Stock Update

Reliance Industries
Re-rating triggers playing out

Sector: Oil & Gas Reliance Industries (RIL) has been our high conviction investment idea for
the past year with street high target price as we anticipated re-rating given
Company Update our expectation of strong earnings growth in retail business and strong
profitability in the digital services business. Some of the triggers like strong
retail growth, better-than-expected performance of digital services assets and
Change recent development of telecom tariff hike plan has played out quite well for
RIL. Going forward, we believe that more re-rating catalyst like balance sheet
Reco: Buy  deleveraging (target to become zero net debt company by March-2020) and
CMP: Rs. 1,537
value unlocking from the retail and digital services businesses have potential
to further re-rating the stock. Hence, we maintain our Buy rating on Reliance
Price Target: Rs. 1,785 á Industries with revised SoTP based PT of Rs1,785 (as assign higher value to
digital services and retail businesses).
Upgrade  No change â Downgrade Balance sheet deleveraging (target to become zero net debt company by
March-2021) and value unlocking from consumer centric businesses could re-
rate the stock: RIL management’s efforts to de-leverage its consolidated balance
Company details sheet through divestments and target to become zero net debt company (by
March-2021) addresses key concerns with regards to high debt on books. The
likely reduction in debt and value unlocking from the retail and digital services
Market cap: Rs. 974,487 cr businesses would act as key re-rating triggers for RIL. Additionally, Reliance Jio,
subsidiary of RIL, plans to hike telecom tariff rates (in-line with incumbent telecom
52-week high/low: Rs. 1,572/1,055 operators) over the next few weeks, which would improve EBITDA margins and
cash flows of digital services business. We highlight here that our enterprise value
NSE volume: (No of (EV) of digital services business would increase by ~Rs50,877 crore (~Rs86/share)
90 lakh for every Rs10 increase in the APRU.
shares)
Refining margin expected to improve supported by likely higher diesel cracks;
BSE code: 500325 retail business to maintain strong growth momentum: The implementation of
revised International Maritime Organisation (IMO) regulations (reduction in sulphur
NSE code: RELIANCE content to 0.5% for marine fuels from 3.5% currently) from January 2020 would
result into incremental diesel demand of 2 -3 million barrels per day (much higher
Sharekhan code: RELIANCE than the historical average incremental diesel consumption of 435 kbpd). Hence,
diesel cracks are expected to increase significantly in 2020. Hence, we expect
earnings outlook for refining business to also improve in FY2021E. Additionally,
Free float: (No of RIL’s premium over Singapore complex GRM is also expected to widen given
316.6 cr
shares) anticipation of weakness in fuel oil cracks as demand for high sulphur fuel oil (HSFO)
would get replaced by diesel post implementation of revised IMO regulations. The
company’s unique online-offline retailing strategy would aid business growth
Shareholding (%) and margin expansion for its retail business and thus we expect retail business to
continue strong earnings growth momentum over next couple of years.
Promoters 50.1 Our Call
Valuation – Maintain Buy rating with revised SoTP based PT of Rs. 1,785: We
FII 23.7 largely maintained our FY2020E EPS and FY2021E EPS and have also introduced
our FY2022E EPS of Rs. 113.8. We believe that balance sheet deleveraging (target
DII 14.4 to become zero net debt company by March-2021) and value unlocking from the
retail and digital services businesses would act as key re-rating triggers for RIL.
Others 11.8 Hence, we maintain our Buy rating on RIL with revised SoTP based price target
(PT) of Rs1,785 as we assign higher EV/EBITDA multiple to digital services and
retail businesses given strong earnings growth outlook. At current market price,
Price chart the stock is trading at 16.8x its FY2021E EPS and 13.5x its FY2022E EPS.
1500
Key Risks
1400 ŠŠ Lower-than-expected refining and petrochemical margins in case global
capacity additions surpass incremental demand.
1300

ŠŠ Slow-than-expected growth in retail business and any delay in deleveraging

1200
of consolidated balance sheet.
1100

Valuation (Consolidated) Rs cr
1000
Particulars FY2018 FY2019 FY2020E FY2021E FY2022E
Feb-19

Aug-19
Nov-18

Nov-19
May-19

Revenues 391,677 567,135 590,696 633,651 666,500

OPM (%) 16.4 14.8 15.8 16.1 18.4
Price performance
Adjusted PAT 34,993 39,837 48,641 53,995 67,337
(%) 1m 3m 6m 12m Adjusted EPS (Rs.) 59.1 67.3 82.2 91.2 113.8
% y-o-y change 17.3 13.8 22.1 11.0 24.7
Absolute 9.3 21.3 17.4 36.8 PER (x) 26.0 22.8 18.7 16.8 13.5
EV/EBIDTA (x) 18.2 14.0 12.5 11.5 9.6
Relative to
5.5 11.2 12.6 18.0 RoCE (%) 10.6 9.7 11.0 11.0 12.0
Sensex
RoNW (%) 11.9 10.3 12.6 12.4 13.4
Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

