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Reliance Industries – BUY

Weak 4Q; but marching ahead in tough macro

Financial summary (Rs bn)

Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii

Revenues (Rs bn) 3,917 5,671 5,967 7,886 8,673

Ebitda margins (%) 16.4 14.8 14.8 10.3 12.6

Pre-exceptional PAT (Rs bn) 350 396 438 364 557

Reported PAT (Rs bn) 361 396 394 364 557

Pre-exceptional EPS (Rs) 55.2 62.5 69.1 57.4 87.9

Growth (%) 17.0 13.1 10.6 (16.9) 53.1

PER (x) 26.6 23.5 21.2 25.5 16.7

ROE (%) 12.6 11.6 10.4 7.7 10.9

Net debt/equity (x) 0.7 0.7 0.7 0.6 0.6

EV/Ebitda (x) 16.9 13.6 13.2 14.2 10.6

Price/book (x) 3.2 2.4 2.0 1.9 1.7

OCF/Ebitda (x) 1.1 0.5 1.1 0.7 0.6

Source: Company, IIFL Research; Priced as on 30 April 2020

Harshvardhan Dole | [email protected] 91 22 4646 4660

Rishi Masand | [email protected] 91 22 4646 4652

|

CMP Rs1466

12-mth TP (Rs) 1673 (14%)

Market cap (US$m) 123,742

Enterprise value(US$m) 151,578

Bloomberg RIL IN

Sector Oil & Gas

Shareholding pattern (%)

Promoters 50.1 Pledged (as % of promoter share) 0.0

FIIs 23.1

DIIs 11.9

52Wk High/Low (Rs) 1618/876

Shares o/s (m) 6339

Daily volume (US$ m) 361.8

Dividend yield FY21ii (%) 0.3

Free float (%) 50.0

Price performance (%)

1M 3M 1Y

Absolute (Rs) 31.6 3.9 5.3

Absolute (US$) 43.2 (3.3) (2.0)

Rel. to Sensex 17.2 21.1 18.9

Cagr (%) 3 yrs 5 yrs

EPS 16.3 11.8

Stock performance

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Result update

Earnings downgrade

4 May 2020

RIL’s 4QFY20 consolidated PAT fell 39% YoY, owing to weaker

than expected O2C performance; GRMs at US$4.4/bbl were at

historic lows (weak spreads + inventory loss). JIO’s performance

was in line, while Retail saw significant deceleration in sales in

March (Covid-linked restrictions). Investors should see through

the challenging macro environment (we cut FY21/22ii EPS 11-

35%) and focus on Facebook + JIO synergies, carve out of O2C

business, induction of a 2nd investor at JIO, announced

deleveraging initiatives, etc. RIL is our sector top pick; retain BUY.

RIL’s 4Q – Weak quarter: RIL’s 4QFY20 standalone and consolidated

PAT fell 70% YoY and 39% YoY respectively, significantly below estimates.

The O2C business performance was adversely affected by volatility in

feedstock prices, weak demand & Rs42.45bn (US$4.4/bbl) inventory loss.

JIO’s revenue/PAT growth of 6% QoQ/72% QoQ was largely in-line; R-

Retail’s 33% YoY growth in Ebitda was partly on the back of Rs2.3bn gain

from adoption of IndAS-116; strong growth in the quarter’s first two

months was offset by the drag in March. The B2C businesses now account

for 41% share in Ebitda (ex-inventory loss) vs 30% YoY.

Marching ahead in a tough macro: While RIL continues to operate its

plants at rated capacity (competitive on cash costs), the margin outlook,

at least till FY21ii, remains weak. R-Retail plans to leverage JIO’s

infrastructure, to boost omni-channel sales (grocery, electronics and

fashion); it targets improving the last-mile connectivity infrastructure by

10x. In the mid-term, JIO’s growth strategy is to leverage its new

partnership with FB. Meanwhile, RIL plans to: 1) carve out the O2C

business (NCLT filing soon); 2) raise Rs531bn through a rights issue (1:15

at Rs1,257/share, 22-May launch); 3) shortlist a 2nd strategic investor at

JIO. Plans are to pare the entire net debt of Rs1.6trillion by CY20.

Cut estimates; retain BUY: We lower RIL’s FY21/22ii consolidated EPS

by 11-35%, to reflect weakness in the O2C segment and slower ramp up

in retail sales; JIO’s earnings remain largely unchanged. Our SoTP

ascribes US$55bn EV to the O2C business, based on normalised business

environment vs the existing uncertain macro; valuations for JIO and R-

Retail remain broadly unchanged, also it does not reflect the rights issue.

As such, investors would see through the challenging macro and focus on

the broader revenue model, deleveraging initiatives & O2C carve out.

harsh.dole@ii flcap.com


2

Figure 1: RIL’s 4QFY20 consolidated PAT was down 39% YoY

Consolidated (Rs m) 4QFY19 3QFY20 4QFY20 YoY QoQ

Net revenue 1,386,590 1,529,390 1,355,690 -2% -11%

Total operating costs 1,178,270 1,305,530 1,144,580 -3% -12%

Employee costs 33,450 38,800 37,130 11% -4%

Purchase of products 321,920 384,760 317,970 -1% -17%

Raw material consumption 604,560 669,950 577,820 -4% -14%

Other expenses 218,340 212,020 211,660 -3% 0%

EBITDA 208,320 223,860 211,110 1% -6%

EBITDA margin 15.0% 14.6% 15.6% 55bps 93bps

Depreciation 52,950 55,450 63,320 20% 14%

EBIT 155,370 168,410 147,790 -5% -12%

Other income 31,470 36,450 48,040 53% 32% Interest 48,940 54,040 60,640 24% 12% PBT 137,900 150,820 135,190 -2% -10% Tax 34,310 31,210 26,770 -22% -14% Share of Associates/Minority Int 30 (1,440) (2,270) Adj PAT 103,620 118,170 106,150 2% -10% Adj PAT margin 7.5% 7.7% 7.8% 36bps 10bps Extraordinary Income 0 (1,770) (42,670) Reported PAT 103,620 116,400 63,480 -39% -45% Reported EPS (Rs) 16.3 18.4 10.0 Source: Company, IIFL Research

