RELIANCE INDUSTRIES A Giant Digital Leap · Reliance Industries 30 July 2020 JM Financial Institutional Securities Limited Page 4 Key charts Exhibit 1. Jio’s ARPU to be driven by

Entering a strong FCFgeneration phase;Initiate with BUY

A Giant Digital Leap

ARPU hike inevitable; Jioon track to ~50% RMS

target in wireless

Digital opportunities -Jio Mart, OTT apps

& IoT

RELIANCE INDUSTRIES

30 July 2020

INDIA | OIL & GAS| COVERAGE INITIATION

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TABLE OF CONTENTS

Introduction

Key charts

Investment thesis

ARPU hike inevitable; Jio on track to ~50% RMS target in wireless

Potential digital monetisation opportunities

Retail - driving omni-channel capabilities across segments

Downstream margins outlook subdued; RIL relatively better placed

Debt concerns behind us; entering a strong FCF generation phase

Key assumptions and estimates

Initiate Coverage with a BUY rating & TP of INR 2,500

Company Profile & Board of Directors

Financial tables 55

Three reasons to read this report:a) Why is Telecom industry revenue set to double in the next 5 years? Refer

to our analysis on sustainable APRUs from bottom-up & top-downperspectives

b) Framework for analyzing long-term digital opportunities and the scopefor monetisation

c) Our 3-year SOTP-based valuation suggests a steady returns profiledriven by earnings growth potential in the consumer business

30 July 2020


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RECENT REPORTS

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COVERAGE INITIATION GMM PFAUDLER

http://www.jmflresearch.com/JMnew/JMCRM/analystreports/pdf/2020%20View-4%20Dec%2019.pdf

http://www.jmflresearch.com/JMnew/JMCRM/analystreports/pdf/India_Strategy_Rural%20Safari%20X_15Oct2019.pdf

http://www.jmflresearch.com/JMnew/JMCRM/analystreports/pdf/India%20Economics_Covid-19%20Tracker_13.pdf

http://www.jmflresearch.com/JMnew/JMCRM/analystreports/pdf/GMM_IC_June20.pdf

http://www.jmflresearch.com/JMnew/JMCRM/analystreports/pdf/SEL_CompanyUpdate_20Jul2020.pdf

Reliance Industries

A Giant Digital Leap

ARPU hike inevitable; Jio on track to ~50% RMS target: Since industry consolidation is largely over, we expect industry ARPUs to rise on a mix of growth in data usage and tariff hikes. Although there exists limited visibility on TRAI floor tariffs, we believe a tariff hike is inevitable given that the industry needs an ARPU of INR 230-250 by FY25E for a pre-tax RoCE of 12-15% to justify future investments. Further, competitor VIL needs APRUs to more than double to +INR 270 by FY23 to avoid a duopoly market. Hence, we expect industry revenue to double by FY25E to ~INR 2,600bn. We expect Jio ARPU to post a 10% CAGR over FY20-28 and expect its strong subscriber additions to continue; we hence expect Jio to attain ~50% RMS target by FY25E (vs. 36% at end-FY20).

Potential digital monetisation opportunities: Jio is ideally placed to capture the growing digital pie given its: a) large +390mn telecom subscriber base, b) network effects by participation of marquee partners such as Facebook,and c) creation of a digital ecosystem, both Jio and third-party apps,enabling cross-selling of solutions.

Retail - driving omni-channel capabilities across segments: RIL expects to drive omni-channel capabilities across segments as well as extend JioMart to Consumer Electronics and Fashion & Lifestyle. Given its previous history of successful execution, this could as well become a sizeable value-creation opportunity in the future.

Downstream margins outlook subdued; RIL relatively better placed: We expect the refining/petchem margin outlook to be subdued in the near term given the large demand contraction. However, RIL is relatively better placed vs. peers due to its integrated and complex facility, and its feedstock sourcing and product placement strength.

Entering a strong FCF generation phase: Initiate with BUY: RIL is entering a strong FCF generation phase with major capex completed and expectation of strong 17-18% EPS CAGR over the next 3-5 years led by Digital and Retail businesses. Hence, we initiate with a BUY rating and TP of INR 2,500. Given the sharp +100% rally in the share price in the last 4 months, there could be near-term weakness given that EPS growth is likely to be muted in the next 1-2 quarters. However, we suggest using this opportunity to BUY as our 3-year TP suggests a potential return CAGR of ~17%.

Recommendation and Price Target Financial Summary (INR mn)

Current Reco BUY Y/E March FY19A FY20A FY21E FY22E FY23E

Current Price Target 2500 Net Sales 56,92,090 59,67,430 51,27,431 66,04,605 74,87,221

Upside/(Downside) 19.2% Sales Growth (%) 45.3 4.8 -14.1 28.8 13.4

EBITDA 8,41,670 8,82,170 8,95,500 12,34,724 15,00,156

EBITDA Margin (%) 14.8 14.8 17.5 18.7 20.0

Key Data – RIL IN Adjusted Net Profit 3,98,370 4,43,240 3,91,765 6,07,810 7,82,632

Current Market Price INR2,097 Diluted EPS (INR) 67.2 69.9 60.8 89.9 115.7

Market cap (bn) INR13800/US$184.5 Diluted EPS Growth (%) 10.4 4.0 -13.1 47.9 28.8

Free Float 39% ROIC (%) 11.2 11.3 10.1 13.8 16.3

Shares in issue (mn) 6,761.6 ROE (%) 11.7 10.5 8.0 10.5 11.8

Diluted share (mn) 6,444.7 P/E (x) 31.2 30.0 34.5 23.3 18.1

3-mon avg daily val (mn) INR40,372/US$539.7 P/B (x) 3.2 2.9 2.6 2.3 2.0

52-week range 2,199/867 EV/EBITDA (x) 19.2 18.3 16.3 11.3 9.0

Sensex/Nifty 38,071/11,203 Dividend Yield (%) 0.3 0.3 0.3 0.4 0.5

I INR/US$ 74.8 Source: Company data, JM Financial. Note: Valuations as of 29/Jul/2020

Price Performance JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters, S&P Capital IQ,

FactSet & Visible Alpha. You can also access our portal: www.jmflresearch.comPlease see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst

Certification.

