Reliance Industries (NS:) (RIL), India’s largest private-sector corporate and an Indian MNC is a diversified group across energy (petrochemicals, refining, oil & gas exploration), retail, digital services including telecom, financial services, and others (textiles, healthcare, sports). Overall, RIL employs almost 200K employees directly under its payroll and is also the largest private-sector employer in India. Over the last few years, RIL is steadily diversifying from fossil fuel/energy business to consumer-facing business both in products & services (b2b, c2c, and c2b).
As a visionary entrepreneur, the RIL CEO Mukesh Dhirubhai Ambani has realized long ago about the importance of climate change and the inevitable global as-well-as local (Indian) transformation from fossil fuels to green/electric energy. Although in a developing country like India, it’s not possible to replace fossil fuel by 100%, by the Paris climate agreement target of 2050-60, the usage of the same may be reduced by almost 50%.
India’s richest billionaire Ambani knows very well about the saturation point of his oil and gas business amid global concern of climate and India’s regulatory restrictions. Over the last few years, RIL is gradually diversifying into other fields, especially consumer-facing business (retail, telecoms). RIL may be aiming to be India’s ‘Wall-Mart’ with China’s ‘Alibaba’ theme using cash & data as new ‘oil’; almost unlimited.
Thus Ambani is steadily transformingdiversifying the RIL group from fossil-fuel energy heavy company to various consumers facing business by both organic and inorganic expansion. R-JIO is most probably the world’s largest and most valued startup (digital business/e-commerce platform). And Ambani is quite successful to sell ‘Digital India Theme’ through JIO to global angel investors for a whopping $27B.
Global angel investors are also scrambling to get a share of digital India (JIO). Global investors are also eager for a stake in Reliance Retail, India’s ‘Wall-Mart’, now emerging as a ‘Desi/Indian Amazon’. Ambani/RIL is now being seen as India’s most trusted person/brand under the ‘too big to fall’ category. Thus, global investors are not thinking twice about in participating India’s growth story through Ambani/RIL, as the group enjoys almost sovereign rating/guarantee. Ambani may also list JIO and Reliance Retail in due course of time to monetize and for further deleveraging. And JIO may be also listed in for a better exit option for such ‘start-up’ global angel investors.
RIL business/diversification at a glance:
Prominent RIL brands (apart from the flagship Reliance Industries):
In early 2018, RIL was hovering around 800 levels; it was under stress on doubt about JIO’s telecom business/revenue model viability and heavy debt. RIL was virtually a debt-free company (on a standalone net basis) till a few years ago, but over the last few years, it has to take huge debt to support its telecom (JIO) dream and oil CAPEX (to support efficacy/refining margin and expansion/diversification). But from mid-2019, Ambani vows to bring out the RIL net-debt free (nominal debt and cash/cash equivalents at par) by FY21.
Arranging debt was never a problem for a company like RIL, because of the market trust in its management/Ambani and the free cash flow (FCF) generating business model. But, as a visionary and debt-shy entrepreneur, Ambani knows very well when to sell out the stake of a profitable business to slash huge debt when the business is booming, not limping/under distress (unlike his younger brother Anil Ambani).
The market cheered the RIL-Saudi Aramco MOU, which was likely to be converted into a $15B deal (20% stake including a 51% stake of petroleum JV). Saudi-Aramco valued RIL at $75B enterprise value, which may be far higher than the prevailing market valuation. RIL also entered a JV with BP (LON:) for 49% of its Petroleum (fuel-marketing) business for $1B. Thus, RIL should reduce its net debt by at least $16B by FY20 (March’20), if these two proposed/potential deals go through all the required regulatory approvals.
RIL was also divesting a significant part of its Jio network assets (telecom Tower) to Brookfield. The market also cheered about RIL’s plan to further deleveraging in the years ahead with a high potential listing of JIO and Reliance Retail. The market was also very optimistic about JIO’s commercial launch of fibre broadband (BB) and the R-JIO was itself at the end of a huge CAPEX cycle.
