What does chairman Mukesh Ambani’s focus on the telecom business in his speech at Reliance Industries Ltd’s (RIL’s) 41st annual general meeting (AGM) mean for the stock?

Not much, at least in the foreseeable future. True, the RIL share price did rise 1% on Friday. However, considering that the share had declined 3% on Thursday, the gains aren’t impressive.

What explains the reaction? A report from Macquarie Research pointed out, “Jio will be a drag on the RIL profit and loss account in its initial phase, as the high depreciation and interest accompanied by initial expenses of launch and ramp-up will be much more than the ebitda generated even if adoption is relatively quick." Ebitda stands for earnings before interest, tax, depreciation and amortization. Jio may turn profitable 4-5 years after launch, says Macquarie. In any case, analysts aren’t really assigning much value to RIL’s telecom unit, Reliance Jio Infocomm, at the moment.

Or for that matter, even to RIL’s organized retail business. In 2014-15, RIL’s organized retail business earnings before interest and tax (ebit) increased a huge 253% year-on-year. However, in the overall scheme of things, contribution from the segment was just 1.5% of the total consolidated ebit, too small to make a sizeable impact.

Nevertheless, considering that retail business is showing results, investors will feel reassured. RIL intends to expand its retail presence across formats from 200 cities to more than 900 cities by next year. Before the year-end, the fashion and lifestyle formats of Reliance Retail will roll out its e-commerce initiative, said the company.

Unfortunately, that would hardly make much difference to the stock. One way to get a better perspective on what matters for RIL is to consider the contributions that analysts have assigned to each of the company’s businesses in their sum-of-total-parts valuation for the stock.

For instance, Macquarie has assigned a value of 49 per share and 48 per share to RIL’s telecom and organized retail business, respectively, to arrive at its 12-month target price of 1,140 after accounting for a 20% conglomerate discount due to the drag from telecom. While the telecom contribution has increased marginally, the share of retail has declined compared with Macquarie’s July 2014 report on the company.

RIL’s stock continues to derive a lion’s share of its valuation from its downstream businesses (refining, petrochemicals), essentially RIL’s core business strength.

Macquarie pegs the downstream business contribution at 1,113 a share, higher than 899 a share in its July report. “The completion of $14 billion worth of core projects shall more than offset the Jio drag in our view," wrote Abhishek Agarwal of Macquarie, adding that the energy/feedstock cost-efficiency projects (petcoke gasifier, off-gas cracker and shale gas imports) will help to boost the margins of downstream businesses, which shall be the prime driver of earnings.

RIL’s refining and petrochemicals businesses together contributed 84% of the company’s ebit in FY15. RIL said the gasification project is expected to be ready for start-up in phases starting from early 2016. The company is set to expand its petrochemicals volumes across major product categories.

The annual meeting, therefore, has done little to change the outlook for the company. The RIL stock currently trades at an undemanding valuation of 11 times its estimated earnings for this financial year.

The writer does not own shares in the above-mentioned companies.

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