Buy Reliance Industries Ltd For Target Rs.1,520 by Motilal Oswal Financial Services Ltd
Bumper O2C profitability drives record-high EBITDA and PAT
* RIL reported a bumper 2QFY27 with consolidated EBITDA rising 19% QoQ (+23% YoY) to INR566b (10% beat), driven by record-high profitability in O2C.
* Consol. O2C EBITDA rose ~48% QoQ (+68% YoY) to a record INR252b (26% beat), fueled by stronger refining cracks and polyester chain deltas (three-year highs).
* Reliance Retail (RRVL)’s net revenue grew modest ~6% YoY on a comparable basis (5% miss), hurt by the festive shift. Segment EBITDA declined ~10% YoY (-3% QoQ, 9% miss) as digital commerce investments, input cost inflation and festive shift weighed on margins.
* Digital services EBITDA rose ~5% QoQ (+18% YoY, 3% ahead), supported by steady net adds, one additional day QoQ, scale of digital services under JPL and robust ~88% incremental margins in RJio.
* Consol. E&P EBITDA declined 1% QoQ (-2% YoY, 14% beat) led by higher condensate and CBM realizations, offset by lower KG-D6 volume.
* Attributable 2Q PAT grew 41% YoY (+22% QoQ) to INR256b (11% beat), driven by record EBITDA, partly offset by lower other income.
* Committed capex remained largely stable QoQ at INR382b, while reported net debt moderated by ~INR58b QoQ to INR1.17t.
Performance summary: 1HFY27
* RIL’s 1H consolidated EBITDA grew 17% YoY to INR1.04t, while adjusted attributable PAT rose 28% YoY to INR465b, driven by strength in O2C.
* RIL’s 1H committed capex increased ~10% YoY to INR768b, while cash capex moderated ~9% YoY to INR527b (~53% lower YoY cash capex in RJIL).
* Calculated net debt (including spectrum liabilities and creditors for capex etc.) inched up ~INR16b in 1HFY27 to INR2.83t on our estimates.
* Consol. 1HFY27 FCF stood at INR175b (vs. INR309b YoY, boosted by ~INR89b from the Asian Paints stake sale). Robust FCF generation in RJio (INR184b vs. INR63b YoY), was offset by weaker FCF generation in RIL standalone.
* We raise our FY27E EBITDA and PAT by 8-10% and FY28E EBITDA and PAT by 4- 7%, driven by improved profitability in the Energy business and better margin delivery in JPL. Overall, we build in a CAGR of 11-12% in RIL’s consolidated EBITDA/adj. PAT over FY26-28E, driven largely by Digital and O2C.
* We reiterate our BUY rating with a revised TP of INR1,520 (earlier INR1,560). At CMP, we estimate that RIL is currently trading at a ~54% holdco discount (Exhibit 3) on its 64.5% stake in JPL, which we believe is excessive. The energy segment drives a near-term earnings upgrade; however, we view recovery in RRVL’s growth and profitability as the key driver of RIL’s stock price.
Reliance Retail: Soft 2Q amid a festive shift and strategic reset
* RRVL’s net revenue rose ~6% YoY on a comparable basis (vs. ~12% YoY in 1Q; 5% miss) due to the festive shift and a strategic reset for scaling the online business.
* The quick commerce (QC) offering, JioMart, continued to scale, with B2C online grocery revenue rising 42% YoY on higher order values (units per order +24%). The online share in B2C grocery revenue rose 270bp YoY, as the network expanded to 5,000+ stores across 1,000+ cities.
* RRVL rationalized its store network with net 222 store closures (~525 gross closures). Retail area was also rationalized to 77.5msf (-0.9msf QoQ).
* Adjusted operating EBITDA declined 11% YoY (8% miss), as margins contracted 140bp YoY to 7.3% (~25bp miss) due to the absorption of input cost inflation and planned investments in the scale-up of the online business and the shift in the festive calendar.
* Management reiterated its target of doubling EBITDA over the next three years with its focus shifting to monetizing the online scale from FY28-29 onwards.
* Reliance Consumer Brands (RIL’s FMCG arm) delivered INR83b in revenue (1.6x YoY), taking the 1HFY27 revenue to INR169b (1.8x YoY). Campa-led beverages surpassed ~INR52.5b in 1H (2.1x YoY), sustaining double-digit market share in key markets. Independence-led daily essentials posted revenue of ~INR70b (1.7x YoY).
* RRVL is strategically resetting by rejigging its stores and supply chain networks to aggressively prioritize online expansion, which has led to a dilution in near-term margins, while the festive shift weighed on growth as well as margins during 2Q.
* We expect a pickup in store additions and increased momentum in QC to support a recovery to double-digit revenue growth for RRVL from FY28. However, profitability could be under pressure over FY27-28 due to the scale-up of digital commerce. We model an EBITDA margin of ~7.3% over FY27-29 (vs. ~7.8% in FY26).
