February 06, 2019 - 11:18pm EST by
2019 2020
Price: 1,311.00 EPS 70 85
Shares Out. (in M): 6,338 P/E 18.7 15
Market Cap (in $M): 116,000 P/FCF 0 0
Net Debt (in $M): 24,000 EBIT 0 0
TEV ($): 150,000 TEV/EBIT 0 0

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Reliance Industries (RIL) is an Indian conglomerate with operations across upstream, refining, petrochemicals, retail, telecom and media. Company has a market cap of ~$116Bn and EV of $141Bn and generated revenues of ~$80Bn and EBITDA of ~$12Bn on an LTM basis.  RIL derives ~80% of its revenues today from refining and petrochemicals.  Over its history spanning 40 years, RIL has continuously transformed its core business through backward integration; first via textiles, then polyester, followed by chemicals and then refining.  Over the lasts 2-3 years, RIL has shifted its focus into growing into telecom, data, broadband and retail businesses with a grand plan to integrate and create India’s largest ecommerce platform. Core thesis for RIL relies on the execution of management to grow the businesses to scale and integrate the business models, to which the market yet has to assign any significant value.

RIL’s goal is to transform itself from an integrated energy player to an ecommerce consumer focused platform where consumer businesses are expected to generate 50% of EBITDA.  In a recent annual meeting, Mukesh Ambani, RIL’s chairman and CEO (and India’s richest man) stated “as India starts on its high-growth journey to double the size of its economy by 2025, I assure you that the size of Reliance will more than double in the same period…Our consumer businesses will contribute nearly as much to the overall earnings of the company as our energy and petrochemical businesses.”

RIL’s energy segment (80% of revenues) is primarily made up of the refining and petrochemicals segments.  RIL operates two refineries in Gujarat with combined capacity for processing 1.24mn barrels of crude per day.  RIL also has a presence in domestic fuel retailing business via almost 1,400 retail outlets of which more than 500 are directly owned by RIL.  On the petchem side, RIL has petchem manufacturing locations, 10 in India and 3 in Malaysia, producing polymers, polyesters, and intermediates for a range of applications. RIL is among the top 5 petchem global players and operates one of the most integrated facilities globally, with a wide product portfolio and diversified feedstock slate with both naphtha and gas based crackers.  Acknowledging the threat of renewables to its energy business, Ambani ventured into a large capex plan over the past 5 years to expand its petchem capacity via refinery off-gas cracker (ROGC), downstream polymer and polyester units and ethane import facility.  The capex program is now tailing off and you are starting to see the fruits of the investments as petrochemical volumes increased by 20%+ during FY18.  Stability of the petchem business is under appreciated by the market, as both fuel mix and product mix is much more diversified today than in the past. Historically, petchem feedstock relied primarily on naphtha but given recent investments, the mix is between ROG, naphtha and ethane while petrochemical production is diversified across polymer, polyester, benzene, butadiene, etc.  With higher volumes and stable margins, EBITDA is expected to grow from Rs. 250bn FY28 to Rs.370bn by FY20.

Refinery business has been challenged as of late due primarily to near-term weakness in margins driven by exports from China which caused some disruption in the market, government regulation on ethanol/gasoline blending causing lower gasoline demand in China and new capacity coming online.  However, RIL has a structural advantage in that its scale, complexity and flexibility have led RIL to have market-leading profitability and consistency vs. peers in the industry.  RIL’s Jamnagar complex is the largest refinery complex in the world with 1,240 kb/d nameplate capacity.  Scale is key in this industry in terms of crude sourcing and optimization of manufacturing and operational efficiencies.  RIL’s refiners also rank among the highest in complexity which allows RIL to process a wide range of types of crude oil which allows RIL to use cheaper heavy crude to produce lighter products and improve its gross refining margin.  A potential tailwind for the business could be recent decision by the International Maritime Organization to cap allowable sulfur content for marine bunker from 3.5% to 0.5% effective 1/1/2020. This will most likely lead to an increase in demand for diesel resulting in higher diesel spreads as well as widening light/heavy differentials benefitting complex refineries such as RIL.  Expectations are for refining business to generate ~Rs. 380-400bn of EBITDA.

