Buy Reliance Industries, target price Rs 1,618: Motilal Oswal

Motilal Oswal has given ebay rating to Reliance Industries with a target price of Rs 1,618, a 10 per cent upside over a CMP of Rs 1,467. Reliance’s fourth quarter consolidated and standalone EBITDA were in line with the brokerage’s estimates. However, the company has recorded its first ever inventory loss in the O2C business, which has led to a PAT miss.


The conglomerate is moving quickly to realize its plan of becoming net debt free by end-FY21. It is now poised to receive Rs 1,037 billion through rights issue, the Facebook-Jio deal and the fuel retailing JV with BP in the coming quarters. The contribution from standalone business to consolidated EBITDA has declined to 60 per cent in FY20 from 85 per cent in FY15. Higher debt in the standalone business as well as better valuations for tech/consumer businesses (together account for 78 per cent of valuations) leads the brokerage to believe these two segments are the new core.


The brokerage values Reliance Industries at Rs 1,618/share (from earlier Rs 1,589) based on SOTP with equity values of Rs 358/share (earlier Rs 353) for the core business, Rs 500/share (earlier Rs 450) for Reliance Retail and Rs 760/share (earlier Rs 750) for R-Jio.

The Reliance share price moved down by -1.79 per cent from its previous close of Rs 1,466. The last traded stock price is Rs 1439.70. Incorporated in 1973, Reliance Industries has a market cap of Rs 930011.97 crore.

Investment Rationale

R-Jio has shown consistent EBITDA growth, reaching the dominant no. 1 position by revenues in less than four years of launch. The brokerage is upbeat on R-Jio’s multiple monetisation avenues coming from increasing long-term ARPUs and other digital applications with the Facebook deal. Thus, it has maintained its target price despite a downward revision in EBITDA due to ARPU increase being pushed forward. Reliance Retail has maintained a strong performance amidst a slowing economy with consistent EBITDA growth.

Petrochem margins are likely to be weak in light of lower product demand, the weak economic outlook and the strong additional supply globally over the next 2-3 years (RIL earlier guided petchem market to balance out by 2021-22E). The brokerage also lowered its FY22E petchem EBIDTA/mt by 10 per cent to $105/mt (keeping FY21 unchanged at $95/mt).

The brokerage values RIL at Rs 1,618/share (from earlier Rs 1,589), based on SOTP with equity values of Rs 358/share for the core business, Rs 500/share (earlier Rs 450) for retail and Rs 760/share (earlier Rs 750) for Jio. The core segment of refining and petrochem is valued at 6.0 times FY22E EV/EBITDA, factoring in the enhanced delayed coker capacity, the widening of crude blend window for maximizing distillate yields prior to the IMO and the revival in petchem margins for the company under its flexible feedstock utilisation. The stock trades at 22 times FY21E EPS of Rs 66.4 and 13.2 times FY21E EV/EBIDTA.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 1,36,240 crore, down -11.06 per cent from last quarter sales of Rs 1,53,179 crore and down -2.40 per cent from last year's same quarter sales of Rs 1,39,590 crore. The company reported net profit after tax of Rs 6,575 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 48.9 per cent stake in the company as of December 31, 2019, while FIIs held26.3 per cent, DIIs 13.6 per cent and public & others 11.2 per cent.