% 1M 6M 12M

Absolute 21.7 43.0 74.8

Relative* 11.7 54.8 73.0

*To the BSE Sensex Dayanand Mittal [email protected]

Tel: (91 96) 19388870

Vishnu K G [email protected]

Tel: (91 94) 46896452

Krishan Parwani [email protected]

Tel: (91 96) 62095500

We initiate coverage on RIL with a BUY rating and TP of INR 2,500/share as we expect RIL to enter a strong FCF generation

phase with major capex completed and expectation of strong 17-18% EPS CAGR over the next 3-5 years, led by Digital and Retail

businesses. We expect telecom industry revenue to double by FY25E as an ARPU hike looks inevitable given the industry’s future

investment needs and to avoid a duopoly market. Hence, we expect Jio ARPU to post a 10% CAGR over FY20-28 and expect

its strong subscriber additions to continue; Jio should attain ~50%

RMS target by FY25E (vs. 36% at end-FY20). Jio is also well-placed to tap potential digital monetisation opportunities. Further,

in Retail, it is driving omni-channel capabilities across segments as well as extending JioMart to Consumer Electronics and Fashion & Lifestyle; this has potential to become a sizeable value-creation

opportunity. The downstream margins outlook is subdued but RIL is better placed than peers to tide the crisis.

Our SoTP-based TP of INR 2,500/share comprises: a) Digital segment at an EV of INR 952/share based on INR 780 for the telecom business, INR 67 for option value of a duopoly market

and INR 105 for potential digital opportunities; b) Retail business at an EV of INR 584/share; we also value Jio Mart at an

EV of INR 115; and c) Energy business at an EV of INR 838/share.

Given the sharp +100% rally in the share price in the last 4

months, there could be near-term weakness given that EPS growth is likely to be muted in the next 1-2 quarters due to the pandemic. However, we suggest using this opportunity to BUY

as our 3-year TP suggests a potential return CAGR of ~17%. Key risks: a) limited APRU hike and lower-than-expected

subscriber additions in the telecom business; b) challenges in monetisation of digital opportunities and new commerce

business and c) continued weak downstream margins.


30 July 2020


http://www.jmflresearch.com/

Reliance Industries 30 July 2020


Key charts

Jio’s ARPU to be driven by increased data usage and tariff Exhibit 1.hikes

Source: Company, JM Financial.

Jio RMS to rise to ~50% by FY25E (from 36% at end-FY20) Exhibit 2.driven by subscriber addition and ARPU increase


Jio’s peak capex cycle is over, long term capex intensity Exhibit 3.seen at 15% of sales


INR 172/share equity value for RIL from duopoly optionality Exhibit 4.and digital applications

Source: JM Financial.

Retail business ROIC improved significantly to 27.1% in Exhibit 5.FY20 aided by higher OPM and better asset turns


RIL’s FCF and FCF yield to rise sharply Exhibit 6.

-5%

-1%

3%

7%

11%

-550

0

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FY18

FY19

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E

ARPU

(INR)

Net

subsc

riber

additio

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(mn)

Jio Net subscriber adds (mn) Jio ARPU (INR) [RHS]

0%

20%

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FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E

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Jio Bharti Airtel VIL Others

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Caepx/ sa

les (%

)Capex

(IN

R b

n)

Capex (INR bn) Capex / sales (%) [RHS]

67

83 8

14172

0

20

40

60

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180

200

Optional value -Telecom Duopoly

Video OTT Audio OTT ConsumerIoT/smart devices

Total

INR/s

hare

2%

2% 2%3% 5%

6.5%

8.8%

15.9%

21.2%

27.1%

3.2

5.0

6.4 6.25.9

0

2

4

6

8

0%

6%

12%

18%

24%

30%

FY16 FY17 FY18 FY19 FY20

NOPAT margin - % ROIC - % Invested capital turns



Investment thesis

We initiate coverage on RIL with a BUY rating and TP of INR 2,500 as we expect RIL to enter

a strong FCF generation phase with major capex phase a thing of the past and expectation of

strong 17-18% EPS CAGR over the next 3-5 years led by Digital and Retail businesses. We

expect Telecom industry revenue to double by FY25E as an ARPU hike looks inevitable given

the industry’s future investment needs and to avoid a duopoly market. We expect Jio ARPU

to grow at 10% CAGR over FY20-28 and expect its strong subscriber additions to continue;

Jio should attain the ~50% revenue market share (RMS) target by FY25E (vs. 36% at end-

FY20). Jio is also well-placed to tap potential digital monetisation opportunities. Further, in

the Retail business, it is driving omni-channel capabilities across segments as well as

extending JioMart to Consumer Electronics and Fashion & Lifestyle; this can become a

sizeable value-creation opportunity. The downstream margins outlook is subdued, but RIL is

relatively better placed than peers to tide the crisis.

Given the sharp +100% rally in share price in the last 4 months, there could be near-term

weakness given that EPS growth is likely to be muted in the next 1-2 quarters due to the

pandemic. However, we suggest using this opportunity to BUY as our 3-year TP suggests a

potential return CAGR of ~17%.


Given that industry consolidation is largely over, we expect industry ARPUs to rise on a mix of

growth in data usage and tariff hikes. We believe there is sufficient headroom for ARPU

expansion, given that ARPU to nominal GDP per capita is at historical lows of 0.6% (vs.