RIL’s entry into the telecom sector provides a blue-print into Ambani’s ambition to transform RIL into India’s leading ecommerce consumer platform.  Using the $5bn cashflow from refining and petrochemical businesses + taking additional leverage, RIL invested ~$37bn into the buildout of its telecom network.  The scope and scale of RJio’s buildout is unprecedented in the Indian markets - just for comparison purposes, the other two largest players, Bharti and VIL have invested ~$7.5bn in network assets.  As a result, RJio has created the world’s largest only 4GL TE network with 4G pop coverage of 90-95% vs. 50-60% for Bharti and VIL.  RJio is also taking a long-term strategy to sacrifice short term results to build scale.  The first part of the plan involved undercutting the market price and taking market share away from incumbents.  RJio launched in 2016 by offering free voice service sparking a price war amongst players in the industry.  Since RJio’s entry, revenues in the industry fell by 35% with industry consolidating rapidly from 9 players to 3.  Over the past 2 years, RJio jumped to become the 3rd largest player with market share of >20% and has gained 280MM subscribers.  Prices in the market have started stabilizing and ARPUs for RJio should increase by mid-teen levels driven primarily by conversion to smartphones and increased spending from data usage.  Even after the increase in ARPU, total mobile revenues as a % of GDP in India will remain amongst the lowest in emerging markets at 0.7% vs. Thailand at 2.4%, China at 1.6% and Indonesia at 0.7% highlighting the upside potential for RJio.

While offering voice for free was initially used to gain market share and gain subscribers, longer strategy is to attract as many subs as possible, convert these subs from voice focused subs to data focused subs by offering low data price points, and forward integrate these customers into RIL’s retail platform and ultimately monetize these customers across various verticals across ecommerce.  As such, the opportunity set RIL is targeting is far beyond a tradition triple-play business model that traditional telecom players target, it is really building a complete consumer eco-system. 

RIL Retail has physical store presence in 6,000+ cities across India with 9,900+ stores covering 21MM sqft.  RIL has adopted a multi-retail concept strategy and operates wide array of store concepts across key consumption baskets – grocery, consumer electronics, fashion and gas stations.  Core to RIL’s plan is to integrate its retail business via an O2O and marketplace model.  One thing to highlight is the deep fragmentation of India’s retail landscape; due partly to structural reasons such as a territorial tax system, demographics and socio-economic differences between top and low tier cities.  Given the fragmentation in the industry, the first leg to RIL’s ecommerce strategy is to create an online marketplace with focus on inventory management and fulfilment services for the millions of mom and pop kirana stores in India.  RIL has been developing an app which will form as a one-stop shop for offline merchants to get on to RIL’s ecommerce platform and will allow them to manage inventory, logistics, supply chain management, payments and place orders from Reliance’s stores.  RIL has already piloted the app with 5,000 karana stores in Mumbai and Ahmedabad and expects to expand the roll out by the end of this year.  Second leg is the O2O strategy is aimed at increasing online ecommerce in India.  Today, India’s e-commerce penetration accounts for only 2% of retail sales vs. 20% in China.  RIL’s long term strategy is to link its 6,000+ offline retail store fronts + another 5,000+ RJio access points with the 280MM RJio subscribers (expected to 400MM by end of 2019).  Expectation is that once synergies between the two segments are fully captured, RJio could potentially add over $1bn in in EBITDA to the retail business.  Another point to note is that unlike the market development in China where Alibaba for example, had the ecommerce platform but not the offline retail platform, and has relied on acquisitions to gain a foothold in offline retail, RIL is the only player at scale in India with both an online and offline presence, with integration being the missing piece of the puzzle.

Looking at the potential of all the businesses, we have taken a SOTP approach to see what the appropriate valuation would be for RIL.  We estimate that the petrochem and refinery business combined should be worth Rs. 900/s.  At RIL’s trading price today of 1,300 Rs/s that implies that market is ascribing Rs. 400/s for the telecom and retail segment or $36Bn for businesses that will generate ~$8bn of EBITDA in 2022. 


I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


- Decline in capex and increase in FCF

- Normalization in refining business off a down cycle

- Rise in ARPU pricing in RJio + continued subscriber growth

- Further retail integretation into RJio + ecommerce platform growth

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