Before the COVID pandemic, in its oil and gas (Petchem) business, RIL has already the advantage of comparatively higher GRM than the regional benchmark (Singapore GRM) consistently, coupled with a large refinery capacity of 1.2 mbpd and vertically integrated business model (petchem). The large CAPEX cycle for both petchem and telecom business is also almost complete and going forward, we may see only some incremental CAPEX, but overall debt reduction- largely through deleveraging and also by internal debt servicing, thanks to robust cash flow of its petchem and refining business. The market was expecting positive operating free cash flow from RIL from FY21 onwards as CAPEX will moderate from FY20.
Subsequently, RIL jumped almost 100% to 1600 levels by December’19 primarily on deleveraging and JIO broadband optimism (just before the COVID-19 pandemic). But soon after that it made a corona panic lockdown low of 867.43, tumbled almost 45% in line with the overall market plunge.
Also, after the COVID pandemic, Saudi Arabia’s (Aramco) proposed $15B deal with RIL was postponed due to economic recession and uncertainty. As an energy (transportation fuel) heavy company, RIL was more affected due to global as-well-as local COVID national lockdown, affecting personal mobility/public transportation. The transportation fuel demand was almost plummeted by 85% in India as well as on both sides of the Atlantic (U.S.-Europe) during full lockdown periods.
But soon after the March lockdown, RIL began to recover and by September’20, made a lifetime high of 2369.35, soared almost +173%, and outperformed , primarily on deleveraging optimism as Ambani & Co made a deluge of JIO stake sale deals (even in the midst of a pandemic) with various big global investors/companies (including Google (NASDAQ:), Facebook (NASDAQ:)) worth almost Rs.1.52T for around 33% of JIO stakes.
Talks with various big global investors were already going on even before the COVID-19, but after the pandemic struck and Saudi Aramco (SE:) postponed the $15B M&A deal, Ambani accelerated the JIO deleveraging process and sold almost 33% of RIL’s JIO stakes cumulatively for around Rs.1.52T on COVID WFH as-well-as the ‘Digital India’ theme. RIL also sold Reliance Retail stakes by around 10% for Rs.0.47T to various global investors. RIL declared itself free of net debt in June’20, nine months before its self-imposed deadline and RIL jumped.
Apart from selling stakes, RIL also raised around Rs.0.53T through a right issue in May-june’20, and then it bought Netmeds (digital pharma Marketing platform) for Rs.0.062T, Urban Ladder for Rs.0.0182T, and offered to buy Future Retail (NS:) group (Big Bazar) for Rs.0.25T in an attempt to compete with the U.S./global retail giant Amazon (NASDAQ:).
But the M&A proposal with Future group is now under a cloud due to legal/contractual disputes between Future and Amazon group. Amazon now desperately wants to buy out the Future group/Big Bazar to effectively control the huge Indian consumer/retail market and it’s virtually a war between Bezos (Amazon) and Ambani (RIL). Ambani is now also playing the ‘Atmanirbhar’ (self-reliant) card in retail as-well-as telecom/digital media including India’s foray into 5G.
In any way, soon after the Q2FY21 report card, RIL began to correct from its lifetime high of 2369.15 (Sep’20) and made a low of 1835.10 in Nov’20, stumbled over -22%, underperforming Nifty. Although, RIL’s digital business (JIO, media) performed quite well during COVID days (lockdowns/WFH), the consumer-facing retail as-well-as transportation fuel heavy refining, petrochemical business underperformed (lockdowns/gradual unlock/partial lockdowns/consumer scarring factors). RIL reported around a 30% fall in quarterly core operating profit (Q2FY21) on a y/y basis due to the COVID-19 pandemic lockdown and a plunge in demand for transportation fuel by almost 85%.
Fair valuation of RIL at a glance:
Considering the COVID disruption, previous trend, and future potential business prospect, the FY21 projected core operating EPS-COEPS (EBITDA-INTT/NO OF EQ SHARES) maybe around 86.25, and thereafter assuming 15% CAGR, the COEPS should be around 99.19, 114.07, 131.18, and 150.85 from FY22-25. As the market is now broadly discounting FY23 forward EPS, assuming an average PE of 20 for RIL, the fair valuation should be around 2281.
