Digital services & Retail business will provide sustainable growth & create consistent value for the company.
Reliance Industries Limited (RIL) is India's largest private sector enterprise. Starting with textiles in the late seventies, the company has undertaken backward vertical integration - in polyester, fibre intermediates, plastics, other petrochemicals, petroleum refining and oil and gas exploration and production - thereby making it a highly integrated player with presence across the energy value chain. RIL enjoys global leadership in most of its businesses, being the largest polyester yarn and fibre producer in the world and among the top five to ten producers of major petrochemical products in the world. It is also involved in diversified businesses consisting of retail, oil marketing and digital services. RIL’s refining complex in Jamnagar is the largest in the world as well as among the most complex; it is also among the largest integrated petrochemical producers globally.
Consequential in-roads achieved in the telecom business: RIL’s digital services subsidiary, Reliance Jio Infocomm Limited, has witnessed healthy addition to its user base since launching its services in September 2016. Jio crossed the 38 crore subscriber milestone as on March 2020 to become the world’s fastest growing digital services company. Jio has not only revolutionised India’s telecommunication industry but also digitised its hinterlands through its extensive network penetration. Jio's revenue metrics have continuously improved, earlier driven by strong subscriber additions and now with recent tariff hikes. Thus we expect a healthy increase in monthly average revenue per user (ARPU) in the near term because of the tariff increase in December 2019.
Facebook deal to be their game changer: Facebook has signed a binding agreement to infuse Rs 43,574 crores in Jio Platform which will give it a 9.99% stake, an all cash deal that will help the oil-to-retail conglomerate reduce debt. This acts as a largest minority investment by any technology company globally and it should help in reaffirming Jio's position as a leading technology company rather than just a telcom. An agreement has also been signed with Whatsapp to provide an impetus to the upcoming new commerce business of Reliance Retail. This investment would enable new opportunities for the company and bring in synergies to create new and exciting digital ecosystems.
Strong market position in the retail segment: Reliance retail is India's largest retailer by revenue and it's strong market position is reflected in its leadership position and was ranked as the fastest growing retail company in the world. The company has been expanding its presence across tier-2 and 3 cities and has reported strong revenue growth of 25% YoY in fiscal 2020 , driven by growth across all its consumption baskets: fashion,grocery, consumer electronics, connectivity, and petro retail. During this period, there has been a strong increase in revenue per store across formats, with the stores launched over the past few years gaining a traction in their respective areas.
Multiple acquisitions make for hidden strengths. Over the last few years, RIL has done multiple acquisitions of start-ups such as Haptik (an AI chatbot firm), Radisys (an AI-based app-less video bot for digital customer engagement), Easy gov (an AI-based technology platform), Reverie (language localisation solutions), Asteria Aerospace (a full stack drone technology company), Netradyne (analytic solutions with a focus on fleet management and surveillance), and many more. These, when integrated with its retail business, can give the company capabilities such as logistics, customer engagement, and inventory management.
Leadership position in the petrochemical segment: RIL maintained its leadership position in various product segments of domestic pet-chem market. It is the second largest producer of polyester fibre/ yarn and paraxylene (PX) globally. RIL is also amongst the top ten global manufacturers of products such as polypropylene (PP), mono ethylene glycol (MEG), purified terephthalic acid (PTA), etc. in the world. A diversified presence across the petrochemicals segment de-risks RIL’s revenues from lethargy in any particular product and also enables the company to command better pricing terms in the industry.
Covid-19 impact: The pandemic outbreak will impact petrochemical segment in the short term and due to sharp fall in brent oil price, refining utilization and economics are likely to get impacted in the near term. But this will partially offset by continuing growth in consumer businesses, even amidst the operational issues posed by the pandemic, thus business will get impacted in short term but the company is well positioned to navigate this macro headwinds
Regulatory risks in the telecom sector: Regulatory and policy changes have largely driven the risk characteristics of the Indian telecom industry.
Fluctuations in crude prices have an impact on its refining and petchem business.
|Raw material Consumed||212356.00||267534.00||394487.00||405240.00||347565.00||399145.00|
|Employee Benefit Expenses||8412.00||9506.00||12488.00||14075.00||13076.00||13969.00|
|Adj EPS (Rs)||50.50||60.90||66.80||62.91||73.97||104.69|
We expect digital services segment to be their new growth driver supported by consistent hikes in their tariff rates along with growth in their subscriber base and also partnership with a strong technological partner will bring in synergies and technical assistance thus adding immense value to the company. Further we expect strong performance in retail segment majorly in grocery and connectivity category will provide additional levers to growth. The company has high visibility of inflows in excess of Rs 104,000 crore in CY2020 which will ensure balance sheet strength. The stock is currently trading at 13x FY22 E EPS.