* We cut our FY27-29E reported EBITDA estimates by ~3-5% to factor in continued investments in digital commerce. We now project a CAGR of ~9%/7% in RRVL’s revenue/reported EBITDA over FY26-29E.
JPL: Strong margin delivery; FCF inflection underway
* JPL reported in-line consolidated revenue growth in 2QFY27 (~3% QoQ, +11% YoY), driven by 1.5% QoQ ARPU uptick (one additional day QoQ), ~9m subscriber net adds, and a scale-up in Digital services (+4% QoQ, +16% YoY).
* Its 2QFY27 reported EBITDA grew 5% QoQ (+15.5% YoY, 3% ahead), driven by a robust ~88% incremental margin in RJio (vs. our estimated 57% and 72% in 1Q) and 8% QoQ (+48% YoY) growth in digital services reported EBITDA.
* JPL’s 1HFY27 consolidated cash capex moderated sharply to INR106b (from INR207b YoY), leading to an inflection in FCF generation to INR189b (vs. INR61b YoY) and a decline in effective net debt by ~INR207b YoY to INR1.38t.
* We raise RJio’s standalone FY27-29E reported EBITDA by 2-5%, driven by higher incremental margin (~70% over FY27-29E vs. ~64% earlier). Our FY27-29E JPL consolidated EBITDA rises by ~3-5% and PAT by ~7-11%, driven by accelerated FCF generation and consequent deleveraging.
* We expect RJio’s capex to remain rangebound, which should enable JPL to generate a cumulative FCF of INR1.68t over FY27-29 and achieve net cash status by FY29.
Valuation and view
* We raise our FY27E EBITDA and PAT by 8-10% and FY28 EBITDA and PAT by 4-7%, driven by improved profitability in the Energy business and better margin delivery in JPL.
* We expect Digital to remain the biggest growth driver (with ~80% contribution to RIL’s incremental EBITDA), with 18% EBITDA CAGR over FY26-28E, driven by the tariff hike (~15% in 4Q), market share gains in wireless, and the continued ramp-up of Homes and Enterprise offerings.
* We expect RRVL to deliver ~10% revenue CAGR over FY26-29E, driven by a mix of store rollouts, improved productivity and scale-up of hyper-local offerings. However, the faster ramp-up of lower-margin businesses could weigh on blended EBITDA margin, driving ~7% EBITDA CAGR over FY26-29E.
* RIL’s O2C segment is benefitting from dislocations in the energy markets and better capture of elevated product cracks. We expect record-high profitability for O2C in FY27 and then a gradual dip. However, our FY28 O2C EBITDA remains higher than that of the past few years (excluding FY27).
* Overall, we build in a CAGR of ~11-12% in RIL’s consolidated EBITDA and PAT over FY26-28E, driven by Digital and O2C segments.
* We model an annual consolidated capex of INR1.3t for RIL over FY26-28E, as we believe the peak of capex is likely behind, which should lead to healthy FCF generation (~INR1.1t over FY26-28E) and a corresponding deleveraging, largely driven by capex moderation and FCF inflection in JPL.
* For RRVL, we ascribe a 25x Dec’28E blended EV/EBITDA multiple (~27x for core retail and ~7x for connectivity) to arrive at an EV of ~INR7.7t for RRVL and an attributable value of INR446/share for RIL’s stake in RRVL. Sustained doubledigit revenue growth in RR remains the key trigger for RIL’s stock price.
* We ascribe a 25% holding company discount to our TP of INR1,515 for JPL to arrive at an attributable equity value of INR499/share for RIL’s ~64.5% stake.
* Using the SoTP method, we value the O2C/E&P segments at 7.5x/5x Mar’28E EV/EBITDA to arrive at an enterprise value of INR6.1t (or ~INR452/sh) for the standalone business. We ascribe an attributable equity valuation of INR499/sh (after 25% holdco discount) and INR446/sh to RIL’s stake in JPL and RRVL, respectively. We reduce our New Energy business valuation to INR90/sh (~INR1.2t equity value, vs. INR174/share earlier), and ascribe INR26/sh (~INR350b) to RIL’s stake in JioStar and INR38/sh (~INR520b, based on 2x FY28 gross sales) to RCPL (RIL’s FMCG arm).
* We reiterate our BUY rating with a revised TP of INR1,520 (earlier INR1,560). At CMP, we estimate that RIL is currently trading at a ~54% holdco discount (Exhibit 3) on its 64.5% stake in JPL, which we believe is excessive. The energy segment drives a near-term earnings upgrade; however, we view recovery in RRVL’s growth and profitability as the key driver of RIL’s stock price.
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