1.3%-1.5% levels seen during FY14-16 i.e. before Jio disrupted the market through rock

bottom tariffs). Although there exists limited visibility on TRAI floor tariffs, we believe a tariff

hike is inevitable given the industry needs an ARPU of INR 230-250 by FY25E for a pre-tax

RoCE of 12-15% to justify future investments. Further, Vodafone Idea Limited (VIL) needs

APRU to more than double to +INR 270 by FY23 to avoid a duopoly market. Hence, we

expect industry revenue to double by FY25E to ~INR 2,600bn. Further, industry capex

intensity is likely to moderate, and together with improving EBITDA, would improve ROCE of

players in the sector.

We have built in Jio’s ARPU CAGR at 10% over FY20-28. We expect Jio to attain ~50% RMS

by FY25E from 36% at end-FY20 (Exhibit 1 and 2), led by ARPU increases and strong

subscriber acquisition (as Jio’s tariffs continue to be at a 10-20% discount to Bharti and VIL

and aided by a strategic partnership with Google to launch low cost smartphones). Jio plans

to incrementally focus on ramping up its fibre to the home (FTTH), target of 50mn customers

in 3 years, and 5G/ Enterprise business.

India’s ARPU to GDP per capita has declined to record low Exhibit 7.of 0.6% in FY19-20 vs. 1.3-1.5% during FY14-16

Source: TRAI, JM Financial.

Industry revenues to double by FY25E, with Jio attaining Exhibit 8.close to ~50% of revenue market share


Limited visibility on implementation of Trai’s floor tariff concept; but tariff hike inevitable

given the future investment needs

We believe that the regulator may not implement floor tariffs in the near term in light of the

ongoing pandemic, but it may also not oppose any fresh hikes in tariff, if the telcos choose to

do so, especially for higher ARPU broadband customers. Also, in our view, it is likely that the

0.0%

0.5%

1.0%

1.5%

2.0%

FY14

FY15

FY16

FY17

FY18

FY19

FY20

ARPU

/GD

P p

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capita (%

)

Historical ARPU/ GDP per capita for India

0

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3000

FY08

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FY24

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FY25

E

ARPU

( base

d o

n A

GR,IN

R)In

dust

ry A

GR (IN

R b

n)

Industry AGR (INR bn) ARPU (based on AGR,INR) [RHS]



telcos could opt for a hike in tariff, given the impending investments for spectrum and 5G

rollout. Our calculation suggests that industry ARPUs might need to reach INR 230-250 levels

by FY25E for a reasonable pre-tax RoCE of 12-15% considering the future investment needs

(cumulative investment of ~INR 8,000bn till end-FY25e).

Estimated ARPU of INR230-250 for a pre-tax RoCE of 12% and 15% based on future investment for private telcos Exhibit 9. For 12% ROCE For 15% ROCE Comments

Required return 12% 15%

Total invested capital (INR bn) 8,012 8,012 Book value of net invested capital at the end of FY20 + estimated capex over FY21-25E

Required EBIT (INR bn) 961 1,201

Actual non-statutory opex (INR bn)* 1,338 1,338 4QFY20 annualized opex ex-License Fees and Spectrum Usage Charges [SUC]

License Fee + SUC (%) 13% 13% License Fee taken at 8% and SUC at 5%

Required revenue (INR bn) 2,642 2,918

Number of subscribers (mn) 962 962

ARPU (INR ) 229 253

Source: Company, JM Financial.* Pre-IND AS numbers used

Significant ARPU increase required to avoid a duopoly market

VIL requires a significant ARPU increase in order to meet its payment obligations without any

further equity injection. Our calculations suggest VIL needs ARPU to rise from current INR 121

to +INR 270 by FY23 to meet its payment obligations in FY23E (Exhibit 32). A significant

ARPU increase for VIL would, however signify an ARPU uplift for other players as well.

However, if the required tariff hike does not come through, VIL might not be able to meet its

payment obligations. We value RIL’s share of the telecom business at an EV of INR 780/

share; additionally we also valued the option value of a duopoly market at INR 67/share for

RIL assuming a 50% probability for duopoly market and Jio garnering 40% of VIL’s total

subscriber base.


RIL’s foray into Digital services has been accelerated by strategic investments by various

marquee tech and PE players in Jio Platform (JPL). Covid-19 has accelerated both data

consumption due to virtual working and adoption of Digital apps. Jio is ideally placed to

capture a major share of this new and growing Digital pie given: a) the large +390mn

subscriber base of Jio; b) network effects provided by participation of marquee partners such

as Facebook; and c) creation of a digital ecosystem, consisting of both Jio and third-party

apps, enabling cross-selling of solutions. We have looked at the value arising from

applications having greater visibility – namely, monetisation of video OTT apps, audio OTT

and ramp-up of consumer Internet of Things (IoT) / smart sensors business. Cumulatively,

these contribute INR 105/share to our RIL target price (Exhibit 4).

Platform business: A case of 1+1>2

We believe the logical conclusion of the ramp-up in digital applications would be the

development of a ‘Super App’ kind of structure, enabling consumers to use their

smartphones / devices for a variety of purposes – social media, ecommerce, gaming, payment

solutions, online learning and telemedicine, all within the Jio ecosystem.

Retail — driving omni-channel capabilities across segments

RIL’s ambition for organised retail business is even larger now and it expects to drive omni-

channel capabilities across segments as well as extend JioMart to Consumer Electronics and

Fashion & Lifestyle – JioMart has started off in the grocery space at present to begin with -

similar to how Reliance Retail initially began. Given its previous history of successful

execution, this could as well become a sizeable value-creation opportunity in the future. For

the near term, we expect larger value-creation potential from the Grocery and Consumer

Electronics businesses over FY20-23 while Fashion & Lifestyle segment is likely to take

relatively more time to recover from the pandemic.

