Reliance: How much is it really worth

What does Reliance industries comprise?

• Reliance Industries has now become the first Indian company to cross $150 billion in market capitalization (~11.50 lakh crore)
• In FY20, it’s consolidated EBITDA, a metric used to measure how profitable a company’s business is,  crossed ₹ 1 lakh crore mark
• While a major chunk of the revenues and earnings comes from its Oil & Gas business, the growth areas for Reliance off late have been Retail and Jio (it’s telecom and platforms business)

• The consumer businesses (Reliance Retail + Reliance Jio) now contributes about 35% of the total consolidated EBITDA
• Growth, however, has been driven by the Retail, telecom and Jio Platforms arms of the company. They have structurally been investing (and now raising money by divesting) in these businesses as they transition from an Oil business to a data Business.

Why has Reliance been rallying in the market?

• Although Reliance is a conglomerate, it’s valuation has traditionally been driven by it’s Oil business. Given the high Capex nature of the business, companies in this sector normally command a PE multiple (price/earnings) of ~13.60 (Trailing)
• However, Reliance is transforming. They undertook a capex of $40 bn over 2013-2018, investing almost half of the total into building Jio and further expanding its retail presence.
• As it stands today, future growth and the roadmap of the company is oriented towards it’s growth segments and hence the stock commands a higher valuation.
• Further, Mukesh Ambani has promised to demerge Jio from the Oil & petchem business within the next 5 years. These demergers result in value unlocking for shareholders as the value of each business is measured separately.
• 'To measure the value unlocking resulting from the demerging of Reliance Jio, we’ve mapped out a sum of parts of Reliance to see how much it could actually be worth.'

How are we going to do this

• Given the size and scope of Reliance, We’re going to estimate an enterprise value for each of it’s business’ - Oil & Petchem, Retail & Oil
• Dividing the Enterprise value by the no. of shares gives us the possible contribution of each business to the stock price.
• 'We’re trying to map out what the stock price of each business is worth given the future growth estimates and what value unlocking by way of demerger could provide shareholders.'

Reliance Jio & Platforms

• The investments by 12 PE firms including KKR, Silver Lake, TPG etc totalling 1.18 lakh crore have valued Reliance Jio’s Enterprise Value at ₹5.16 lakh crore.
• Taking the Enterprise Value of ₹5.16 lakh crore as the base case, the EV/EBITDA (trailing) multiple works out to about 22.3 for Reliance Jio (based on Reliance Jio’s EBITDA in FY20). This is the base case
• Reliance Industries holding in Jio has come down to 67% in Reliance Jio, after all the stake sales. Therefore, the equity value is adjusted in the table below, to reflect this.
• Given Jio’s future growth will be driven by digital initiatives and Jio platforms, EV/EBITDA of comparable businesses (Tencent, FB, Amazon, Alibaba etc), although none is exactly comparable, ranges from 25-40. And much higher during the growth phase.
• Further, we assume a 50% EBITDA growth for Reliance Jio in FY21 as Optimistic Case, and 5% decline in EBITDA as the Worst Case
• Here’s what possible valuations could be

Reliance Retail

• Reliance Retail has got the tag of fastest-growing retailer in the world.
• In the last five years, the revenues in the retail business have grown 8 times and profits have multiplied 11 times.
• There has been a lot of buzz around JioMart-- a tech-enabled partnership links producers, traders, small merchants, consumer brands and consumers.  Reliance Retail and WhatsApp have announced creating a JioMart platform using WhatsApp and to support small businesses on WhatsApp.
• We have assumed a EV/EBITDA multiple of 15.50 for Reliance Retail (based on a peer-set of Indian and global retailers)
• In the worst-case scenario, we have assumed no growth in EBITDA for FY21. However, we believe this is highly unlikely

Oil & Gas

• Oil & Gas segment, which includes businesses such as Refining & Marketing, Petchem, and Exploration and Production contributed to about 70% of the overall revenues, and 54% of the consolidated EBITDA
• This segment saw an overall decline in the previous year due to the challenging market environment. 
• We assume a stable 11% growth in EBITDA in the best-case, and a 10% decline in the worst case. 
• EV/EBITDA multiple is assumed at about 8 times for this segment

Stitching the segments together

• The media and entertainment segment, which contributed to 0.6% of the consolidated EBITDA has been clubbed in with Digital Services (Reliance Jio) for the purpose of this analysis
• Apart from these segments, Reliance Industries also earned about ~₹14,300 crore in EBITDA categorised as ‘others.’   The modeling for this segment has been done assuming a 50% growth and EV/EBITDA of about 9 times.
• After raising capital, Reliance Industries achieved a status of becoming a ‘net zero’ debt company. In fact, it now has a surplus Cash of about ~44,145 crore. The company had a ‘Minority Interest’ of about ~₹80,000 crore. This has been factored into while valuing the investments/others division.
• Appropriate adjustments have been made to arrive at the Equity Value from Enterprise Value in the respective divisions.
• We assume this to be constant over the next year.Here’s the break-up of Sum of the Parts’ contribution to RIL’s share price, and our estimate.

• 'Given the tremendous tailwinds the company is experiencing and unparalleled execution capability, a sum of parts value of over ₹2,450/share is very realistic currently.'
• Conglomerates; which hold different businesses under one umbrella, typically trade at a discount to the sum of parts. This is currently happening in Reliance.
• The Significant value unlocking, which we are sure Mukesh Ambani will skillfully execute at the right time will reap the rewards in stock price post demerger

Reliance Industries shares are currently trading at ₹1,911. Our VGQM model has a HOLD rating on the stock.