Zero to hero: RIL’s consumer biz drives stock’s valuation upgrade
- At Jio’s launch, the Street was assigning very little value to RIL’s telecom as well as retail businesses
- RIL’s consumer businesses contribute over 50% of the EV estimates of most brokers now
Three years ago, when Reliance Industries Ltd’s (RIL’s) telecom unit, Reliance Jio Infocomm Ltd, launched commercial operations, investors were uncertain, even sceptical, about how the business will shape up. Back then, analysts at Kotak Institutional Equities had assigned zero equity value to the telecom piece in their sum-of-the-parts (SOTP) valuation.
RIL’s other consumer play, Reliance Retail Ltd, contributed merely 3.7% to Kotak’s SOTP back then as well, and along with the debt in Jio's books, the two consumer businesses accounted for about 25% of total enterprise value estimate of the broker.
Now, both consumer businesses put together account for nearly 55% of the brokerage firm’s enterprise value (EV) estimate for RIL. EV is a measure of valuing companies by adding their market capitalization and net debt.
For some brokers, the two businesses accounted for merely 10% of EV.
Clearly, the past three years have been a remarkable zero to hero journey for Reliance Jio and Reliance Retail.
RIL’s consumer businesses now contribute more than half of the EV estimates for most brokerage firms.
“This just shows that RIL’s transition to a customer service conglomerate is in full bloom,” said Probal Sen, senior vice president (research) at Centrum Broking Pvt. Ltd. “Additionally, the trend is a reflection of the higher multiples that the consumer businesses enjoy. In any case, outlook for RIL’s downstream energy businesses remains muted from a medium-term perspective as margins remain subdued.”
While telecom and retail businesses account for 50-60% of valuation estimates, they still comprise a lower 33% share of the company’s operating profit. But it’s also worth noting here that growth in the consumer businesses hasn’t disappointed, firing each quarter to boost overall profit.
Just a year ago, RIL’s consumer businesses accounted for a much lower 23% consolidated Ebitda (earnings before interest, tax, depreciation and amortization).
What’s more, Goldman Sachs Services Pvt. Ltd expects strong growth at RIL’s consumer businesses to continue, with the three-year Ebitda compound annual growth rate of 40-35% for telecom and retail. “We expect consumer businesses to account for 40% of RIL Ebitda in financial year 2022 (estimates),” said Goldman Sachs in a report on 21 October.
Even as the implementation of the International Maritime Organization’s (IMO’s) new regulations from 2020 are expected to support stronger refining margin environment, analysts aren’t particularly gung-ho. “While IMO should benefit refining. Overall, given the weak global macro, large new refining addition, and continued pressure on heavy crude supply, beyond the next two quarters, refining could weaken,” wrote JPMorgan’s analysts in a report on 21 October.
Simply put, it would hardly be surprising if RIL’s investors continued to assign more value to the consumer businesses, going ahead.
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