We value the Retail business at an EV of INR 584/share (or INR 3,706bn) based on 25x

forward EBITDA. Further, we value Jio Mart at an EV of INR 115/share (or INR 732bn),

factoring the opportunity of digitisation of Kirana store (Exhibit 63). We expect Jio Mart to

get +10% market share in the digitised General Trade market (expecting it to be 50% of the

total GT market by FY30) by FY30 and given the profitability potential, we peg the value of

this business at INR 1,600bn by Mar’29, which implies INR 732bn in present value terms.




We expect refining and petchem margins outlook to be subdued in the near term given the

huge ~8% global oil demand contraction likely in CY20 (Exhibit 65 and 66), ongoing capacity

additions and the resultant excess inventory build-up. However, RIL is relatively better placed

to mitigate this challenge due to its integrated and complex facility, locational advantage and

its strength for feedstock sourcing and product placement. Hence, we expect RIL to continue

to operate its plants at optimum utilisation despite near-term demand concerns. We expect

RIL’s GRM at USD 7.5/9.0/10.0/bbl in FY21/22/23 (vs. USD 8.9/bbl in FY20) and petchem

EBITDA margin at USD 192/221/243/tn in FY21/22/23 (vs. USD 218/tn in FY20). We value

Refining and Petchem business at an EV of INR 346/share and INR 424/share, respectively,

based on 7.5x EV/EBITDA.

Debt concerns behind us; entering a strong FCF generation phase

We take comfort from RIL’s deleveraging efforts via stake sale in JPL and rights issue to

become zero-net-debt ahead of its Mar’21 target. Although the RIL-Aramco deal for a

proposed 20% stake in RIL’s O2C has been delayed, we still see a possibility of this deal

going through given its strategic importance for Saudi Arabia to secure its future crude

markets. RIL is entering a strong free cash flow (FCF) generation phase with major capex

completed and expectation of strong 17-18% EPS CAGR over next 3-5 years led by growth

potential in the Digital and Retail business. We expect RIL’s FCF yield to improve from 2% in

FY20 to 7% in FY25 as RIL would generate FCF of INR 235bn in FY21 and grow to INR 993bn

by FY25 (Exhibit 6).

RIL’s net debt flow chart based on recent and proposed stake sale (INR bn) Exhibit 10.

Source: Company, JM Financial

RIL’s major capex (INR bn) phase is behind us Exhibit 11.

101

269 246

327

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RIL's major capex phase is behind us


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Initiate coverage with a BUY rating with TP of INR2,500

Our Target Price for RIL of INR 2,500/share (Sep’21 basis) is computed on a sum-of-the-parts

(SOTP) valuation method:

a) Petchem segment at an EV of INR 424/share based on 7.5x forward EV/EBITDA, in-line with

the implied Saudi Aramco deal multiple;

b) Refining segment at an EV of INR 346/share based on 7.5x forward EV/EBITDA, in-line with


c) E&P segment at an EV of INR 68/share based on 9.0x forward EV/EBITDA; higher multiple

as we EBITDA is likely to jump 3x due to a rise in gas production from new fields;

d) Digital segment (RIL’s 67.05% stake in JPL) at an EV of INR 952/share comprising: i)

Telecom business at INR 780/share based on DCF valuation; implied valuation of 14.3x

Sept’21 EV/EBITDA; ii) Option value of duopoly market at INR 67/share; and iii) Digital

opportunities at INR 105/share based on potential monetisation of Video OTT apps, audio

OTT and Consumer IoT business.

e) Retail business at an EV of INR 584/share based on 25x forward EBITDA. Further, we value

Jio Mart at an EV of INR 115/share, factoring the opportunity of digitisation of Kirana store.

RIL is entering a strong FCF generation phase with major capex completed and expectation of

strong 17-18% EPS CAGR over the next 3-5 years led by Digital and Retail businesses. Hence,

we initiate with a BUY rating and TP of INR 2,500/share (Sep’21 basis). We have also

computed a 3-year Target Price (Sept’23 basis), which comes to INR 3,350/share, implying a

potential ~17% CAGR return. Given the sharp +100% rally in the share price in the last 4

months, there could be near-term weakness given that EPS growth is likely to be muted in

the next 1-2 quarters. However, we suggest using this opportunity to BUY as our 3-year TP

implies a potential return CAGR of ~17%.

We also take comfort from the company’s effort to address balance sheet concerns by

expediting its deleveraging exercise and getting to zero net debt ahead of its end FY21

target. At CMP, stock is trading at FY22E P/E of 23.3x (3 yr avg: 18.6x), FY22E P/B of 2.3x (3

yr avg: 1.7x) and FY22E EV/EBITDA of 11.3x (3 yr avg: 10.8x).

RIL Sum-of-the-parts valuation - our Sept’ 2021 Target Price for RIL is INR 2,500/share Exhibit 12.

