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Consumer biz steers growth, refining retains sweet spot

Reliance Industries Limited (RIL) is an Indian conglomerate to reckon with; it runs India’s largest energy & petrochem business and a key global player. Reliance Retail is the largest company in the retail space, while another key subsidiary Reliance Jio is a telecom heavyweight. RIL is now setting up a mega solar capacity to produce hydrogen under the New Energy segment. In FY23, O2C contributed ~43% to EBITDA, while Upstream/ Digital/ Retail fetched ~9%/32%/12%. Going forward, the gen-next of the Ambani family would steer individual business units with Akash at the helm of Reliance Jio, Isha leading the Retail arm, and Anant involved in the New Energy initiative.

Oil to Chemicals (O2C): O2C segment is well integrated, strategically located, and sources feedstock on favorable terms, making it better equipped to absorb macro shocks. It has a crude processing capacity of 1.3mbpd and given the super cycle in refining, the phenomenal earnings would help raise RIL’s performance by leaps and bounds, further aided by expansion of PET bottle recycling, sustainable packaging solutions, and tech-enabled green products, and a Carbon Fiber facility coming up in Hazira, all of which will induct it into the hall of fame, as one of the top three global players of the segment.

Upstream: From Krishna Godavari Basin, Reliance has discovered substantial reserves and has commenced production from 3 fields – R-cluster, Satellite-cluster, and MJ field – slated to produce above 25mmscmd and achieve 30mmscmd in coming months, accounting for ~15% of domestic demand. Coal methane bed in Madhya Pradesh has 300 wells operational. 11mmscmd of gas from KGD6 has been successfully auctioned.

Digital: Jio has subscriber base of 459.7mn and ARPU of Rs 181.7. The industry expects tariff hikes to take ARPU gradually to Rs250-300, net additions being higher at 11mn in last quarter. AirFiber can reach 250m users in a short span as its infra requirements are minimal. Heavy capex requirement and launches for transition from 2G to 5G would increase data consumption per user (currently: 25GB). Growth in digital services would be driven by new offerings like cloud solutions, IoT, broadcasting. RIL is also trying to grab a big share in the Indian OTT market via JioCinema, and seeking a controlling stake in Disney+ Hotstar.

Retail: RIL announced its FMCG foray with entry into Personal Care and Home Care under its brand ‘Independence’. Revenue is growing organically YoY through key acquisitions like Campa Cola, Soyso Beverages, Lotus Chocolates, Metro Cash and Carry. Consequently, the company has a strong brand portfolio, robust supply chain, and expanded footprint through store additions and JioMart offerings. Digital commerce and new commerce are together boosting revenues.

Valuation: Our target price is premised upon an operating earnings CAGR of ~10% over FY23-26e where O2C and upstream contribution to EBITDA is ~40%, rest would come from consumer biz, Digital/ Retail in FY26. We place a BUY rating on the stock on SOTP basis at a TP of Rs 3170/share. The O2C contributes Rs647, upstream Rs168, and Jio platforms and Retail at Rs 754/1541. New Energy piece adds Rs182 and a reduction of Rs121 of Net debt. Key

Risks: High competition in retail space challenges growth prospects, petchem spreads and crude oil volatility could impact margins, slow growth of retail revenue and lower EBITDA margins, huge capex required in telecom sector with slow ARPU growth and regulatory changes, capex being largely debt-funded could further strain financials.

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