Figure 2: Share of non-oil businesses in consolidated EBITDA is 41% now vs 30% YoY* Consol Segment EBITDA (Rs m) 4QFY19 3QFY20 4QFY20 YoY QoQ Petchem 93,610 72,520 59,380 -37% -18% Refining 49,640 65,300 66,140 33% 1% Oil & Gas 2,580 640 (460) NA NA Retail 19,230 27,270 25,560 33% -6% Jio 43,290 58,330 64,520 49% 11% Others (30) (200) (4,030) NA NA Total 208,320 223,860 211,110 1% -6% Source: Company, IIFL Research * ex-of inventory loss adjustment

Figure 3: RIL’s 4QFY20 standalone PAT was Rs25.8bn YoY, below estimates

(Rs m) 4QFY19 3QFY20 4QFY20 YoY QoQ

Net revenue 835,970 862,890 736,730 -12% -15%

Total operating costs 698,930 734,180 626,130 -10% -15%

Employee costs 14,050 14,260 15,060 7% 6%

Purchase of products 15,940 18,410 21,580 35% 17%

Raw material consumption 572,040 619,350 492,000 -14% -21%

Other expenses 96,900 82,160 97,490 1% 19%

EBITDA 137,040 128,710 110,600 -19% -14%

EBITDA margin 16.4% 14.9% 15.0% -138bps 10bps

Depreciation 24,650 25,510 26,850 9% 5%

EBIT 112,390 103,200 83,750 -25% -19%

Other income 28,830 39,540 42,290 47% 7% Interest 27,910 25,200 41,610 49% 65% PBT 113,310 117,540 84,430 -25% -28% Tax 27,750 21,690 16,180 -42% -25% Tax rate 24% 18% 19% -533bps 71bps Adj PAT 85,560 95,850 68,250 -20% -29% Adj PAT margin 10.2% 11.1% 9.3% -97bps -184bps EO items - - (42,450) Reported PAT 85,560 95,850 25,800 -70% -73% Reported PAT margin 10.2% 11.1% 3.5% -673bps -761bps Shares outstanding (m) 6,339 6,339 6,339 Reported EPS (Rs) 13.5 15.1 4.1 Source: Company, IIFL Research

Figure 4: RIL continued to outperform the benchmark Singapore GRMs

(US$/bbl) 4QFY19 3QFY20 4QFY20 YoY QoQ

Gasoil 14.0 15.4 11.9 -15% -23%

Gasoline 3.7 12.9 6.7 81% -48%

Naphtha -7.5 -2.2 -2.9 NA NA

FO -0.9 -19.7 -8.4 NA NA

RIL GRMs 8.2 9.2 8.9 9% -3%

Singapore GRMs 3.2 1.7 1.2 -63% -29% Source: Company, IIFL Research



3

Weak O2C; resilient JIO and Retail

RIL’s 4QFY20 consolidated PAT fell 39% YoY – below consensus.

It booked inventory loss of Rs42.45bn (~US$4.4/bbl) in its

refining business (~US$40/bbl fall in oil prices), while

petrochem Ebitda fell 37% YoY. The sharp 49% YoY rise in JIO

Ebitda was in-line, while the 33% YoY growth in retail Ebitda

was partly on account of adoption of the IndAS-116 model

(lease accounting). The share of B2C businesses in overall

Ebitda now stands at 41% vs 30% earlier (ex-adjustment of

inventory losses).

Refining – Weak performance: RIL reported GRM of US$4.5/bbl in

4QFY20, one of the lowest in its history. Owing to ~70% slump in oil &

product prices during the quarter, the company incurred inventory loss

of Rs42.45bn (classified as extraordinary items in its P&L). We note that

the volatility in oil prices has been unprecedented and such (resultant)

losses are likely to be reported by other refining companies, too, in

India. As such, during the quarter, product spreads across the segment

were weak, as global demand collapsed by almost 25%. The Singapore

benchmark margin in the period was estimated at US$1.2/bbl and, to

that extent, RIL’s GRMs stand out well.

RIL, in 4QFY20, operated its refinery at 107% utilisation, maximising

production of the relatively high-margin products (gasoil) and

optimising crude purchases. Opex during the quarter was estimated at

US$2.1/bbl (vs US$2.3/bbl last quarter; Figure 6).

Figure 5: Refinery utilisation improved to 107%

Source: Company, IIFL Research

Figure 6: Opex/bbl was lower at US$2.1/bbl this quarter

Source: Reuters, Company, IIFL Research Note: Opex/bbl is not comparable pre 2QFY20, due to reclassification of certain expenses to the ‘others’ segment

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4

Petrochemicals – Mixed performance:

RIL’s Petchem Ebitda declined 37% YoY and 18% QoQ, despite

petrochemicals’ production remaining flat. Consequently, Ebit/tonne was

down 22% QoQ, at US$64/MT. Production of polymers was up 6% YoY

and almost flat QoQ, while that of polyester intermediaries (PX, PTA and

MEG) stayed broadly unchanged; the polyester production was also

unchanged.