Source: JM Financial Note: We have used 6,349mn shares for our target price computation (including 423mn Rights shares but excluding 413mn Treasury shares)

Business segment

Valuation

methodology

EBITDA

(INR Bn)

Valuation

multiple

Valuation

(INR bn)

Valuation

(USD bn)

Valuation

(INR/share) Comments

Energy business 5,322 71 838

Petchem EV/ EBITDA 359 7.5 2,692 36 424

Valued at 7.5x EV/EBITDA; in-line with multiple

implied by Saudi Aramco deal

Refining EV/ EBITDA 293 7.5 2,198 30 346



E&P EV/ EBITDA 48 9.0 431 6 68

Valued at 9x EV/EBITDA; higher multiple used as

EBITDA to jump 3x

Digital business (for RIL's 67.05% share) 6,044 81 952

a) Telecom business DCF 4,952 66 780

Based on DCF valuation; implied valuation of

14.3x Sept'21 EV/EBITDA

b) Optional upside in Telecom business 423 6 67

50% probability of duopoly market; Jio garnering

40% of VIL subscriber without any ARPU dilution

c) Digital opportunities 669 9 105

Based on potential monetization of Video OTT

apps, JioSaavn and Consumer IoT business

Retail business EV/ EBITDA 4,437 60 699

a) Retail business 3,706 50 584

Valued at 25x EV/EBITDA, based on peers

valuation range

b) JioMart New commerce business 732 10 115

Valuing kirana digitisation opportunity assuming

Jio Mart gets ~10% market share in General

Trade ecommerce market by FY30

Total Enterprise Value 15,803 212 2,489

Less: Net Debt -70 -1 -11

Factoring: a) Rs1,521bn from 32.95% stake sale

in JPL; b) Rs76bn from BP; and c) rights issue

proceeds of INR531bn

Total Equity Value 15,873 213 2,500

CMP 2,097

% upside 19%





Risks along with EPS and valuation sensitivity

a) Refining margin sensitivity: Every USD 1/bbl increase/decrease in GRM has a

positive/negative impact of 2% of our valuation, 5% of our FY22E EPS, and 3% of our FY22E

EBITDA. An unexpected decline in refining margin could have a negative impact on RIL’s

earnings and valuation.

b) Petchem margin sensitivity: Every USD 20/ton increase/decrease in EBITDA margins has a


EBITDA. An unexpected slide in petchem EBITDA margins could hurt RIL’s earnings and

valuation.

c) Retail margin sensitivity: Every 50bps increase/decrease in retail EBITDA margins has a

positive/negative impact of 1% of our valuation, FY22E EPS, and FY22E EBITDA. Any

downside to retail profitability could have a negative impact on RIL’s earnings and valuation.

d) ARPU and subscriber sensitivity: Every INR 10 increase/decrease in ARPU has a

positive/negative impact of 2% of our valuation, 3% our FY22E EPS, and 2% of our FY22E

EBITDA. Every 20mn increase/decrease in subscribers has a positive/negative impact of 1% of

our valuation, 1% our FY22E EPS, and 1% of our FY22E EBITDA. Lower than expected ARPU

and subscriber growth could have a negative impact on RIL’s earnings and valuation.

RIL Earnings and valuation sensitivity Exhibit 14.

Source: JM Financial

Business segment

Valuation

methodology

EBITDA

(INR Bn)

Valuation

multiple

Valuation

(INR bn)

Valuation

(USD bn)

Valuation









E&P EV/ EBITDA 84 5.5 464 6 72 Valued at 5.5x EV/EBITDA

Digital business (for RIL's 67.05% share) 7,169 96 1,129


Based on DCF valuation; implied valuation of 12x

Sept'23 EV/EBITDA







Retail business EV/ EBITDA 7,191 97 1,133



valuation range






Less: Net Debt -931 -12 -147 Net debt at end end Sept'2023


CMP 2,097

% upside 60%

Change

FY22e Base case

assumption INR bn % change INR % change INR % change

GRM (USD/bbl) 9.0 +/- USD 1/bbl 39 3% 4.2 5% 50 2%

Petchem EBITDA margins (USD/ton) 221 +/- USD 20/tn 31 2% 3.3 4% 42 2%

Retail EBITDA margins (%) 5.9% +/- 0.5% 11 1% 1.2 1% 21 1%

Jio w ireless ARPU 171 +/- INR 10 26 2% 2.9 3% 39 2%

Jio w ireless subscriber (mn) 457 +/-20mn 10 1% 1.1 1% 28 1%

Base case 1,235 90 2,500

Impact on FY22 EBITDA Impact on FY22 EPS Impact on TP




Just over three years since its launch, Jio has become the undisputed leader both in terms of

revenues and subscriber market share. Given that industry consolidation is largely over, we

expect industry ARPUs to rise going forward, driven by a mix of increase in data usage and

tariff hikes. Although there exists limited visibility on TRAI’s floor tariff, we believe a tariff

hike is inevitable given the industry needs an ARPU of INR230-250 by FY25E for a pre-tax

RoCE of 12-15% to justify future investment requirements. Further, VIL needs APRU to more

than double to +INR 270 by FY23 to avoid a duopoly market. Hence we expect industry

revenue to likely double by FY25E to ~INR 2,600bn. We expect Jio ARPU to post a 10%

CAGR during FY20-28 and expect its strong subscriber acquisition pace to continue. Hence,

we expect Jio to attain ~ 50% RMS by FY25E (from ~36% at end FY20). We value RIL’s

share of the telecom business at an EV of INR 780/ share; additionally also valued the option

value of a duopoly market at INR 67/share for RIL.

Jio on track to achieve ~50% RMS target in wireless business

Jio’s continued robust subscriber additions over the past 3 years means it is now the

undisputed leader both in terms of subscriber market share and revenue market share. Jio

witnessed a net subscriber addition of 81mn in FY20, taking the total number of subscribers

to 388mn at the end of FY20 and enabling it to reach 36% in terms of both subscriber and

revenue market shares.

We expect Jio’s ARPUs to sequentially increase in the coming quarters driven by: a) recent

tariff hikes and b) plan upgrades due to higher data demand. However, despite the recent

tariff hikes, Jio’s tariffs continue to be at a 10-20% discount to Bharti and VIL in key price

points. Hence, we expect net subscriber additions to continue to be healthy for Jio and

expect it to increase its subscriber market share to ~45% by FY25E (from ~36% at end-FY20)

and revenue market share (RMS) to increase to ~50% by FY25E (from ~36% at end-FY20) –

(Exhibits 24 and 28). Jio’s market share gains could be higher in the scenario of further

consolidation of the market to a duopoly market – this is not part of our base case scenario.

