Reliance Industries Limited (RIL) is India's largest private sector enterprise. Starting with textiles in the late seventies, the company has undertaken backward vertical integration - in polyester, fibre intermediates, plastics, other petrochemicals, petroleum refining and oil and gas exploration and production - thereby making it a highly integrated player with presence across the energy value chain. RIL enjoys global leadership in most of its businesses, being the largest polyester yarn and fibre producer in the world and among the top five to ten producers of major petrochemical products in the world. It is also involved in diversified businesses consisting of retail, oil marketing and digital services. RIL’s refining complex in Jamnagar is the largest in the world as well as among the most complex; it is also among the largest integrated petrochemical producers globally.
Oil Refining & Marketing: RIL's refining margin has remained relatively strong even in a dynamic and volatile market. RIL maintained a significant premium over the benchmark Singapore complex margins. RIL’s superior refining margins are a result of superior product slate, robust risk management and higher secondary unit throughputs.
Petrochemicals: RIL’s petrochemical businesses broadly include polyesters, polyolefin, chemicals and elastomers. The petrochemical business is fully integrated with a focus on specialty products and commands amongst the lowest operating costs in the industry. Petrochemicals segment demonstrated earning power of the new plants commissioned over the last investment cycle, unmatched integration and feedstock flexibility.RIL commenced cracking of Ethane at Nagothane plant in the previous year. By leveraging the capabilities in polymer formulations, materials engineering, product design and 3D printing, the company is strengthening its new business line for Advanced Materials & Composites to deliver innovative products and solution offerings to the industry.
Oil & Gas: The Company marked progress on plans to monetise its discovered deepwater resources. Development work for R-Cluster and Satellite Cluster fields has commenced, while field development plans have been approved by the government. These fields are expected to come on-stream from mid-2020.
Reliance Retail: Reliance Retail’s new commerce initiative is now in the pilot phase. The differentiated business model will provide a technology platform for millions of small merchants across India to strengthen and grow their business. Leveraging technology and connectivity, the platform will drive efficiency and value creation for all players in India’s retail market –principally the producers / brand owners, supply chain, merchants and customers. It became the first retailer in India to cross the Rs 1 lakh crore turnover milestone also crossed the 10,000 store count milestone.
Digital Services: Reliance Jio added an average of 10 million subscribers a month and crossed the 300 million subscriber milestone this year to become the world’s fastest growing digital services company. Recently, Jio was recognised for its meaningful impact by being ranked #1 globally on Fortune’s 'Change the World' list. The ranking evaluates companies that use the profit motive to help the planet and make an important social impact.
Rationale for Investment
Well integrated product line and operations: RIL operates along the entire energy value chain starting from oil and gas production up to manufacturing of petrochemicals, ensuring higher value addition and making its production line highly cost efficient thereby allowing it to market its products at a competitive price.
Jio Giga Fibre: Jio is working towards serving the need for better connectivity with its GigaFibre services. This would include home broadband, entertainment and smart home IoT solutions. Jio, with its FTTH (Fiber to the home) services, has set a target to connect 50 million homes across the country. To accelerate Jio’s commitment to connect 50 million homes with Jio’s solutions, RIL has made strategic investments in Hathway Cable and Datacom Limited and DEN Networks Limited. During the year, Jio demerged passive tower and fibre infrastructure into an InvIT structure. Jio has now emerged as an asset-light, focussed digital services company.
Highly Complex refinery asset: RIL has massive scale of downstream business with highly complex refinery asset which leads to better Gross Refining margins (GRM). RIL operates two of the largest and most complex refineries in the world with combined Nelson Complexity Index (NCI) of 12.7 and crude processing capacity of almost 1.24 million metric barrels per day (MMBPD). RIL has been consistently operating at a capacity utilization of more than 100%.
Leadership position in the petrochemical segment: RIL maintained its leadership position in various product segments of domestic pet-chem market. It is the second largest producer of polyester fibre/ yarn and paraxylene (PX) globally. RIL is also amongst the top ten global manufacturers of products such as polypropylene (PP), mono ethylene glycol (MEG), purified terephthalic acid (PTA), etc. in the world. A diversified presence across the petrochemicals segment de-risks RIL’s revenues from lethargy in any particular product and also enables the company to command better pricing terms in the industry.