For FY24-25, the fair median valuation should be around 2624-3017.
RIL is expected to report a normalized CAGR of around 15% in COEPS as the Indian economy is now running almost 90% of its pre-COVID levels even without any COVID vaccinations. India may have acquired natural herd immunity to a great extent and thus, despite visible laxity in mask-wearing, social distancing, the COVID curve is flattening at a steady rate.
RIL has relatively a low PE of around 12 on an average during 2016-17 mainly due to the huge energy CAPEX and negative FCF. But the average PE was improved to around 20 due to higher deleveraging; the end of incrementally higher CAPEX cycle and lower net debts coupled with a generally bullish market. At TTM COEPS of around 87.65 and CMP 1988.00, the TTM PE of RIL is 22.68, not overvalued at all, especially if we consider the current TTM PE of Nifty (14018.50) at 38.55, almost at 4-SD of 38.75, a deep bubble zone.
In any way, RIL was also under stress on the legal disruption of Future retail M&A as the likely acquisition of Big Bazar will make a big synergy of its retail platform from mainly readymade garments to consumer/FMCG goods. Also, Reliance Fresh/Jio mart, engaged in farm products marketing is not so much successful in India as consumers generally buy fresh vegetables from the normal market and also consumers generally visit shopping malls to buy readymade garments, consumer goods, or FMCG products, not to buy vegetables. And due to Reliance Fresh (corporate agriculture), RIL is also a soft target of currently ongoing farmer’s protest and its telecom assets/JIO towers are being vandalized.
But the primary factor behind its recent underperformance may be speculation about Ambani’s health. There was an unconfirmed report (rumour?) about the health of Ambani (63-yrs old) as he may be suffering from liver cancer and has undergone liver transplant abroad recently, now in the recovery phase, staying in Britain. Despite intense rumours about Ambani’s health and subsequent steep fall in RIL stock price, there was no official reaction or denial from the RIL; Ambani is the ‘face’ of RIL. In any way, RIL is a professionally managed company, and Ambani may also be reportedly planning an eventual succession plan by setting up a family council by the end of 2021.
Looking ahead RIL may be boosted by:
· Prospect of further deleveraging; especially the RIL-Saudi Aramco deal in the coming days
· Listing of R-JIO and Reliance Retail by next few years
· Incrementally higher demand for oil amid progress of vaccinations on both sides of the Atlantic
· The demand for oil has already been recovered by almost 85% of the pre-COVID levels both globally and locally
· A potential foray into small finance bank or even normal big banks (if the government/RBI approves big corporate/industrial groups for banking licenses); RIL has already a payment bank JV with SBI (NS:), having a controlling stake; now may also make some JV with WhatsApp and GPAY in JIO ecosystems
· Successful M&A with Future Retail
· Renewed thrust on oil & gas exploration, oil refining capacity, and any deregulation policy (structural reform) by the government to make some progress in India’s energy independence
· Under Biden admin, the U.S. sanction policy on Iranian and Venezuelan oil may be less hawkish than Trump; RIL may be a major beneficiary of low cost heavy Venezuelan and Iranian due to its
cost-effective refining technology. This may result in higher GRM. Presently, RIL is compelled to use U.S. Light Sweet crude oil due to Trump sanction on Venezuela and Iran
· Launch of 5G in India
· Higher market share in fibre broadband
· JIO e-commerce ecosystem, where JIO-Facebook will link ‘Kirana’ (mom & pop)/small stores and customers via WhatsApp using JIO’s 400M subscribers
Techno-Funda View: RIL
Technically, whatever may be the narrative, RIL now has to sustain over 2020 for 2285-2375 zones; otherwise, it may correct again to 1800-1730 levels, which should offer a good demand zone for investors, considering the current bull market scenario and RIL’s prospect from oil to digital and retail.
RIL P/L account analysis: Consolidated