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 Jamnagar manufacturing division was built in a record time at globally competitive capital costs – in fact, at costs much lower than comparable refineries around the world. With crude processing capacity of 1.24 million Barrels Per Stream Day (BPSD), the Jamnagar refinery is a trendsetter and fuels from the refinery are exported to several countries across the world. RIL has maintained a significant premium over the benchmark Singapore complex margins and its superior refining margins are a result of superior product slate, robust risk management and higher secondary unit throughputs.
Petrochemicals: RIL is the largest producer of petrochemicals in the country and amongst the top ten in the world. With a unique portfolio of B2B businesses spread across polymer and polyester chains, Reliance produces an extensive range of polymers (PP, PE, PVC), elastomers (PBR, SBR, Butyl), polyesters (PSF, PFY, IDY), aromatics (PX, OX, BT, LAB), fibre-intermediates (PTA, MEG, EO) and advanced materials (composites). The petrochemical business is fully integrated with a focus on specialty products and commands amongst the lowest operating costs in the industry. 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.
Exploration and Production: Reliance is one of the largest exploration and production players in India having a balanced domestic conventional and unconventional hydrocarbon portfolio. The company and its partners in domestic and Shale business work closely together and channelize expertise to target high quality prospects and optimise existing and future development plans. Oil and gas is currently being produced from their coal based methane blocks in India and Shale JVs in the US.
Reliance Retail: Reliance Retail has grown to cater to millions of customers, and thousands of farmers and vendors. Reliance Retail serves over 100,000 customers every hour, and has the patronage of more than 117 million registered customers. Their nationwide network of retail outlets delivers a world-class shopping environment and unmatched customer experience powered by our state-of-the-art technology and seamless supply-chain infrastructure. Leveraging technology and connectivity, the platform will drive efficiency and value creation for all players in India’s retail market –principally the producer’s/ brand owners, supply chain, merchants and customers. It became the first retailer in India to cross the Rs 1 lakh crore turnover milestone and also crossed the 11,000 store count milestone. The differentiated business model will provide a technology platform for millions of small merchants across India to strengthen and grow their business
Digital Services: Reliance Jio aims to enable this transformation by creating not just a cutting-edge voice and broadband network, but also a powerful ecosystem on which a range of rich digital services will be enabled. Due to disruptions caused by pandemic the need for strong data networks has increased tremendously. Further, digital platforms have become critical for home, business and school connectivity.
Jio platforms will be their biggest catalyst that will drive growth
The company indicated on five growth drivers for its digital platforms: Mobile broadband, JioFiber, Enterprise Broadband, Broadband for SMEs and Narrow band Internet-of Things. The company has high ambitions and aims to connect over 5 crore homes and business establishments through Jio Fiber and connect over 100 crore smart sensors through internet of things. Further Jio platforms will also provide solutions for healthcare, financial services, education etc. supported by technology such as 4G and 5G, cloud computing, big data analytics, machine learning, block chain etc. Further, Jio is also making rapid progress in Azure cloud partnership with Microsoft.
Global investments in its digital platform will aid in deleveraging its balance
Jio platforms received investments from thirteen investors along with strategic partnership with Facebook and Google which has helped them in accelerating its deleveraging initiative and further it has helped them reposition Jio Platforms as a quasi-technology company. We expect these investments will aid in developing new products and create an ecosystem of services along with providing cross selling opportunities.
Consequential in-roads achieved in the telecom business
Jio has witnessed healthy addition to its user base since launching its services in September 2016. Jio is now the digital lifeline of 38.8 crore customers and has 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. Jio's revenue metrics have continuously improved, earlier driven by strong subscriber additions and now with recent tariff hikes.
Collaboration with Google will augment Jio’s customer base
Jio platforms has entered into an agreement with Google to jointly develop affordable entry level smartphone along with Android-based operating system and the play store. We believe this will enable the company to target ~35 crore feature phone users in India and gain market share from incumbents like Vodafone Idea. This collaboration will further drive smartphone penetration in the country and also potentially unlock new opportunities and boost data consumption in India.
Indigenously developed Jio 5G network to unlock huge value in long term
Jio’s in house team has designed and developed a complete 5G solution by using 100% home grown technologies and solution. This 5G network is meant to deliver more data with higher reliability and offer users a more uniform experience across devices. We expect this to be a long term story as the trial run will be conducted, once spectrum is available. Further, Jio will be the biggest beneficiary of this upgradation to 5G as they have all network infrastructure in place.
Retail segment will provide impetus to growth
Reliance Retail continues to grow in scale, driven by new store expansion across the geography, improving store throughput and favourable product mix. Reliance Retail and WhatsApp entered into a commercial partnership agreement to further accelerate Reliance Retail’s digital commerce business on the JioMart platform using WhatsApp and to support small businesses on WhatsApp. We believe this roll-out of the digital commerce initiative will open up further growth opportunities for the organised retail business, leveraging the best of their consumer and digital platforms.
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.
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%. 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.
COVID 19 Impact
Due to Covid-19 pandemic the business will get impacted in near term but the company is well positioned to navigate this macro headwinds and also high visibility of inflows from marquee investors in CY2020 will ensure balance sheet strength.
The Indian economy grew by 4.2% in FY 2019-20 still remaining one of the fastest growing major economies in the world. India’s oil demand remained flat in FY 2019-20 as compared to the previous year, with consumption-led demand growth in gasoline (+6.2% y-o-y) and LPG (+6% y-oy). ATF growth (-3.5% y-o-y) was subdued as air traffic growth remained soft, while diesel demand (-1% y-o-y) was impacted by weaker economic growth. Domestic demand growth for petrochemical products was healthy with polymer and polyester demand growing by 4% and 9.0% respectively. Global oil prices averaged US$61 / bbl in 2019 supported by continued production cuts and supply constraints from Iran and Venezuela and global demand for ethylene increased by 4% y-o-y to 167 MMT in 2019. However, capacity addition across key petrochemical products significantly outpaced demand growth, pushing down prices and margins to multi-year low for these products.
Domestic data usage and use of digital platforms continue to gain traction in India. The extra-ordinary circumstances unfolding in 2020 has underscored the need for strong data networks. Increasingly, digital platforms have become critical for home, business and school connectivity. 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.
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We believe the outlook for Jio platforms has improved significantly with a large stake sale and strategic tie-ups with Facebook and Google. Further, we expect digital services segment to capture the incremental growth opportunities supported by consistent hikes in their tariff rates along with growth in their subscriber base and also partnership with a strong technological partner will bring in synergies and technical assistance thus adding immense value to the company. Further we expect strong performance in retail segment majorly in grocery and connectivity category will provide additional levers to 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. The stock is currently trading at a valuation multiple of 17.3x FY22E EPS and we remain positive on RIL from long term perspective.