Reliance Retail - Top-line disappoints, margins surprise - Q4FY20 Result Review - HDFC Securities

Amidst the COVID-19 induced lockdown and subsequent store closures, Grocery taking the lead on growth was par for the course, while Consumer Electronics (CE) and Fashion & Lifestyle (F&L) take a beating. Net Revenue for Reliance Retail (RR) grew 5.5% YoY in 4Q to Rs. 344bn (HSIE: Rs. 356bn); while Core Retail gross revenue (Grocery/F&L/CE) declined by 7.6% YoY to Rs. 195bn (HSIE: Rs. 234bn). The miss in top-line was on account of subdued CE (down 43% YoY ) and F&L (flat YoY) revenues. Interestingly, while CE & F&L revenues declined, their respective margins inexplicably improved.

Grocery takes centre-stage in growth narrative: Grocery revenue grew 44% YoY to Rs. 100.4bn (HSIE: Rs. 82.4bn) as bill sizes increased courtesy excessive hoarding of essentials during the lockdown. Our store network analysis for grocery biz validates RR's focus on the 'SMART' format. (HSIE: 166/253 SMART stores added over FY18-20E), Grocery margins improved 237bp YoY to 7.8% (on gross sales). Cost of retailing has inched down (HSIE: down 250bp) over FY18-20E as store network gets denser with time.

CE and F&L top-line takes a beating, margins inexplicably improve: While the lockdown-induced store closures in Mid-Mar-20 took a toll on RR's CE (down 43% YoY to ~Rs.62bn) and F&L revenues (0.3% YoY; Rs. 32.9bn); margins inexplicably improved YoY despite the revenue drop. Adj. CE/F&L EBITDA (Pre-IND-AS 116) margins is estimated to have improved by 190/158bp YoY to 6.9/22.6% resp. in 4Q.

FY20 store addition remains strong across categories: RR added 1,370 stores (net) and ~6.7mn sq. ft in retail area (30% YoY growth) in FY20. 85%+ of incremental area addition is estimated to have come from Grocery/F&L, which ties into our argument that Grocery/F&L are likely to be growth anchors for RR over the medium-to-long term (Link).

Margin levers limited: While RR enjoys best-in-class margins across all categories given its unparalleled scale. Benefits hereon seem limited as 1. Competitive intensity increases in CE (biggest EBITDA contributor) and 2. Omni-investments increase cost of doing biz. Expect 50bp cut in FY21 (COVID-led) and full recovery in margins by FY22.

STANCE: RR's long term growth visibility remains high esp. in grocery and F&L as 1. it seems past its "rummaging through formats phase" and 2. Addressable market remains massive. However, CE growth (biggest segment) should cool off as JIO phone sales moderate and competitive intensity increases. We maintain our FY21/22 estimates and build in Rev/EBITDA/PAT CAGR of 15/14/12% over FY20-22E. We assign an SOTPbased fair value of Rs. 2.36tn (EV), implying 19x FY22 EV/EBITDA (Rs. 380/sh) on RIL share count.

Shares of RELIANCE INDUSTRIES LTD. was last trading in BSE at Rs.1435.4 as compared to the previous close of Rs. 1467.05. The total number of shares traded during the day was 978857 in over 36490 trades.

The stock hit an intraday high of Rs. 1464.9 and intraday low of 1419.75. The net turnover during the day was Rs. 1412912322.

Source : Equity Bulls

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