Jio’s subscriber addition remained robust; ARPU yet to reflect tariff hike Exhibit 15.


Consolidation to drive doubling of industry revenue over next 5 years

Jio’s aggressive tariff pricing over the past few years has resulted in a sharp decline in industry

AGR revenue to ~INR 1,300bn in FY19-20 from ~INR 1,800bn in FY17 (Exhibit 21); this has

driven major consolidation in the industry and had reduced it to 4 players now, including the

public sector BSNL/MTNL (from a peak of 15 players in 2012). Jio was able to reach a

subscriber market share of ~36% at end-FY20 and become the market leader in less than 4

years of its launch; with all players (except Bharti) seeing major subscriber market share loss.

100

115

130

145

160

10

20

30

40

50

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

2QFY

20

3QFY

20

4QFY

20

ARPU

(INR)

Net

sub

scrib

er a

dditi

ons

(mn)

Net Subscriber adds (mn) ARPU ( INR )

Jio’s aggressive tariff has resulted in

decline in industry AGR revenue to

~INR 1,300bn in FY19-20 from ~INR

1,800bn in FY17



AGR RMS for the telecom industry for FY12 Exhibit 16.

Source: Company, JM Financial. *Others include Aircel, TTSL, Telenor, MTS and MTNL.

Exhibit 17.


AGR RMS for the telecom industry for 9MFY20 Exhibit 17.

Source: TRAI, JM Financial.* Others include RCOM. TRAI is yet to publish AGR data for 4QFY20.

India’s ARPU to GDP per capita was at respectable 1.3-1.5% during FY14 to FY16, i.e. before

Jio disrupted the market through rock bottom tariffs. However, ARPU started declining

sharply since FY17 due to rising competition after the entry of Jio. The consistent decline in

ARPU from FY17 has resulted in a record low ARPU-to-GDP per capita ratio of ~0.6% in FY19

and FY20. This is also evident from FY20 ARPU of ~INR 103 vs. inflation adjusted ARPU of INR

175-200 during FY11-16 (and even higher during the earlier period) giving sufficient

headroom for a tariff hike. Globally also, ARPU for India is one of the lowest at sub USD

2/month.

India has one of the lowest ARPUs globally Exhibit 18.


31%

21%13%

12%

9%

15%

Bharti Airtel Vodafone Idea BSNL RCOM Others

33%

31%

27%

9%

Jio Bharti Airtel VIL BSNL/MTNL and Others

0

8

16

24

32

40

48

Ind

ia

Bangla

desh

Ind

on

esi

a

Sri

lanka

Nig

eri

a

Bra

zil

Chin

a

Mala

ysia

UK

Sin

gap

ore

So

uth

Kore

a

US

ARPU

(U

SD

/month

)

ARPU (USD/month)

ARPU to nominal GDP per capita is

at historical lows of 0.6% vs 1.3%-

1.5% levels seen during FY14-16



India’s ARPU to GDP per capita has declined to record low Exhibit 19.of 0.6% in FY19-20 vs 1.3-1.5% during FY14-16


Inflation adjusted ARPUs are at historical lows Exhibit 20.


ARPUs need to rise to INR 230-260 (from INR 103 in FY20) for the ARPU-to-GDP per capita

ratios to go back to 1.3%-1.5% levels seen earlier. After nearly three years of very low tariffs,

tariff was hiked by 30-40% across players in Nov-Dec’19, signalling a price revival. Going

forward, we expect increase in tariffs due to industry consolidation, which coupled with

higher usage is expected to drive industry revenue to nearly double at ~INR 2,600bn by

FY25e vs. ~INR 1,300bn in FY19 and FY20. Further, industry capex intensity is likely to

moderate going forward, and together with improving EBITDA across the industry, would

improve the ROCEs of players in the sector.

Consolidation to drive doubling of industry revenues over Exhibit 21.

the next 5 years…


….and capex intensity to soften improving the ROCE Exhibit 22.

profile


Jio’s subscriber market share to rise to ~45% and RMS to ~50% by FY25e

Despite the recent tariff hikes, Jio’ tariffs continue to be at a 10-20% discount to Bharti and

VIL in key price points.

Despite recent tariff increases, Jio’s tariffs continue to be at a discount Exhibit 23.

Jio Bharti VIL

28 day 1 GB/Day * 174 219 219

28 day 1.5 GB/Day 199 219 219

28 day 2 GB/Day 249 298 299

28 day 3 GB/Day 349 398 399

84 day 1.5 GB/Day 555 598 599

84 day 2 GB/Day 599 698 649

365 day 24 GB 1299 1498 1499

365 day 1.5 GB/Day 2020 2398 2399

Source: Company, JM Financial. * Jio’s 1GB/day plan is only for 24 days, effective tariff for 28 days calculated at INR 174.

