JV. Our FY27E PAT increases by ~7% YoY, primarily due to higher other income and lower minority interest.
* Digital Services is likely to remain the biggest growth driver, contributing ~85% to RIL’s incremental consolidated EBITDA over FY26-28. We expect ~19% EBITDA CAGR over FY26-29, driven by tariff hikes (~15% from 3QFY27), market share gains in wireless, and continued ramp-up of the Homes and Enterprise offerings.
* We expect RRVL to deliver ~11% net revenue CAGR over FY26-29, driven by a mix of store rollouts, improved productivity, and scale-up of JioMart. However, the faster ramp-up of lower-margin hyper-local businesses could weigh on blended EBITDA margin, driving ~9% EBITDA CAGR over the same period.
* After a weak 4QFY26, RIL’s Energy profitability recovered sharply in 1QFY27. However, given a lack of volume-led growth, we model combined consolidated O2C and E&P EBITDA of ~INR800b in FY28 (similar to FY26 and lower than FY24).
* Overall, we build in a CAGR of ~9-10% in RIL’s consolidated EBITDA/PAT over FY26-28. We do not build in any meaningful earnings contribution from RIL’s forays in New Energy, Datacentre, AI, and FMCG businesses in the near term.
* We model an annual consolidated capex of INR1.3t for RIL over FY26-28E, as the moderation in RJio capex is likely to be offset by higher capex in New Energy and AI/Datacenter forays. However, we believe the peak of capex is behind, which should lead to healthy FCF generation (~INR900b over FY26-28E) and a corresponding decline in consolidated net debt (0.7x leverage by FY28E).
* For RRVL, we ascribe a blended EV/EBITDA multiple of ~28x (30x for core retail and ~5.5x for connectivity) to arrive at an EV/equity value of ~INR8.8t/INR8.3t for RRVL, with attributable value for RIL’s stake at INR515/share (earlier INR505/share). Sustained mid-teen revenue growth in retail remains the key for RIL’s re-rating.
* We value RJio at INR11.9t (USD124b) EV, based on a DCF implied ~11.5x Sep’28E EV/EBITDA and assign ~USD9b (INR839b) valuation to other digital services under JPL to arrive at INR12.8t (or ~USD133b) EV. Factoring in net debt, our equity value stands at INR11.7t (or ~USD122b). We now also apply a 25% holdco discount to RIL’s ~66.4% stake in JPL, and our attributable value for RIL now stands at INR431/share (earlier INR555/sh without a holdco discount).
* Using the SoTP method, we value the O2C/E&P segments at 7.5x/5.0x FY28E EV/EBITDA to arrive at an enterprise value of INR5.6t (or ~INR415/sh) for the standalone business. We ascribe an equity valuation of INR431/sh and INR515/sh to RIL’s stake in JPL and RRVL, respectively. We assign INR174/sh (~INR2.4t equity value) to the New Energy business, INR40/share (or INR529b) attributable equity value to RCPL (FMCG, at 2x FY28 EV/sales), and INR26/sh (~INR350b) to RIL’s stake in JioStar. We reiterate our BUY rating with a revised TP of INR1,550 (earlier INR1,695). Recovery in RRVL’s revenue and profitability, along with a roadmap for scaling up RIL’s new businesses (FMCG, New Energy, AI and Datacentre), remains key triggers for RIL, post separate listing of JPL.
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