The weakness in polyester intermediates was partially offset by

relatively better margins for downstream polyester-products & polymers

(PE-naphtha). There was weakness across product categories,

considering the weak demand outlook and the recent start-up of new

capacities in polymers and polyester intermediaries.

On QoQ basis, due to a large fall in crude prices, spreads rose slightly −

POY (to 16%), PSF (to 13%), PET (to 22%), PX (to -1%), PTA (to 8%),

MEG (to 12%), PP (to -2%), HDPE (to 32%) and PVC (to 6%). However,

the overall demand environment remains weak.

Figure 7: Production was largely flat

Production (mMT) 4QFY19 3QFY20 4QFY20 YoY Chg QoQ Chg

PFY, PSF, PET 0.71 0.71 0.69 -4% -4%

PX, PTA, MEG 2.76 2.84 2.81 2% -1%

PP, PE, PVC 1.44 1.53 1.54 6% 0% Source: Company, IIFL Research

Figure 8: Ebit/tonne (on production basis) was sharply lower


Figure 9: PX margins are expected to remain under pressure due to supply additions

Source: IHS, ThaiOil, IIFL Research

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5

R-Retail – Grocery saves day; improved disclosures a positive

RIL’s retail business faced significant challenges in March-2020, given

the lockdown imposed due to COVID-19. In 4QFY20, overall sales were

up 4% YoY, albeit down 6% QoQ. Only, the grocery and connectivity

segments saw 51% YoY and 24% YoY growth respectively, while

consumer electronics’ sales fell sharply by 44% YoY, given constraints in

the supply chain in March. Petro-retail sales were flat YoY, along with

fashion and lifestyle. As per disclosures, R-Retail was experiencing

growth across all the segments (Figure 13); however, the performance

was dragged by the unforeseen collapse in March.

In 4Q, RIL’s overall Ebitda margin expanded 130bps to 6.7% vs 5.2%

YoY and 6% QoQ. Notably, R-Retail adopted IndAS-116 for lease

accounting, which led to a gain of Rs2.3bn and boosted Ebitda margins

by almost 70bps. For 4Q, RIL has also disclosed Ebitda performance

from various sub-segments of the retail business (Figure 15); the

comparable numbers, however, have not been shared.

RIL’s core retail business now accounts for 86% of retail Ebitda and only

51% of sales. Retail area of 2.4m sqft was added in 4Q − 468 store

additions vs 415 store additions in 3Q. This resulted in total retail area

increasing to 28.7m sqft across 11,784 stores.

Figure 10: Retail revenue growth decelerated from 27% in 3Q to 4% in 4Q

(Rs m) 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20

Revenues 355,770 366,630 381,960 412,020 453,270 382,110

% growth 89% 52% 48% 27% 27% 4%

Ebitda 16,800 19,230 20,490 23,220 27,270 25,560

Ebitda margin (%) 4.7 5.2 5.4 5.6 6.0 6.7

Ebitda growth (%) 178% 77% 70% 67% 62% 33%

Ebit 15,120 17,210 17,770 20,350 23,890 20,620

Ebit margin (%) 4.2 4.7 4.7 4.9 5.3 5.4


Figure 11: Retail added 2.4m sqft of retail space during the quarter


Figure 12: Consumer Electronics and Fashion & Lifestyle affected by the COVID disruption


9,907 10,415 10,644 10,901 11,316 11,784

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18.9% 19.4% 26.3%

29.6% 31.7% 16.2%

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6

Figure 13: Segmental performance - Revenue

(Rs m) 4QFY19 4QFY20 YoY

Grocery 69,439 100,430 44.6%

% share 18.9 26.3 734bps

Consumer electronics 108,458 61,980 -42.9%

% share 29.6 16.2 -1336bps

Fashion & Lifestyle 33,354 32,920 -1.3%

% share 9.1 8.6 -48bps

Connectivity 120,168 151,930 26.4%

% share 32.8 39.8 698bps

Petro Retail 35,212 34,860 -1.0%

% share 9.6 9.1 -48bps

Total 366,630 382,120 4.2%


Figure 14: Segmental performance – Revenue (Jan Feb)

Revenue (Rs m) Growth YoY

Consumer electronics 41%*

Fashion & Lifestyle 42%

Grocery 35%

Connectivity 32%

Petro Retail 10%

Total 33%


* Excluding devices

Figure 15: RIL provided new disclosures on segment-wise Ebitda breakdown

Ebitda (Rs m) 4QFY19 4QFY20 YoY FY19 FY20 YoY

Consumer electronics 5,420 4,310 -20% 18,946 27,850 47%

Fashion & Lifestyle 6,950 9,750 40% 21,329 32,420 52%

Grocery 3,790 7,830 107% 11,370 22,530 98%

Connectivity 2,640 3,370 28% 8,910 12,370 39%

Petro Retail 430 300 -30% 1,350 1,360 1%

Total 19,230 25,560 33% 61,905 96,530 56%


Figure 16: … providing clarity on respective segment ebitda margins

Ebitda margin 4QFY19 4QFY20 FY19 FY20

Consumer electronics 4.9% 7.0% 4.7% 6.2%

Fashion & Lifestyle 21.2% 29.6% 19.9% 23.9%

Grocery 5.7% 7.8% 4.9% 6.5%

Connectivity 2.2% 2.2% 2.0% 2.2%

Petro Retail 1.2% 0.9% 1.0% 1.0%


Figure 17: Core Ebitda margin expanded 360bps YoY


7.2% 7.6% 8.1% 8.1%

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Core Retail Ebitda margin (%) Blended Ebitda margin (%)



7

R-JIO: Marginal miss, but given the circumstances, we'll take it

JIO’s 10.6% QoQ Ebitda growth to Rs61.8bn was slightly below

estimates (Rs63bn), primarily due to somewhat weak ARPU growth.