0.0%

0.5%

1.0%

1.5%

2.0%

FY14

FY15

FY16

FY17

FY18

FY19

FY20

AR

PU/G

DP

per

capi

ta (%

)Historical ARPU/ GDP per capita for India

0

100

200

300

400

500

600

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

ARPU

base

d o

n A

GR (IN

R b

n)

ARPU (INR) Inflation adjusted ARPU (INR)

0

50

100

150

200

250

300

0

500

1000

1500

2000

2500

3000

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

E

FY

22

E

FY

23

E

FY

24

E

FY

25

E

AR

PU

( base

d o

n A

GR,IN

R)In

dust

ry A

GR (IN

R b

n)

Industry AGR (INR bn) ARPU (based on AGR,INR) [RHS]

0%

13%

25%

38%

50%

63%

75%

88%

100%

0

250

500

750

1000

1250

1500

1750

2000

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

E

FY

22

E

FY

23

E

FY

24

E

FY

25

E

Capex / sa

les (%

)

Tota

l Indust

ry c

apex (IN

R b

n)

Total Industry Capex (INR bn) Capex / sales (%) [RHS]

Consolidation to drive industry

revenue to double at ~INR 2,600bn

by FY25e; significant headroom for

ARPU expansion

Jio’s subscriber addition likely to

continue as its tariff is still at a 10-

20% discount to Bharti/VIL



VIL has lost c.130mn customers in the first 18 months of the merger. These have been driven

by difficulties in integrating networks across circles, leading to network disruptions, and a

relatively lower ARPU customer base, which has shifted to Jio due to lower price points. A

part of the customer loss could also be attributed to the minimum recharge plans introduced

in November 2018. Recently, VIL rejigged its organisational structure and adopted a cluster-

wise approach, wherein the entire business has been reorganised into 10 clusters rather than

the circle-wise approach adopted earlier. We believe this signals intent to focus only on

strong circles and could lead to more customer churns. Accordingly, we believe the subscriber

market share for VIL would decrease from the current 27% to 21% by the end of FY25E.

However, we believe that the subscriber losses for Bharti Airtel have largely played out, as

evidenced by the stable overall subscriber number, and healthy addition of 4G customers in

4QFY20. Despite the premium pricing to Jio, Airtel’s benefits program (Airtel Thanks) has

been a major differentiator, ensuring stickiness of high ARPU customers and upgrade of the

existing customer base. We have built in gradual subscriber additions for Bharti Airtel, taking

the subscriber market share from the current 26% to 29% by the end of FY25E.

RIL, in its FY20 AGM, had announced that Google would buy a 7.73% stake in Jio Platforms

Limited (JPL), the intermediate holding company for the Telecom business. The company also

highlighted that this was a strategic partnership, wherein Google and Jio would work

together to develop low cost 4G/5G Android-based smartphones, targeting existing 350mn

2G users and accelerating their upgrade to mobile broadband. While Jio already has a 4G-

enabled feature phone (Jiophone), it has limited apps that can be installed in its OS

(Operating System). We expect the new device, based on Android, would be much more

attractive for the consumers, given the huge app ecosystem in Android OS. Moreover, the

development of a low cost 5G smartphone (the current prices range from USD 750 – 1000 in

India), would enable Jio to accelerate 5G subscriber additions relative to its competition, and

sustain growth in both the user base and revenues in the medium to long term.

Jio subscriber market share to rise to ~45% by FY25E (~36% at end-FY20) Exhibit 24.


0%

20%

40%

60%

80%

100%

FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E

Subsc

riber

mark

et

share

(%

)


Development of low cost

smartphone with Google could

sustain Jio’s growth in subscriber

and revenues in the medium to long

term

Jio’s subscriber market share to rise

to ~45% by FY25E (from ~36% at

end-FY20) and RMS to increase to

~50% by FY25E (from ~36% at

end-FY20)



ARPU to see a gradual rise; increased data consumption post Covid-19 a boost

Bharti’s higher ARPUs are driven by the high-quality MBB (Mobile Broadband) subscriber

base. This could be attributed to the higher usage and stickiness driven by programmes such

as Airtel Thanks benefits. However, for VIL, usage and stickiness seems to be low, as shown

by the lower ARPU for MBB subscribers. The tariff hikes in Dec’19 are yet to reflect for Jio

customers and the higher tariffs are expected to flow through in FY21.

Subscriber, ARPU and revenue break-up Exhibit 25. Avg. subs (mn) % of subs Revenue (INR bn) % of revenue ARPU (INR)

Jio

Post-paid 4 1% 2 2% 199

Smartphones 285 75% 123 83% 144

Jiophone 90 24% 23 15% 84

Total users 379 100% 148 100% 131

Bharti

Post-paid 15 5% 18 14% 399

MBB/ Smartphones 145 51% 96 74% 221

2G 123 43% 16 13% 44

Total users 283 100% 130 100% 154

VIL

Post-paid 23 8% 30 26% 399

MBB/ Smartphones 118 40% 64 55% 167

2G 156 53% 23 19% 45

Total users 298 100% 118 100% 121

Industry (ex- BSNL/MTNL)

Post-paid 42 4% 51 13% 383

MBB/ Smartphones 548 57% 284 72% 170

2G (including Jiophone) 369 38% 62 16% 54

Total users 960 100% 395 100% 134


Jio’s FY20 revenues at INR 543bn, grew 34% YoY, with EBITDA at INR 216bn, growing 43%

YoY. Exit ARPU at INR 131, however was only up 1.7% QoQ. The muted growth could have

been driven by: a) aggressive pushing of long-term plans just before the implementation of

the tariff hike; b) promotional offers for Jiophone in 3QFY20, increasing the number of low

ARPU customers in the subscriber base and c) extension of recharge benefits due to the

lockdown. However, we expect ARPUs to sequentially increase in the coming quarters driven

by: a) recent tariff hikes; b) plan upgrades by users due to higher data demand. Hence, we

have built in an ARPU growth of c.15% for FY21 and long-term (FY20-28) ARPU CAGR of

10%. Jio is poised to benefit from virtual working initiatives due to its extensive coverage

(99%), in our view.

Industry data usage per subscriber to increase Exhibit 26.

Source: TRAI, company, JM Financial.

