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Compelling risk-reward; FCF generation likely to pick up

Reliance Industries (RIL) has underperformed the broader benchmarks, Bharti and organized retail peers, over the past few years, despite similar or superior EBITDA growth. We believe RIL’s underperformance was driven by higher capex in Retail and RJio as well as a lack of FCF generation. However, we believe the capex has likely peaked and expect RIL to generate ~INR1t cumulative FCF over FY24-27. We believe the risk-reward is compelling as RIL is currently trading close to our bear-case valuations (1:10 risk-reward skew).

* The earnings outlook remains robust for RIL’s key segments, with growth likely to be driven by RJio (more frequent tariff hikes, market share gains, and FWA ramp-up).

* While near-term growth in Retail could be impacted by the streamlining of operations, we expect robust growth recovery driven by footprint and category expansions.

* After two quarters of weakness, refining margins have improved in 3Q, though petchem contribution is likely to remain subdued in the medium term.

* We believe RIL’s capex has likely peaked in FY24 with the completion of 5G rollouts. Capex should increase in New Energy, but will likely be funded by robust cash flow generation in the O2C segment.

* We expect ~INR1t cumulative FCF generation for RIL over FY24-27, driven by standalone and RJio. The separate listing of RJio and Retail and commissioning of giga factories in New Energy remain the key medium-term triggers.

Reliance Jio: Tariff hike, market share gains, and FWA ramp-up to drive growth

* The pass-through of Jul’24 tariff hike has been encouraging and the full benefits should reflect by Mar’25. The headline subscriber churn for Reliance Jio (RJio) in 2Q was largely driven by the clean-up of inactive subscriber base as reflected by an improvement in RJio’s VLR subs.

* 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 build in ~15% tariff hike in Dec’25.

* With Vi’s large capex plans, we believe the pace of market share gain may slow down, but RJio (and Bharti) is still likely to continue gaining market share at Vi’s expense.

* Post the completion of 5G rollouts, RJio’s focus has shifted to accelerating the AirFiber (FWA) rollout. We expect contribution from the Broadband business to increase to ~12-13% by FY27 (vs ~7% currently).

* We build in a revenue/EBITDA CAGR of ~17%/21% over FY24-27 for RJio.

Reliance Retail: Growth recovery remains key for re-rating

* Over the past few quarters, Reliance Retail’s (RR) growth has been impacted by weak discretionary demand as well as its focus on streamlining operations and adopting a more calibrated approach in B2B.

* We expect RR’s growth to pick up in 2H with the festive season and a higher number of weddings. However, a return to the double-digit group could take a few quarters as the company is likely to continue its focus on streamlining operations in the near term.

* 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.

* We build in modest ~12.5% revenue CAGR over FY24-27 (significantly lower vs. ~19% CAGR over FY19-24), with broadly stable EBITDA margin at 8.4% by FY27 (vs. 8.4% in 2QFY25), which could have upside risks from a faster ramp-up in RIL’s consumer foray and new category launches.

O2C: Refining margins recovery underway; petchem to remain soft

* While RIL’s O2C segment delivered a weak performance in 2QFY25, we note that SG complex GRM has improved significantly (3QFYTD average: USD4.9/bbl vs. USD3.1/bbl in 2Q).

* We believe GRMs should remain healthy, albeit range-bound in CY25 amid global oil demand continuing to be under pressure (IEA: 1mbpd increase).

* 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, we build in modest recovery in consolidated O2C EBITDA. However, we note that our FY27 consol O2C EBITDA is only marginally higher than FY24 levels and could have upside risks from recovery in petchem cycle and higher contribution from petro retail marketing JV.

New Energy: Best placed to utilize economies of scale

* 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 aims to integrate backward from modules to cells, ingots, wafers, and glass manufacturing by FY27-28, a feat that requires not only significant capital commitments but also technical know-how. We believe RIL’s backward integration will enable it to achieve not only a strong market share but also cost leadership.

* In FY24 AGM, RIL had outlined its vision for New Energy to become as big as the O2C business in five to seven years. We believe near-term profit contribution from New Energy will be minuscule as the bulk of the output would be used for captive consumption.

*  As such, we are not building any contribution from the New Energy segment till 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.

* RIL had originally outlined a USD10b investment in the New Energy business over three years. The capex outlay has been slow (USD3-4b spent so far), but we believe the original capital commitment will increase as RIL ramps up battery manufacturing and green hydrogen initiatives.

* With ~INR600-700b operating cash flow generation for the standalone business and low capex (INR150-200b), we believe robust O2C cash flows can continue to fund New Energy capex.

Valuation and view

* We build in ~10% consolidated EBITDA and PAT CAGR over FY24-27, driven by double-digit EBITDA CAGR in RJio (tariff hikes, market share gains, and FWA ramp-up) and RR (continued footprint and category expansions). After a subdued 1H, we expect earnings to recover for the O2C segment, driven by improvement in refining margins. However, our FY27 consolidated EBITDA for O2C and E&P is broadly similar to FY24 levels.

* 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 (~INR1t over FY24-27) and a reduction in consolidated net debt.

* For RR, we ascribe a blended EV/EBITDA multiple of 32x (35x for core retail and ~7x for connectivity), based on average valuations for retail peers (DMart, Trent, ABFRL, Vedant Fashions, and Metro Brands) to arrive at an EV of ~INR10t (~USD120b) for RRVL and an attributable value of INR600/share for RIL’s stake in RRVL.

*  We value RJio on DCF implied 12.7x FY27E EV/EBITDA to arrive at our enterprise valuation of INR11.6t (USD138b) and assign ~USD10b valuation to other offerings under JPL. Factoring in the net debt and also 33.5% minority stake, the attributable value for RIL comes to INR530/share.

* Using the SoTP method, we value the O2C/E&P segments at 7.5x/6x Dec’26 EV/EBITDA to arrive at an enterprise value of INR445/sh for the standalone business. We ascribe an equity valuation of INR530/sh and INR600/sh to RIL’s stake in JPL and RRVL, respectively. We assign INR44/sh (INR600b 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 INR1,580.

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