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The recent weakness in RIL’s share price (down ~15% in the last 2 months) seems primarily due to: a) 5-6% downgrade in consensus FY25 EBITDA estimate driven by weak O2C and Retail business earnings in 1HFY25; and b) limited clarity on Jio’s listing timeline. Further, this was aided by accelerated stake sale by FIIs (down 112bps in Oct'24 and down 169bps during Jul-Oct’24 to 22.5% at end-Oct’24). Hence, at CMP, RIL is trading near our bear-case valuation of INR 1,230. We expect RIL’s 3QFY25E EBITDA to be robust at INR 434bn (up 11% QoQ and 6.7% YoY) led by recovery in GRM, lagged impact of tariff hike and some recovery in Retail business growth driven by the festive season. We reiterate BUY as we expect its net debt to decline gradually as capex will not only moderate (INR 1.2trln-1.4trln p.a. vs. INR 2.3trln in FY23 and INR 1.3trln in FY24) but, importantly, also be fully funded by a gradual increase in internal cash generation. Be that as it may, we believe RIL could still drive a robust 14-15% EPS CAGR over the next 3-5 years with Jio’s ARPU expected to rise at 11% CAGR over FY24-28 with ARPU being on a structural uptrend given the industry structure, future investment needs, and the need to avoid a duopoly market. Clarity on the potential timeline and valuation for Jio’s listing could be a possible near to medium term trigger.

* Digital business ARPU poised for structural ~11% CAGR led by tariff hikes, MBB upgrades, post-paid additions and data monetisation: As highlighted in our recent Telecom sector note, we believe ARPU is on a structural uptrend given the consolidated industry structure, and the industry’s need to earn respectable RoCE on huge investments already made in the business and future investment needs. Our calculation suggests (Exhibit 2) that the industry needs to achieve an ARPU of INR 275-305 in the next 3-4 years for a pre-tax RoCE of 12-15% considering the significant capex incurred on 5G rollout and future investment needs; this is likely to come via a mix of: a) regular tariff hikes, and b) continued MBB upgrades, post-paid additions and data monetisation. Hence, we expect Jio’s ARPU to rise at 11% CAGR over FY24-28. We value the Digital segment on DCF basis at an enterprise value of INR 551/share (or INR 7,453bn) based on: a) INR 493/share EV for the Telecom business implying 10.5x FY27 EV/EBITDA vs. our implied valuation of ~11.5x FY27 EV/EBITDA for Bharti Airtel’s India business; and b) INR 58/share EV for potential digital opportunities (video & OTT apps, IoT business, etc.)

* Retail business weakness driven by store rationalisation, scale down of low margin B2B business and muted growth in Fashion & Lifestyle segment: RIL’s Retail business growth has been muted for last 3 quarters driven by: a) muted growth in Fashion and Lifestyle (F&L) segment while growth is robust in grocery and consumer electronics segment; b) rationalisation of stores; c) scale-down of the lowmargin B2B business; and d) one-off factors like heavy monsoon in 2QFY25, heat wave in 1QFY25 and farmer protest in Northern India in 4QFY24. The management is hopeful of growth revival driven by the ongoing festive season. We continue to expect 15-20% growth in Retail business EBITDA as RIL is driving omni-channel capabilities across segments. Further, the company’s foray into FMCG point towards its strong focus on building a large portfolio of brands and strengthening the supply chain. We continue to value the Retail business at an EV of INR 543/share (or INR 7,349bn) based on 25x FY27 EBITDA; however, we conservatively now value JioMart at NIL value (vs. EV of INR 79/share) due to potential impact of Quick Commerce on opportunity to digitise kirana stores.

* Petchem margin continues to be muted, but refining margin outlook robust: Industry’s petchem margin outlook continues to be subdued due to significant capacity, particularly in China amidst weak global demand growth. However, refining margin outlook is robust as IEA expects global oil demand growth to be robust at 0.9mmbpd in CY24 and 1.0mmbpd in CY25 despite China’s oil demand growth concerns, while refining capacity addition is likely to be slightly lower than demand growth. RIL is relatively better placed to mitigate macro uncertainty due to its integrated and complex facility, locational advantage and its strength in feedstock sourcing and product placement. Separately, RIL’s E&P business earning is likely to be steady given near peak volumes and gas realisation is likely to continue to be around USD 9-10/mmbtu. We value its Energy business at an enterprise value of INR 517/share (or INR 6,996bn) based on 7.5x FY27 EBITDA for the O2C business and 6.0x FY27 EBITDA for the E&P business.

