Reliance Industries Ltd. share price target

RIL, Jio Platforms Ltd (JPL) and Facebook Inc (FB) announced the signing of binding agreements for Rs435.7bn investment by FB in JPL. FB's investment will translate into a 9.99% equity stake in JPL on a fully diluted basis. Deal is subject to statutory approvals. The investment values JPL at a pre-money EV of Rs4.62tn, or USD65.95bn (at Rs70/USD) which is in line with RIL's aspiration of USD65-70bn. JPL is hold-co for Reliance Jio, along with other Jio app companies/digital platforms. RIL will now have ~90% stake in JPL. Concurrent with this, JPL, Reliance Retail and WhatsApp have also entered into a commercial partnership agreement to further accelerate Reliance Retail's New Commerce...

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. 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.

Recovery is expected to be slow with potential EBITDA cut of ~60%/30% The ongoing lockdown should have limited impact on RJio as telecom companies are expected to see recharge upgrades given the increase in data consumption. We have cut GRM forecast from USD10/bbl earlier to USD8/bbl for FY21E. With valuation of INR450/share for Reliance Retail and INR500/share for RJio, the current price implies 2.5x FY22E EV/EBITDA for the core segment. If FY22E were to turn out similar to FY21E, the current price would imply 3.2x FY22E EV/EBITDA for the core segment. This could be due to additional ARPU increase or market share gains as RJio remains well placed to gain from the bleeding Given the fluid nature of the current circumstances, we have not cut our estimates for Reliance Retail, but have trimmed valuations to capture the potential revenue loss in the coming period and the risk of slow recovery.

Robust performance in Digital & Retail offset by O&G; weakness In Q3FY20, topline remained under pressure as major revenue contributor, Refining and Marketing segments revenue slipped (-7.2% YoY; contributed ~49% of revenue) due to weak crude prices and geopolitical tensions impacting heavy crude sourcing & freight markets. Petrochemical segment also declined 19.1% YoY (~18% of revenue) due to lower price realization across product categories and global demand slowdown. This is partially offset by robust growth in Digital Services (+36.1% YoY; ~8% of revenue) and Organized Retail (+27.4% YoY; ~22% of revenue) with double digit likefor-like sales from existing store. Standalone exports fell 13.7% YoY to Rs. 53,804cr....

on account of 10.6% decline in order-to-cash (O2C) business revenues, with lower product price realization and 6.6% fall in Brent crude price. This was partially offset by continuing growth momentum in consumer businesses. Digital Services and Retail business recorded an increase of 36.2% and 27.4% respectively, in revenue during the quarter compared to the corresponding quarter of the previous year. Exports (including deemed exports) from RIL's India operations were lower by 13.7% at Rs 53,804 crore as against Rs 62,378 crore in the...

The much awaited IMO regulations will boost the core refining business. However, both refining and petchem segments face demand slack, given the impending capacity additions in CY20. We expect both segments to peak out in the near term. Monetisation of Jio's infrastructure is a catalyst, but timing/pricing are crucial. We remain NEUTRAL on RIL, post an underwhelming 3QFY20. Reported EBITDA was 10% below our estimate at Rs 128.71bn. Weak margins across petchem products and higher operating expenses have adversely impacted this segment. Our SOTP valuation is Rs 1,562/sh (7.5/9.0x EV/e for refining/petchem, 18.0x EV/e for Retail, 10x EV/e for Telecom business and Rs 116/sh for E&P; assets).

Key highlights from Reliance Industries' (RIL) Q3 financials: (a) Cyclicals under-performed on low GRMs (US$9.2/bbl, Vs US$10.7 ests); and tepid petchem margins (US$100/MT EBITDA, -23% QoQ)); (b) higher than expected earnings from retail Rs27 bn (+62% YoY, 6% margins) and (c) lower than estimates earnings from RJIO Rs58 bn (+9.6% YoY).

18 January 2020 Oil & Gas 3QFY20, primarily led by the better-than-expected performance of the Digital and Retail segments. However, higher depreciation/interest and lower other income led to in-line PBT of INR149.1b (our estimate INR142.9b, +3% YoY). The company recognized an exceptional item of INR1.8b toward license fees/spectrum usage charges. Reported PAT came in at INR118.4b (+10% beat, +14% YoY) and adj. PAT at INR119.8b (11% beat, +15% YoY). basis stood at 20.9% v/s 24.7% last quarter as the company benefitted from lower tax in the standalone business. RIL reported in-line standalone revenue of INR862.

Pressure on cyclical earnings

RJio and Retail neutralise uncertainty over cyclicals