Reliance Industries: High aspirations backed by deep pockets

28 Aug 2023 , 10:31 AM

Recommendation: Buy; Target Price: Rs 2761

RIL’s FY23 Annual Report (AR) showcases how its revenue model is aligned to meet consumption needs of India (clean energy, transport fuels, data, staples to high-end luxury products, etc). With D/capital of 20%, balance sheet has headroom to support ambitious capex; cashflows are robust; ROCE is however sub-par (low asset turns in B2C segments), and may be viewed as an overhang. Base case SoTP is Rs2,761/share. Maintain BUY. Good in giving big picture: RIL’s FY23 AR spells out its commitment to scale up clean energy, growth plans in B2C (retail: 2/3rd portfolio in non-metros; Jio: fast track 5G rollout), etc. AR also showcases how its business portfolio is aligned to the India growth theme (clean energy, data, staples to luxury products, etc). There is a significant scope to enhance disclosures, which may help better analyse the B2C segments. 

Aggressive in some aspects: RIL’s D/capital ratio (even adjusted for various other liabilities) in FY23 is estimated at 24%, which offers scope for pursuing aggressive expansion in clean energy, retail, etc. Even otherwise, it has generated an OCF of Rs1.1trn. However, return ratios are sub-par (ROCE of ~9%), given the low asset turns in B2C; B2B ROCE is ~15%. In the Retail business, RIL does not have any material RoU assets (variable lease agreements; IndAs 116 NA) for which the actual capital employed in business remains unknown. RPTs in the business are up 14% YoY, including lease payments. 

Successful diversification leading to lower BETA? Analysts of IIFL Capital Services model in FY24-26ii consolidated PAT growth of 8% based on -1) steady O2C, ramp-up in E&P. 2) 10% p.a. growth in Jio ARPU. 3) 19% p.a. growth in the Retail business; no external sales of PV cells are modelled until then (captive use). The base case SoTP is Rs2,761/share and can move up, provided there are surprises on growth + improved disclosures. Alternatively, in case RIL is able to induct strategic investors in the Retail and Clean Energy businesses at premium valuations, the SoTP will stand to alter. Rising share of B2C businesses in capital/Ebit would imply less volatile cashflows and hence, lower stock BETA (as seen over the past decade: BETA down from 1.2 to 0.9).