IGI Logo

FY24 AGM: Targets to double EBITDA in next five years

We attended the 47th AGM of Reliance Industries (RIL) held on 29th Aug’24, in which the management reiterated its strategic vision for its four key businesses – Telecom, Retail, O2C and New Energy. The company aims to double its EBITDA in the next five years, powered by 5G opportunities, increased investments in AI/data centers, further expansion in Retail (physical + digital) and the start of PV/battery facilities in New Energy. While RIL delivered a weak 1QFY25 earnings performance, we believe 2QFY25 should benefit from sequentially higher refining margin (SG GRM: USD4.3/bbl QTD vs. USD3.5/bbl in 1Q), the partial benefits of telecom tariff hikes taken in 1Q and an improving retail earnings momentum QoQ on a weak 1Q base. We maintain our BUY rating on the stock with a TP of INR3,435.

AI/Data centers and New Energy key drivers for next five years

* In the AGM, the management highlighted RIL’s ambitious plans across business verticals, particularly the ensuing AI-based solutions and new energy.

* RJio expects to double revenue/EBITDA in the next 3-4 years, aided by 5G opportunities, accelerating home broadband services with target to reach 100m home subscribers/20m SME users, and AI-based opportunities. With investment in AI and GW-scale data centers, RIL will leverage JioBrain and offer AI service platform to other enterprise at affordable prices.

* Reliance Retail expects to double revenue/EBITDA in the next 3-4 years, led by the continued expansion in all categories (Grocery, Electronics, Fashion, Jewelry and Beauty) through physical as well as digital platforms. The company also plans to enter into the luxury jewelry segment. Partnerships with Asos and Shein will bring global fashion design to India.

* Media: The partnership with Disney could be pivotal as it will combine content creation with digital streaming, provide content at an affordable price, and create synergies in the OTT/linear platform.

* O2C: The expansion plan of vinyl and polyester chains to meet rising domestic demand includes the development of integrated 1.5mmtpa PVC and CPVC facilities at Dahej and Nagothane by FY27. Furthermore, a 1mmtpa increase in specialty polyester capacity and 3mmtpa backward integration will boost PTA capacity, both scheduled for completion by FY27.

* New Energy: RIL expects the segment to achieve earnings capacity comparable to that of the O2C business in 5-7 years. The company aims to establish 55 operational CBG’s by FY25 end. Additionally, by FY25 end, RIL will begin producing from its own solar photovoltaic (PV) modules with an initial annual capacity of 10GW. An advanced chemistry-based 30GWh battery manufacturing facility in Jamnagar shall also be operational from 2HFY26.

Valuation and view

* Among its segments, the consumer business continues to post double-digit EBITDA growth, with both RJio and Reliance Retail likely to record 25% and 19% EBITDA CAGR over FY24-26, respectively. The growth would be driven by footprint additions, new categories in the retail sector, a focused approach to subscriber growth, and tariff hikes in the telecom business. In O2C, we see Refining and Petchem segments picking up from the current levels, as net capacity additions for both segments are tapering off on a YoY basis. Moreover, FY25 would witness the full benefit of the volume ramp-up at the MJ Field.

* We value Reliance Retail’s core business at 45x EV/EBITDA on FY26E and connectivity at 5x to arrive at a company value of INR12.2t (INR1,797 per share). Reliance Retail’s value in RIL share comes to INR1,579/sh (for its 87.9% stake). Our premium valuation multiples capture the opportunity for a rapid expansion in its retail business and the aggressive rollout of digital platforms.

* For RJio, we assign a 13x FY26E EV/EBITDA to arrive at our valuation of INR9.6t. Factoring in the 34% stake sale, RJio’s value in RIL comes to INR940/share (for its 66% stake). The higher multiple captures: a) its market leadership and market share gains, b) growth in the wireline (JioFiber and JioAirFiber) business, and c) AI based opportunities.

* We model a capex of INR650b for FY25 and FY26 each in the standalone business, considering RIL’s investments in greener new-age businesses (such as solar energy and a hydrogen ecosystem in India).

* We maintain our capex estimates at INR1.2t each year for FY25/FY26 – INR392b/INR356b in Telecom, INR650b each year in the standalone business, INR110b/INR107b in Retail, and the rest in others.

* Using the SoTP method, we value the Refining & Petrochemical segment at 8x FY26E EV/EBITDA to arrive at a value of INR1,061/sh for the standalone business. We ascribe an equity valuation of INR940/sh to RJio and INR1,579/sh to Reliance Retail and assign INR89/sh to the New Energy business. Reiterate BUY with a TP of INR3,435.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412