November 21, 2019 2

 Stock Update
Balance sheet deleveraging and value unlocking from consumer centric businesses could as key re-rating
catalyst
Reliance Industries (RIL) management’s efforts to de-leverage its consolidated balance sheet through
divestments and company’s target to become zero net debt company (by March-2021) addresses key concerns
with regards to high debt on books. The likely reduction in debt and value unlocking from the retail and digital
services businesses would act as key re-rating triggers for RIL.
In-line with incumbent’s telecom operators, Reliance Jio (subsidiary of RIL) has also announced to take hike
in telecom tariff rates in the next few weeks. This indicates towards end of tariff war and paves way for
improvement in ARPU, which is sooner than street expectations. Higher tariff would improve EBITDA margin
and cash flows of digital services business. We highlight here that our enterprise value (EV) for digital
services business would increase by ~Rs50,877 crore (~Rs86/share) for every Rs10 increase in the APRU.

Sensitivity of FY21E EV (Rs crore) of digital services business to subscribers and APRU
Subscribers (million)
414 424 434 444
(Rs per subscriber

110 359,775 373,306 386,837 400,368

per month)
ARPU

120 410,652 425,413 440,174 454,935

130 461,528 477,520 493,511 509,502
140 512,405 529,626 546,848 564,069
150 563,282 581,733 600,184 618,636
Source: Company; Sharekhan Research

Refining – GRM expected to improve with better diesel spreads

The implementation of revised International Maritime Organisation (IMO) regulations (reduction in sulphur
content to 0.5% for marine fuels from 3.5% currently) from January 2020 would result in incremental diesel
demand of 2 -3 million barrels per day (much higher than the historical average incremental diesel consumption
of 435 kbpd). Hence, diesel cracks are expected to increase significantly in 2020. Additionally, benefit from
petcoke gasification project would further add to refining margins of RIL. Thus, we expect refining margins of
RIL to improve in FY2021E.

Gasoil crack spread trend Gasoline crack spread trend

20 18 10
8
18 16 16 7
15 8 7
16 14 15 6
14 6 6
13 13 6
14 12 12 5
12 3
4 2
10
8 2
6 0 -2
4 -3
-2
2
0 -4
Aug-19
Apr-19
Jan-19

Jul-19
Feb-19

Sep-19

Nov-19
Aug-19

Jun-19
Apr-19
Jan-19

May-19
Jul-19
Feb-19

Sep-19

Nov-19

Mar-19

Oct-19
Jun-19
May-19
Mar-19

Oct-19

Gasoil cracks ($/bbl) Gasoline cracks ($/bbl)

Source: Bloomberg Source: Bloomberg

November 21, 2019 3

 Stock Update
RIL SoTP valuation
Particulars Methodology Value per share (Rs/share)
Refining 8x FY21E EV/EBITDA 373
Petrochem 8x FY21E EV/EBITDA 471
Upstream EV/BOE 41
Retail 30x FY21E EV/EBITDA 418
Digital Services 16x FY21E EV/EBITDA 782
Others 28
Enterprise Value 2,113
Net Debt 328
Price target 1,785
Source: Sharekhan Research

November 21, 2019 4

 Stock Update
About company
RIL is a diversified conglomerate with business interests across the oil refining, petrochemicals, exploration
& production, retail and digital services businesses. The company has one of the world’s largest refining
assets with high Nelson complexity level and an integrated petrochemical complex. RIL launched its telecom
services, under the brand Jio, in September 2016 and this business has already started reporting profits.
Core businesses of refining and petrochemicals accounted for ~69% of consolidated EBITDA in FY2019, while
customer-centric businesses (retail and digital services) contributed 24.6% to consolidated EBITDA.

Investment theme
RIL has completed its capital expenditure for expanding downstream capacities, which have already started
yielding strong earnings growth. Refining margins would benefit from the gradual ramp-up of petcoke
gasification project and implementation of IMO regulations in January 2020, while petrochemical margins
are likely to sustain, given feedstock advantage from ethane import project. Balance sheet deleveraging,
value unlocking from the retail and digital services businesses and high growth in retail business would be
the key re-rating catalysts for RIL.

Key Risks
ŠŠ Lower-than-expected refining and petrochemical margins in case global capacity additions surpass
incremental demand.
ŠŠ Slow-than-expected growth in retail business and any delay in deleveraging of consolidated balance
sheet.

Additional Data
Key management personnel
Mukesh D. Ambani Chairman & Managing Director
Alok Agarwal Chief Financial Officer
PMS Prasad Executive Director
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Devarshi Commercials LLP 11.2
2 Srichakra Commercials LLP 10.9
3 KARUNA COMMERCIALS LLP 8.0
4 Tattvam Enterprises LLP 6.8
5 Life Insurance Corp of India 6.6
6 Capital Group Cos Inc/The 4.5
7 Reliance Industries Holding Pvt Lt 4.1
8 PETROLEUM TRUST 3.8
9 RELIANCE SERVICES AND HOL 2.7
10 Vanguard Group Inc/The 1.8
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

November 21, 2019 5

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