Reported revenue growth of 6.2% included tailwinds from IUC, which

we estimate to be ~150bps. Though we expected December-2019 tariff

hikes to have benefitted JIO to a lower extent in 4Q vs. peers,

considering JIO’s higher share of subs on longer-validity plans, the

estimated service ARPU remaining flat QoQ was a negative surprise.

Overall opex was in-line. PAT grew 73% QoQ to Rs23.3bn, helped by

interest expense decline post infusion of Rs1.08trn equity from RIL.

JIO’s debt as of end-FY20 stood at Rs262bn and it had Rs188bn

deferred spectrum liabilities. Under the circumstances, this is a decent

result from JIO, and 1Q should see further acceleration.

Net adds of 17.5m in 4Q were in-line (3Q: 15m). Note that in 3Q, for

most of October and November, JIO’s pricing discount to peers was

lower, which resulted in Bharti (and VIL to a lower extent) gaining at

JIO’s expense. 4Q marks some normalisation and would have been

better by ~8% if the last week of March had not been marred by the

COVID-19 related lockdown.

Reported ARPU (which includes IUC) rose 1.7% QoQ to Rs130.6. JIO

mentioned that its outgoing to total off-net minutes was 48-49% in 4Q,

marking an improvement from the estimated 55% for 3Q. Based on

JIO’s disclosures of total minutes, we estimate that ~1.5% of the ARPU

increase was on account of the minutes-mix change. This indicates a

largely-flat QoQ service ARPU.

JIO has a higher proportion of its subs on long-term plans (3, 6 and 12-

month validity plans). Thus, the ARPU increase for JIO from the Dec-

2019 tariff hike will be spread till 2QFY21, in our view. JIO’s ARPU also

saw the full-quarter impact from the elevated Jio Phone additions (due

to the handset being offered at Rs699) in 3Q. Further, there was ~1ppt

hit on QoQ ARPU growth due to one less day in 4Q. While we had

budgeted for all these factors in our estimates, the flat service ARPU

was a bit lower than our estimates.

Total revenue grew 6.2% QoQ (est. ~4.7% service revenue growth).

This does not include any significant contribution from the FTTH

business, as JIO has just started charging a part of its 1m FTTH sub

base.

With the work-from-home (WFH) condition imposed by the COVID-19

related lockdown, many households are realising the need for a good-

quality internet connection. We expect JIO to accelerate FTTH

deployment once the lockdown is lifted.

JIO’s overall data traffic grew 7.5% QoQ at 141PB/day in 4Q. Data

usage per sub rose, from 11.1GB in 3Q to 11.3GB in 4Q. Daily traffic

has risen to 170PB during the lockdown. Ebitda grew 10.6% QoQ

JIO’s off-net OG:IC ratio, which stood at 62:38 on 10-Oct (the day it

started charging for IUC), had improved to 48:52 by Dec 31, 2019. JIO

maintained that the 48:52 ratio through 4Q. Net-net, we estimate that

JIO’s IUC Ebitda in 4Q was ~Rs850m vs. Rs2.6bn net IUC payout in 3Q

and Rs6.5bn payout in 2Q.

Other cost line items saw some sharp movements. Employee costs

jumped up 23% QoQ due to the bonus payouts for 2019. Other

expenses spiked up 48% QoQ, largely due to higher FX loss. S&D costs

were down 36% due to lower gross additions. Network opex remained

in check (3% QoQ growth). JIO’s gross debt at 4Q was Rs232bn.

JIO incurred Rs30bn capex in 4Q and Rs195bn capex in FY20. IIFL’s

Telecom team estimates that FY20 capex included the ~Rs55bn opex

capitalisation. Also, note that under the InvIT structure, capex incurred

by the tower and fibre SPVs is outside JIO and RIL. But even after

factoring this in, capex intensity has clearly come off in FY20.



