Reliance Industries (RIL), in its latest AGM laid out the blueprint for value creation over the next decade, with its emphasis on continuing its transition to a new-age digital conglomerate. With emphasis on growing its digital footprint by expanding Jio’s product and solutions bouquet, accelerating efforts to transition to new energy and specialty chemicals, and continuing to leverage the world-scale platform established by its retail segment, RIL sees a radically different future for itself over the next decade vs the last 40 years. Additionally, the induction of three members of the next generation into the Board with Mr. Mukesh Ambani (MDA) committing to remain chairman for at least the next 5 years – are aimed to create a stable succession roadmap for RIL.
FY23 was a strong year
MDA highlighted the strong performance seen over FY23, with growth of 23% in revenue, 29% in EBITDA and 14% YoY in recurring PAT for consolidated RIL. MDA emphasised the transforming nature of RIL over the last 5-6 years into a new-age digital conglomerate and the changing mix of EBITDA for RIL reflects that change. EBITDA contribution from the erstwhile mainstay oil-to-chemicals (OTC) segment reduced by 2,958bps over FY19-FY23 to 41% while share of retail and Jio had expanded (aggregate) by 2,158bps over the period to 45% as of FY23-end.
Jio 5G roll-out on schedule; Jio AirFiber to expand target market
Jio 5G rollout is on target with presence already in 96% of Indian towns and districts and 85% of all 5G cells in the country on Jio network. RIL aims to have 1mn 5G cells operational by Dec’23. It already has >50mn 5G customers and expects to see ARPU improvement as higher-end postpaid customers migrate to Jio. RIL is now focusing on growing its broadband services (JioFiber), which now has ~10mn subscribers. To mitigate challenges of last-mile connectivity, RIL is launching its wireless solution called JioAirFiber, which can increase potential connections per day to 0.15mn per day from the potential 15k per day with last-mile physical connectivity solutions. RIL sees an addressable market of ~200mn using this method with a launch planned for 19th Sep’23.
Extending 4G to feature phones
The other area of focus for Jio is to help the ~250mn feature phone users to use high speed data and apps. The launch of Jio Bharat, an affordable 4G phone with several smartphone like features, at INR 999 only is aimed to help transition traditional feature phone users away from 2G on to 4G networks and provide an additional area of growth for Jio.
Retail – to be the growth engine
RIL’s retail business has seen phenomenal growth over the last 3-4 years, with a CAGR of 27% in revenue and 48% in segment EBITDA over FY18-FY23. RIL retail is now the only Indian retailer in the list of top 100 retailers globally, and ranks in the top 10 of the most visited retail companies. RIL saw 780mn footfalls across >18k stores spanning >65mn-sqft in FY23. RIL has seen sharply higher growth for its digital and new commerce channels aggregating INR 500bn in revenue (20% of total retail). It has invested a cumulative USD 10bn in this business over the last few years focusing on building integration, growing in-house brands, and improving supply chain networks.
RIL’s confidence in this segment is underpinned by a fresh investment by Qatar’s sovereign wealth fund, The Qatar Investment Authority’s (QIA) investment of INR 82.8bn for a ~1% stake in the business, values the business at ~INR 8.3trn, almost 2x the implied value of INR 4.2trn at which the previous round of investment took place in CY20.
Oil & gas – transition to pick pace
RIL continues to be in the top quartile of refining and petrochemical companies globally, even in a challenging operational environment over the last 12 months. Upstream segment has seen strong revival with production at ~20mmscmd of gas from near-zero a few years ago and is on target to reach 30mmscmd by the year-end. RIL is focused on continuing to derisk the commodities business by growing its portfolio of specialty chemicals, adding more new material capacity and creating Jamnagar as a feedstock production hub over the next decade.
New energy timelines become clearer
RIL highlighted updates on the Giga factories announced in areas of solar, wind, batteries and green hydrogen. RIL plans to bring the solar plant on-stream by CY25, battery plant by CY26 and concurrently establish wind and hydrogen manufacturing capacity to enable the installation of 100GW of renewable energy generation by CY30. This is expected to underpin RIL’s stated goal to achieve net carbon zero by CY35.
Our view: Lofty objectives, but returns remain backended; maintain ADD
Led by a sharp uptick in capital employed, which keeps running well ahead of earnings growth, RoCE has remained at moderate levels over the last 4-5 years. Despite a near-18% CAGR in operating earnings over FY20-FY23, FCF earned during the period has remained muted. Aggregate FCF earned during FY20-FY23 is a negative INR 760bn, with a small positive FCF earned in FY20 and FY22 offset by a sharply negative FCF of ~INR 1trn seen cumulatively in FY21 and FY23. While our estimates suggest a solid 18.6% CAGR in earnings over FY23-FY25E, our concern on muted return ratios and limited FCF yield remains. Reiterate ADD.
Stronger OTC margin, lower capex, stronger ARPU growth in Jio and faster-than-estimated execution on green energy plans.