Established presence in crude oil refining segment: Crude oil requirements of RIL are met through imports and the sheer size of the operations enables RIL to procure crude oil through Very Large Crude Carriers (VLCC) which results in competitive oceanic freight. Further, the company has product placement flexibility due to its ability to manufacture over 20 grades of petrol and diesel and proximity to the shore. Overall, RIL has a significant competitive edge over other global and domestic refineries due to its large scale of operations along with similar crude procurement and storage facilities with capability to process wide varieties of crude, including some of the heaviest grades of crude as well as flexibility to manufacture products of high standards.
Presence across all the product segments in Petchem business: RIL had both naphtha as well as gas-based crackers earlier and now has also modified crackers to use ethane. This has enabled it to add significant value over the naphtha it produces, further diversifying its manufacturing capabilities. RIL commissioned the world’s largest refinery off-gas cracker complex of 1.5 million MTPA capacity along with downstream plants and utilities which provides significant integration benefits as the complex will utilise off-gases from RIL’s refineries as feedstock thereby providing a cost advantage. The commissioning of the downstream units has significantly added to the strength of RIL in the petrochemicals business.
Substantial in-roads achieved in the telecom business - RIL’s digital services subsidiary, Reliance Jio Infocomm Limited, has witnessed healthy addition to its user base since launching its services in September 2016. Jio added an average 10 million subscribers a month and crossed the 300 million subscriber milestone to become the world’s fastest growing digital services company. Jio has not only revolutionised India’s telecommunication industry but also digitised its hinterlands through its extensive network penetration.
Exceptionally high financial flexibility: The company’s capital structure and debt coverage metrics remain comfortable. There is significantly high financial flexibility arising from a large net worth base, high cash balances, access to treasury shares, and good-standing among the financial institutions. Furthermore, RIL has a proven track record in raising funds from the international/domestic bond markets with long tenures and low cost of debt
The economy continued to witness an increase in investments, with Gross Fixed Capital Formation growth at a six-yearhigh of 10%. India’s oil demand grew at about 3% y-o-y with consumption-led demand growth in gasoline (+8.1%), gasoil (+3.0%) and jet fuel (+9.1%). The demand was driven by robust growth in commercial vehicle sales and strong air traffic growth during the year. On the rural side, tractor sales and three-wheeler sales declined from the highs of FY 2017-18, but continued to grow in double digits. Domestic demand growth for petrochemical products was healthy with both polymer and polyester demand growing at 7.0% y-o-y. India continues to embrace the digital life.
With ubiquitous and reliable data services, data networks are increasingly being used for media and entertainment, education, market information and for transactions among other use-cases. Adoption of digital transactions witnessed exponential growth. UPI payments grew from 0.7% of GDP in FY 2017-18 to 4.7% in FY 2018-19, while credit card growth averaged a strong 32% y-o-y in FY 2018-19.Personal consumption trends remain strong with personal credit at a healthy 18% y-o-y, reflective of the strength in India’s consumption cycle.
|Tax Rate (%)||25.50||27.00%||27.90%||29.80%||29.70%|
|No. of shares (cr)||295.60||592.50||592.60||592.60||592.60|
|Adj EPS (Rs)||101.10||60.90||66.80||74.60||91.90|
We expect earnings to grow at healthy 15.0% CAGR over FY19-21E and improve EBITDA margin on the back of non-regulated segments like refining, chemicals and shale gas. The company has done significant investments in world-scale projects like petcoke gasification, off-gas crackers. Considering the performance of Retail and Jio segments, we expect these segments to drive future growth. RIL’s strength lies in its ability to build businesses of global scale and implement complex, time-critical, and capital-intensive projects which will prove beneficial as it initiates large investments in all core segments.
Global refining peers are trading at 7.2x FY21 EV/EBITDA. We, however, value RIL at 7.5x FY21 EV/EBITDA at Rs 330– the premium is on the basis of higher capacity utilization, better yield management and crude optimization. Global petrochem companies are trading at 7.2x FY20E EV/EBITDA. We value RIL at 7.5x FY21E EV/EBITDA at Rs 482 - the premium is on the basis of high level of integration and strong growth in the domestic petrochem market. For Telecom Business, we value Jio at Rs 253 using DCF valuation. We value Reliance Retail business at 1.6x FY 21 sales at Rs 404 and E&P business at Rs 26 after considering net debt worth Rs 70. We initiate our coverage with a target price of Rs 1,425 using sum of the parts (SOTP) valuation methodology (based on EV/EBITDA multiples for business).