8

Figure 18: R-JIO’s 4QFY20 PAT grew ~178% YoY

(Rs m) 4QFY19 3QFY20 4QFY20 YoY QoQ

Revenue 117,150 139,680 148,350 26.6% 6.2%

Costs

Licence fee + SUC 11,800 14,830 15,760 33.6% 6.3%

Access charges 17,080 14,420 13,670 -20.0% -5.2%

Network opex 34,010 44,230 45,600 34.1% 3.1%

S&D costs 3,290 3,560 2,270 -31.0% -36.2%

Other costs 3,130 3,670 5,430 73.5% 48.0%

Employee costs 4,580 3,140 3,870 -15.5% 23.2%

Total opex 73,890 83,850 86,600 17.2% 3.3%

Ebitda 43,260 55,830 61,750 42.7% 10.6%

Ebitda margin 36.9% 40.0% 41.6% 470 bps 165 bps

Depreciation and amortisation 17,440 17,960 21,680 24.3% 20.7%

Ebit 25,820 37,870 40,070 55.2% 5.8%

Interest expense 12,940 19,530 11,330 -12.4% -42.0%

Other income 30 180 260 766.7% 44.4%

Exceptional item 0 -1,770 310

PBT 12,910 16,750 29,310 127.0% 75.0%

Tax 4,510 3,250 6,000 33.0% 84.6%

PAT 8,400 13,500 23,310 177.5% 72.7%

EoP sub base (m) 306.7 370.0 387.5 26.3% 4.7%

ARPU (Rs) 133 128 131 -1.9% 1.7%

Data traffic (mn GB) 9,560 12,080 12,840 34.3% 6.3%

Data traffic per day (PB) 106.2 131.3 141.1 32.8% 7.5%

GB/month per sub 10.9 11.1 11.3 4.0% 1.8%

Voice minutes (bn min) 724 826 876 21.0% 6.0%

MOU per sub (min) 823 760 771 -6.3% 1.4%


Figure 19: Capex intensity has clearly come off


E&P – Small share now: Production in KG-D6 continued to decline,

with gross production now at 0.9mmscmd. Domestic EBIT was virtually

nil. The shale gas segment continues to report losses (~Rs4.9bn EBIT

loss). The R-Cluster development project remains on track for first gas

by June-2020, with 5mmscmd of gas from the field having been bid out

recently, at a slope of 8.5-8.6% Brent. All in all, RIL expects 25-

30mmscmd of gas from the three fields by 2022/23, with distribution

being 40:20:40 across the R-cluster, MJ cluster and the satellite cluster.

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9

Marching ahead amid challenging times

The macro environment in general remains challenging, given

the ongoing COVID pandemic. The resultant slowing economic

activity weighs high on RIL’s O2C (oil-to-chemicals) business

and on R-Retail, while JIO seems to be relatively unaffected.

Despite collapse in oil and petchem consumption, RIL continues

to operate its plants near rated capacity, given cost

competitiveness; however, spreads would be under pressure. In

the retail business, it plans to grow omni-channel sales by

leveraging JIO’s network. Also in the offing are i) a rights issue

(Rs531bn); ii) potential induction of another strategic investor

in JIO; iii) carving out of the O2C business (Aramco due

diligence underway).

O2C business: challenging macro

RIL’s O2C business is significantly exposed to the macro landscape; as

such, the global oil demand is down 25-30% and petrochemical

consumption has also slowed down, as key industries such as

automobiles and downstream polyester either remain shut or operate

well below their rated capacity. Globally, high-cost refiners and

petrochemical units have announced production cuts and, if the demand

outlook remains weak, the cuts are likely to intensify. Back home, PSU

refiners have also announced production cuts, while polymer plants of

GAIL, etc remain non-operational.

RIL, against this backdrop, has operated its plants at rated capacity and

not announced any major cuts even now. This is perhaps due to: 1) the

strategic location of its refinery and plants (ports), which enable it to

focus on exports; 2) its refinery complexity is one of the highest across

the region, thereby giving it flexibility to take advantage of swings in oil

prices and alter the product slate for maximising margins; 3) refinery-

petrochemical integration; and 4) diversified feedstock for its crackers

(naphtha, ethane and propane imports, etc), which placed it favourably

vs other crackers globally.

While these advantages would allow RIL to operate its units near rated

capacity, its operations are not insulated from the weakness in margins.

As such, at a time when demand remains low, we see weakness across

the commodity chain, which would weigh high on its financial

performance, although we note that such a weak performance would be

significantly better than domestic and some regional peers’.

The RIL Board, meanwhile, has approved the carving out of its O2C

business, including the fuel retailing JV with BP, into a separate

company – Reliance O2C Limited. With this step, RIL has inched closer

to inducting a strategic investor in its core O2C business; separately,

RIL stated that ARAMCO’s due diligence is underway, though no definite

timelines for its conclusion were stated.

Figure 20: RIL’s refining units are relatively better placed due to higher complexity

Source: Worldwide Refinery Survey and Complexity Analysis 2019 from the Oil & Gas Journal



10

Figure 21: Feedstock flexibility allows RIL to position itself favourably on the cost curve

Source: Industry

Reliance Retail – Focus on growing omni channel sales

During the Microsoft meet after its 4Q earnings results, RIL highlighted,

in detail, it plans to leverage JIO’s technology platform, to scale up the

retailing operations. The strategy entails: 1) ramping up customer reach

by leveraging JIO and Retail’s customer ecosystem; 2) building a brand

portfolio; 3) strengthening digital platforms, marketplace, and omni-

channel capabilities across the businesses (in particular fashion,

electronics and grocery); 4) scaling up capacity to deliver goods to the

customer premise (last mile); 5) rapidly scaling up physical stores and

smart points, post COVID. As such, management commentary

underscored taking aggressive steps to capture market share amid

these challenging times.

We recently tested ordering groceries on Whatsapp-JioMart and you can

read more about our experience in our note here.

Figure 22: R-Retail plans to leverage R-JIO’s vast network for growing its business


R-JIO – Optionalities is in the JIO-FB deal

JIO’s flat service ARPU QoQ was marginally below estimates. We await

the results of peers, to determine the RMS movements in 4Q. We

expect revenue growth to improve in 1Q, as the benefits of tariff hikes

flow through. For now, we maintain our projections and US$67bn EV

estimate. We remain positive on the long-term outlook of the industry

and expect the government to allow deferred payment on AGR dues, to

ensure VIL’s survival. For VIL to sustain, we believe more tariff hikes in

the next 2-3 years are inevitable. JIO will also gain from VIL’s stretched

financials. There could be optionalities in JIO/RIL, from indirect benefits

of the FB-WhatsApp deal, which may improve stickiness.

https://www.iiflcap.com/Upload/Research/IIFL_-_RIL_-_20200428.pdf



11

Targeting to be debt-free by CY20; rights issue

RIL’s CFO, during the analyst briefing, stated that firm measures are in

place for making RIL net debt-free in CY20; this would be through a

combination of: 1) cash inflow (of Rs435bn) from the Facebook deal; 2)

Rs70bn cash flow expected from the deal with BP (fuel retailing); 3)

proposed rights issue (Rs531bn); and 4) induction of another strategic

investor in R-JIO, on the lines of Facebook. It, however, does not

consider the proposed investment by ARAMCO in its O2C business.

