Investment in consumer business paying off, upgrade to Buy - Update on Reliance Industries - HDFC Securities

RIL stock has corrected by 25% from its peak over the past 4 months driven by global economic slowdown concerns. Our view that the stock price correction is overdone, and the stock should outperform, is premised on 1) Non-cyclical domestic consumer business accounting for 56% of FY21E EBITDA (31% in FY19), 2) The stock factoring only an USD 3.0/bbl FY21E refining margin, 49% lower than Global Financial Crises (GFC) quarterly trough and 3) Interest Coverage ratio of 4.3x and Net Debt/EBITDA of 1.6x in FY22E (12-35% better than the FY19 lows). The stock offers 18% upside at our TP of INR 1,400.

No financial stress even under economic slowdown conditions

We estimate that even with refining margins of USD 5.9/bbl (lowest quarterly margin during the Global Financial Crises and 36% lower than 3QFY20) and Petchem margins at a discount of 29% to 3QFY20 (lowest quarterly margin in last 13 years), RIL's FY21E EBITDA would be INR 775bn, more than adequate to service its INR 2.9trn of debt.

Jio: Next catalysts-Mobile revenue growth, fibre broadband ramp-up

With about USD 50bn (50% of market cap) invested in telecom, Jio's revenue market share growth and monetisation continues to drive a significant proportion of the value creation opportunity for RIL's shareholders. Our current forecasts imply CAGR of 13.6% in mobile subs, 4.7% in ARPUs over FY19- FY23E and 8mn fibre subs by FY23E supporting EBITDA of INR 390bn and EV of INR 4,806bn.

Retail: India's 'Everything store' continues to gain market share

Reliance Retail (RR) should gain further market share as it improves upon assortment, pricing and distribution. Grocery (46% of incremental EBITDA) should be the key EBITDA growth driver over FY19-22E. We bake in Rev/EBITDA/PAT CAGR of 20/28/34% over FY19-22E and value RR at an EV of INR 2.4trn, implying 18.5x FY22 EV/EBITDA.

Valuation: We value RIL on SOTP

We have cut FY21/22E EPS by up to 33% and our TP by 11% to INR 1,400 factoring up to 31% lower downstream margins driven by slowing global economy. We use EV/EBITDA to value downstream at Sep-21E EV/e, Retail on peer benchmarked EV/e and E&P, Jio on DCF.

Shares of RELIANCE INDUSTRIES LTD. was last trading in BSE at Rs.1150.05 as compared to the previous close of Rs. 1189.25. The total number of shares traded during the day was 834155 in over 32228 trades.

The stock hit an intraday high of Rs. 1235.95 and intraday low of 1142.7. The net turnover during the day was Rs. 985936742.

Source : Equity Bulls

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