* 3QFY25 earnings likely to be robust led by recovery in GRM and lagged impact of tariff hike: S’pore Dubai GRM has recovered to ~USD 6/bbl currently (vs. USD 3.6/bbl in 2QFY25) as diesel cracks has strengthened to ~USD 16-17/bbl (vs. USD 12.8/bbl in 2QFY25) while petrol crack has improved to ~USD 14/bbl (USD 10.7/bbl in 2QFY25) – Exhibit 9. Assuming current cracks continue, S’pore Dubai GRM can average USD 5.3/bbl and diesel crack can average USD 15.9/bbl in 3QFY25E. Hence, we expect RIL’s 3QFY25E EBITDA could be up ~11% QoQ and up 6.7% YoY at INR 434bn assuming: a) O2C EBITDA up 14% QoQ on expectation of RIL's GRM rising to ~USD 9/bbl (from ~USD 7.1/bbl in 2QFY25) while petchem margin continues to be weak; E&P EBITDA expected to be largely steady QoQ; b) Digital EBITDA up 7% QoQ on expectation of 5.5% QoQ rise in ARPU to INR 205 on the back of partial flow-through of Jul'24 tariff hike; c) Retail EBITDA up 10.5% YoY, given the company's commentary of robust start to festive season sales.

* Valuation near bear-case scenario:  The recent weakness in RIL’s share price (down ~15% in the last 2 months) seems primarily due to 5-6% downgrade in consensus FY25 EBITDA estimate driven by weak 1HFY25 earnings as: a) O2C earnings was hit on account of weakness in GRM in 1HFY25 amidst continued sluggish petchem margin; and b) Retail business EBITDA moderated sharply in the last 3 quarters (as discussed above). Limited clarity on Jio’s listing timeline added to the weakness. In addition, this was aided by accelerated stake sale by FIIs (FIIs’ stake in RIL at 22.5% at end-Oct’24, 112bps in Oct'24 and down 169bps during Jul-Oct’24 — Exhibit 18). Hence, at CMP, RIL is trading near our bear-case valuation of INR 1,230 (Exhibit 15) which is based on the following bear-case assumptions: a) valuing the O2C business at 6.5x Mar’27 EV/EBITDA (vs. 7.5x in the base case) and assuming O2C EBITDA is 20-30% below our base case due to global macro uncertainty; b) valuing the Telecom business at implied ~9.5x Mar’27 EV/EBITDA (vs. 10.5x in base case) and valuing its Digital assets at 50% of their book value; c) valuing the Retail business at 20x Mar’27 EV/EBITDA (vs. 25x in the base case); and d) valuing New Energy business at 0.5x of investments (vs. 1.5x in the base case).

* Net debt to decline gradually on likely moderation of capex; Reiterate BUY on robust 14-15% EPS CAGR over the next 3-5 years: We maintain our earnings estimate; however, our TP has been cut by ~4% to INR 1,660 (from INR 1,735) primarily as we conservatively now value JioMart at NIL value (vs. EV of INR 79/share) due to potential impact of Quick Commerce on the opportunity to digitise kirana stores. We reiterate BUY as we expect its net debt to decline gradually as capex will not only moderate (INR 1.2trln-1.4trln p.a. vs. INR 2.3trln in FY23 and INR 1.3trln in FY24) but, importantly, also be fully funded by a gradual increase in internal cash generation. RIL’s guidance on keeping reported net debt to EBITDA below 1x (0.75x at end-2QFY25) also gives comfort. Clarity on the potential timeline and valuation of Jio’s listing could be a possible near to medium term trigger. Be that as it may, we believe RIL could still drive a robust 14-15% EPS CAGR over the next 3-5 years with Jio’s ARPU expected to rise at 11% CAGR over FY24-28 with ARPU being on a structural uptrend given the industry structure, future investment needs, and the need to avoid a duopoly market — A Giant Digital Leap. Further, listing of Jio and Retail businesses over the next few years could lead to a potential re-rating. At CMP, the stock is trading at FY27E P/E of 16.6x (3-yr avg: 24.9x) and FY27E EV/EBITDA of 8.5x (3-yr avg: 12.8x). Key risks: a) continued high capex, resulting in rising net debt with limited earnings visibility from new projects; b) weak subs addition and limited ARPU hike; c) continued muted growth in Retail business; and d) subdued O2C margins due to macro concerns.

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