Figure 23: RIL’s adjusted net debt stands at Rs2.3trillion, as of 4QFY20


While RIL’s reported net debt is Rs1.6trillion, it does not take into

account the Rs250bn deferred spectrum liability of JIO and Rs500bn of

vendor financing. Further, the cash & cash equivalents (Rs175bn)

include Rs370bn NCDs invested in the two InvITs (tower and fibre). RIL

expects to close the tower InvIT deal with Brookfield by the end of the

quarter and realise Rs120bn thereof; conclusion of the fibre InvIT deal

would enable it to monetise the balance amount invested. As such,

these NCDs are tradable and carry a coupon of 9%, as per RIL

management.

Separately, while announcing the rights issue (1:15), RIL has plans to

raise Rs531bn, at a price of Rs1,257/share. The rights issue is to open

by 22-May 2020 and would require investors to pay 25% on application

and the balance in one or more calls. As such, the promoters have

expressed intent to subscribe to their share of the rights issue (50%)

and also to any quantum unsubscribed by the retail category. At this

price, as per the RIL CFO, the rights issue is marginally EPS accretive

(Figure 24).

Figure 24: As per RIL, the rights issue price is marginally EPS accretive

Source: Company

Figure 25: Sensitivity of rights issue and pricing to EPS, as per RIL

Source: Company



12

Revise estimates; top-pick; BUY

We cut RIL’s consolidated EPS by 35%/11% for FY21/22ii, to

reflect: i) weakness in the O2C segment; ii) some logistical

challenges in scaling up the retail business in FY21, given the

expected country-wide restrictions in 1H. Any recovery in O2C

earnings would largely be contingent on recovery in global

demand. Growing share of non-oil businesses would, however,

provide some hedge to consolidated earnings.

Cut earnings to reflect weak O2C

The macro landscape though challenging, remains dynamic, with

product and feedstock prices experiencing severe volatility; as such,

slowing economic activity in India as well as globally would weigh high

on RIL’s O2C business as well as on its retail initiative. Our earnings

assumptions are based on further moderation in GRMs, petchem Ebitda

and slower ramp up in the R-Retail business. We now factor in US$7/bbl

GRM in FY21ii, which partly recovers to US$8.5/bbl in FY22ii; we do not

take any material benefit of the petcoke gasification project (US$7.5bn

capex), which is intended to lower the cash cost and improve the

energy security of the Jamnagar complex. On these assumptions, we

cut RIL’s consolidated FY21/22ii EPS by 11-35%. On a lower base, we

forecast RIL’s consolidated Ebitda and PAT, to register 11.3% and 19%

annual growth respectively, through FY20-22ii. Such growth does not

take into account the impact of the proposed rights issue or any

corporate restructuring.

Figure 26: We expect some recovery in O2C Ebitda FY22ii onwards

Consol EBITDA(Rs bn) FY19 FY20ii FY21ii FY22ii

Refining 230 245* 176 229

Petchem 376 309 238 295

Domestic E&P 12 7 6 17

Shale Gas 4 -4 -4 -3

Retailing 62 97 96 132

Jio 151 216 298 422

Others 3 12 0 0

Total 839 882 811 1,093 Source: Company, IIFL Research; Note: * excluding inventory loss of Rs42.5bn

We note that earnings are sensitive to GRMs and to changes in the

underlying petrochemical Ebitda/MT. For FY21, a US$1/bbl change leads

to an 8-9% swing in EPS, while a US$50/MT change in blended

petrochemical Ebitda implies a swing of ~15% in RIL’s consolidated

EPS. Similarly, a Rs10 change in ARPU for R-JIO leads to a 7% change

in RIL’s earnings.

Re-iterate BUY

While we lower RIL’s consolidated earnings, driven by weakness in the

O2C business, we largely maintain its valuation. We believe that given

the carving out of the business and the on-going discussion with

ARAMCO, one would need to value the business on normalised earnings,

rather than the depressed earnings trajectory as a result of the COVID

pandemic. We value RIL’s O2C business at an EV of US$55bn, based on

past 10-year average GRMs and 5-year average of petrochemical

margins. We value the retail business at 22x FY22ii Ebitda; our SoTP-

based calculations do not consider the impact of the proposed rights

issue. RIL is our sector top-pick. Figure 27: Our SOTP-based price on FY22ii implies 14% upside

US$ bn Rs bn Rs/share Comments

Refining 27 2,055 324 GRM of US$9.5x/bbl

Petrochemical 28 2,101 332 Blended Ebitda/MT of US$250

E&P 1 102 16

Jio 69 5,181 817 IIFL Telecom team valuation

Retail 39 2,897 457 22x FY22ii Ebitda (D-Mart @ 44.6x)

Other Investments

1 86 14 At BV

Treasury stock 6 484 76 20% discount to the market value

EV 172 12,908 2,036

Less: Net debt 31 2,306 364 Incl. vendor financing & Spectrum Liability for JIO

Equity Value 141 10,602 1,673




13

Figure 28: US$1/bbl change in GRM = Rs46/share for RIL’s fair value

Source: IIFL Research

Figure 29: Our O2C EV is < indicated valuation for ARAMCO deal (US$75bn)




14

Management

P/E EV/Ebitda

Background: Reliance Industries Limited (RIL) is one of India’s largest private sector enterprises, a vertically-integrated company with business

interests in the energy and materials value chain. The group’s activities span across E&P, petroleum refining and marketing, petrochemicals (polyester,

fibre intermediates, plastics and chemicals), retail, shale gas and telecom services. RIL was founded in 1958 by Dhirubhai Ambani, as a textiles trading

firm in Mumbai. Today, RIL operates the largest single refinery complex (68mmtpa) at Jamnagar and one of the most complex refineries (Complexity

index 21.1) in the world. It is among the top-ten largest producers of major petrochemical products (PP, PX, PTA, MEG) and the largest polyester

producer in the world.

Company snapshot

Name Designation

Mukesh Ambani Chairman and Managing Director

Alok Agarwal CFO

V Srikanth Joint CFO

Source: Company

3.0

5.0

7.0

9.0

11.0

13.0

15.0

Apr-09 Jun-11 Sep-13 Nov-15 Feb-18 Apr-20

12m fwd EV/EBITDA Avg +/- 1SD

(x)

Assumptions Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii

Refining throughput (mbbl) 511.6 500.6 517.5 499.9 499.9

Refining GRM (US$/bbl) 11.6 9.2 8.9 7.0 8.5

Petchem volumes (mmt) 13.2 14.6 14.7 14.8 14.9

Petchem EBIT margin (US$/mmt)

249.2 316.3 245.5 165.9 214.5

INR/US$ 64.6 69.9 71.0 75.0 75.0


6.0

9.0

12.0

15.0

18.0

21.0

24.0

Apr-09 Jun-11 Sep-13 Nov-15 Feb-18 Apr-20

12m fwd PE Avg +/- 1SD

(x)

Petchem, 45%

Refining, 27%

Others, 10%

Jio, 18%

EBITDA break-up - FY19

RIL Capacities mmtpa

Refining DTA Refinery 33.0

SEZ Refinery 35.2

Petrochemicals PE 2.3

PP 2.9

Paraxylene 4.8

PTA 4.9

PFY and PSF 2.1

PET 1.1




15

Financial summary Income statement summary (Rs bn) Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii Revenues 3,917 5,671 5,967 7,886 8,673 Ebitda 642 839 882 811 1,093 Depreciation and amortisation (167) (209) (222) (231) (254) Ebit 475 630 660 580 839 Non-operating income 89 86 140 137 133 Financial expense (81) (165) (220) (226) (224) PBT 483 551 579 491 748 Exceptionals 11 0 (44) 0 0 Reported PBT 494 551 535 491 748 Tax expense (133) (154) (137) (123) (187) PAT 360 397 398 368 561 Minorities, Associates etc. 1 (1) (4) (4) (4) Attributable PAT 361 396 394 364 557

Ratio analysis Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii Per share data (Rs) Pre-exceptional EPS 55.2 62.5 69.1 57.4 87.9 DPS 6.0 6.5 6.5 4.8 5.9 BVPS 463.0 610.7 715.1 767.0 847.9 Growth ratios (%) Revenues 28.3 44.8 5.2 32.2 10.0 Ebitda 38.9 30.8 5.1 (8.1) 34.8 EPS 17.0 13.1 10.6 (16.9) 53.1 Profitability ratios (%) Ebitda margin 16.4 14.8 14.8 10.3 12.6 Ebit margin 12.1 11.1 11.1 7.4 9.7 Tax rate 27.0 27.9 25.7 25.0 25.0 Net profit margin 9.2 7.0 6.7 4.7 6.5 Return ratios (%) ROE 12.6 11.6 10.4 7.7 10.9 ROCE 10.3 9.8 9.4 8.2 10.5 Solvency ratios (x) Net debt-equity 0.7 0.7 0.7 0.6 0.6 Net debt to Ebitda 3.3 3.3 3.5 3.7 2.7 Interest coverage 5.9 3.8 3.0 2.6 3.7 Source: Company, IIFL Research

Balance sheet summary (Rs bn) Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii Cash & cash equivalents 43 75 309 331 267

Inventories 608 676 739 977 1,074

Receivables 176 301 197 260 286

Other current assets 599 839 1,229 1,624 1,965

Creditors 2,668 2,654 3,105 3,693 3,858

Other current liabilities 41 42 37 49 53

Net current assets (1,283) (805) (668) (550) (320) Fixed assets 5,851 5,658 6,315 6,471 6,709

Intangibles 58 120 103 103 103

Investments 829 2,355 2,768 2,768 2,768

Other long-term assets 0 0 0 0 0

Total net assets 5,454 7,328 8,518 8,791 9,260

Borrowings 2,188 2,875 3,363 3,303 3,253

Other long-term liabilities 332 582 621 627 632 Shareholders equity 2,935 3,871 4,533 4,862 5,375 Total liabilities 5,454 7,328 8,518 8,791 9,260

Cash flow summary (Rs bn) Y/e 31 Mar, Consolidated FY18A FY19A FY20ii FY21ii FY22ii Ebit 475 630 660 580 839 Tax paid (98) (122) (84) (123) (187) Depreciation and amortization 167 209 222 231 254 Net working capital change 185 (251) 219 (96) (294) Other operating items (14) (8) (37) 1 1 Operating cash flow before interest 715 457 981 593 613 Financial expense (177) (233) (285) (226) (224) Non-operating income 23 16 16 137 133 Operating cash flow after interest 561 240 711 504 522 Capital expenditure (730) (928) (756) (387) (492) Long-term investments 23 (78) 141 0 0 Others (7) (25) (173) 0 0 Free cash flow (152) (791) (77) 117 30 Equity raising 5 2 1 0 0 Borrowings 199 865 356 (60) (50) Dividend (39) (43) (46) (35) (44) Net chg in cash and equivalents 12 33 234 21 (63) Source: Company, IIFL Research



16

Disclosure: Published in 2020, © IIFL Securities Limited (Formerly ‘India Infoline Limited’) 2020

India Infoline Group (hereinafter referred as IIFL) is engaged in diversified financial services business including equity broking, DP services, merchant banking, portfolio management services, distribution of Mutual

Fund, insurance products and other investment products and also loans and finance business. India Infoline Ltd (“hereinafter referred as IIL”) is a part of the IIFL and is a member of the National Stock Exchange of India Limited (“NSE”) and the BSE Limited (“BSE”). IIL is also a Depository Participant registered with NSDL & CDSL, a SEBI registered merchant banker and a SEBI registered portfolio manager. IIL is a large broking

house catering to retail, HNI and institutional clients. It operates through its branches and authorised persons and sub-brokers spread across the country and the clients are provided online trading through internet

and offline trading through branches and Customer Care.

a) This research report (“Report”) is for the personal information of the authorized recipient(s) and is not for public distribution and should not be reproduced or redistributed to any other person or in any form without IIL’s prior permission. The information provided in the Report is from publicly available data, which we believe, are reliable. While reasonable endeavors have been made to present reliable data in the

Report so far as it relates to current and historical information, but IIL does not guarantee the accuracy or completeness of the data in the Report. Accordingly, IIL or any of its connected persons including its

directors or subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained, views and

opinions expressed in this publication.

b) Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment of its original date of publication by IIFL and are subject to change without notice. The price, value of and income from any of the securities or financial

instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or

income of such securities or financial instruments.

c) The Report also includes analysis and views of our research team. The Report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed in the Report are our current opinions as of the date of the Report and may be subject to change from time to time without notice. IIL or any persons

connected with it do not accept any liability arising from the use of this document.

d) Investors should not solely rely on the information contained in this Report and must make investment decisions based on their own investment objectives, judgment, risk profile and financial position. The recipients of this Report may take professional advice before acting on this information.

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h) As IIL and its associates are engaged in various financial services business, it might have:-

(a) received any compensation (except in connection with the preparation of this Report) from the subject company in the past twelve months; (b) managed or co-managed public offering of securities for the subject company in the past twelve months; (c) received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months; (d) received

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i) IIL and its associates collectively do not own (in their proprietary position) 1% or more of the equity securities of the subject company mentioned in the report as of the last day of the month preceding the publication of the research report.

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(a) does not have any financial interests in the subject company (ies) mentioned in this report; (b) does not own 1% or more of the equity securities of the subject company mentioned in the report as of the last

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k) The Research Analyst engaged in preparation of this Report:-

(a) has not received any compensation from the subject company in the past twelve months; (b) has not managed or co-managed public offering of securities for the subject company in the past twelve months; (c) has not received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months; (d) has not received any compensation for

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We submit that no material disciplinary action has been taken on IIL by any regulatory authority impacting Equity Research Analysis.



17

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in the research report.

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(Choose a company from the list on the browser and select the “three years” period in the price chart).

Name, Qualification and Certification of Research Analyst: Harshvardhan Dole(B.Tech, PGBDA), Rishi Masand(MS Finance)

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Key to our recommendation structure

BUY - Stock expected to give a return 10%+ more than average return on a debt instrument over a 1-year horizon.

SELL - Stock expected to give a return 10%+ below the average return on a debt instrument over a 1-year horizon.

Add - Stock expected to give a return 0-10% over the average return on a debt instrument over a 1-year horizon.

Reduce - Stock expected to give a return 0-10% below the average return on a debt instrument over a 1-year horizon.

Distribution of Ratings: Out of 230 stocks rated in the IIFL coverage universe, 111 have BUY ratings, 10 have SELL ratings, 85 have ADD ratings and 23 have REDUCE ratings

Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment. Whichever valuation method is used there

is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such

demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in

certain industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social

conditions. This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.

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http://economictimes.indiatimes.com/markets/stocks/stock-quotes

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http://www.indiainfoline.com/

http://www.indiainfoline.com/



18

0

500

1,000

1,500

2,000

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct

-17

De

c-1

7

Feb

-18

Ap

r-1

8

Jun

-18

Au

g-1

8

Oct

-18

De

c-1

8

Feb

-19

Ap

r-1

9

Jun

-19

Au

g-1

9

Oct

-19

De

c-1

9

Feb

-20

Ap

r-2

0

Price TP/Reco changed date(Rs)

Reliance Industries: 3 year price and rating history Date Close price

(Rs)

Target price

(Rs)

Rating

28 Apr 2020 1417 1710 BUY

20 Jan 2020 1581 1725 BUY 02 Dec 2019 1551 1592 BUY

22 Oct 2019 1416 1588 BUY

22 Jul 2019 1249 1530 BUY

22 Apr 2019 1386 1508 BUY

08 Feb 2019 1290 1396 BUY

30 Nov 2018 1169 1430 BUY 19 Oct 2018 1151 1312 BUY

30 Jul 2018 1130 1285 BUY

24 Jul 2018 1120 1250 BUY

17 Jul 2018 1076 1113 BUY

Date Close price

(Rs)

Target price

(Rs) Rating

16 Oct 2017 876 940 BUY

24 Jul 2017 1585 1745 BUY 16 Jun 2017 1384 1475 BUY