Jio ARPU growth to be driven by increased data usage and Exhibit 27.tariff hike


0

2

4

6

8

10

12

14

FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

Data

usa

ge p

er

data

subsc

riber

(GB/m

onth

)

Average Monthly Data Usage (GB/month)

100

125

150

175

200

225

250

0

25

50

75

100

125

150

FY18

FY19

FY20

FY21

E

FY22

E

FY23

E

FY24

E

FY25

E

ARPU

(INR)

Net

sub

scrib

er a

dditi

ons

(mn)

Jio Net subscriber adds (mn) Jio ARPU (INR) [RHS]

Industry data consumption to see

sustained rise post Covid-19; Jio

ARPU growth to be driven by

increased data usage and tariff hike



Jio RMS to rise to ~50% by FY25E (from ~36% at end-FY20) driven by strong Exhibit 28.subscriber additions and ARPU increase


Limited visibility on implementation of TRAI’s floor tariff concept; but tariff hike inevitable given the future investment needs

On 17Dec’19, the regulator TRAI floated a consultation paper (click here) to discuss on

whether it should fix a floor tariff given the dire state of the industry due to intense

competition, huge AGR liability and capex requirement in future owing to impending

investments for spectrum and 5G rollout. In response, Bharti (click here) and VIL (click here)

have batted for floor tariffs citing insufficient returns while Jio (click here) has backed the

demand for floor tariffs citing future investments needed in the sector However, as per news

reports, the enactment of the floor tariffs has been deferred in light of the ongoing

pandemic. While we believe that the regulator may not implement any floor tariffs in near

term, it may not oppose any fresh tariff hikes, if the telcos choose to do so, especially for

higher ARPU broadband customers. Also, in our view, it is likely that the telcos could go in for

a hike in tariff, given the impending investments for spectrum and 5G rollout.

Our calculation suggests (Exhibit 29) that the industry needs to reach an ARPU of around INR

200 for covering the cost of capital (12%) and an ARPU of INR 215 for a healthy pre-tax

RoCE (of 15%) based on actual investment until FY20 (~INR 5,495bn). However, if we also

consider the future investment requirements (taking total investments to ~ INR 8,000bn

cumulative till end FY25e), medium term ARPUs might need to reach INR 230-250 levels by

FY25E for a reasonable pre-tax RoCE of 12-15% (Exhibit 30). Players such as Bharti have

guided for a near-term ARPU target of INR 200 to earn its cost of capital and a medium-term

ARPU target of INR 300 for a reasonable pre-tax RoCE of 15%, keeping in mind the future

investments needs.

Estimated ARPU of INR 200-215 for a pre-tax RoCE of 12% and 15% based on actual investment for private telcos Exhibit 29. For 12% ROCE For 15% ROCE Comments


Total invested capital (INR bn) 5,495 5,495 Book value of net invested capital at the end of FY20

Required EBIT (INR bn) 659 824

Actual non-statutory opex (INR bn)* 1,338 1,338 4QFY20 annualised opex ex-License Fees and Spectrum Usage Charges [SUC]




ARPU (INR ) 199 215


0%

20%

40%

60%

80%

100%


Reve

nue m

ark

et

share

(%

)


While floor tariff implementation

has been deferred, TRAI might not

oppose a fresh hike in tariff by

telcos, especially for broadband

customers

https://trai.gov.in/sites/default/files/CP_17122019.pdf

https://www.trai.gov.in/sites/default/files/Bharti_Airtel_Limited_04032020.pdf

https://www.trai.gov.in/sites/default/files/Vodafone_Idea_04032020.pdf

https://www.trai.gov.in/sites/default/files/Reliance_Jio_04032020.pdf



Estimated ARPU of INR230-250 for a pre-tax RoCE of 12% and 15% based on future investment for private telcos Exhibit 30. For 12% ROCE For 15% ROCE Comments


Total invested capital (INR bn) 8,012 8,012 Book value of net invested capital at the end of FY20 + estimated capex over FY21-25E

Required EBIT (INR bn) 961 1,201

Actual non-statutory opex (INR bn)* 1,338 1,338 4QFY20 annualised opex ex-License Fees and Spectrum Usage Charges [SUC]




ARPU (INR ) 229 253


Jio, Bharti and VIL want the floor tariff for data to be set at INR 20/GB, INR 30/GB and INR

35/GB respectively (from current INR 9-12/GB). Also, Bharti and VIL have recommended a

minimum subscription charge (MSC) to compensate for the maintenance of network even

when there is no usage of voice/data. Bharti has recommended a flat MSC of INR 75; VIL on

the other hand has recommended a MSC of INR 40 for voice-only subscribers, INR 50 for

data-only subscribers and INR 75 for bundled pack users.

Bharti and VIL wants to price voice at INR 60 for unlimited packs (average MOU of 1000 per

month). For metered voice, while Bharti would like to keep both onnet and offnet calls under

forbearance, VIL wants to keep offnet calls at INR 0.06/min and reiterated that onnet calls are

under forbearance. Jio reiterated that it would prefer that voice services be kept under

forbearance, while acknowledging that it was charging for off-net calls due to continuation

of IUC. Further, Jio wants any floor on voice calls, if implemented, to be technology-neutral.

While we do not expect a blanket acceptance of these recommendations by TRAI, given that

it could hit bottom of the pyramid customers. Based on the above recommendations by

Jio/Bharti/VIL we assume that only offnet calls could be priced at 6 paisa/minute with an MSC

of INR 75/28days for MBB subscribers; accordingly we have considered 3 probable scenarios

which suggest potential floor tariff could be around: a) INR 167 as per Jio’s suggestions

(Scenario 1); b) INR 211 as per Bharti’s suggestions (Scenario 2) and c) INR 231 as per VIL‘s

suggestions (Scenario 3). We observe that data tariffs would have the largest effect on overall

ARPU. It is highly likely that the telecom operators would choose to implement these tariff

hikes over a period of time, rather than a one-time increase, to reduce the burden on

consumers and ensure that usage metrics do not drop drastically.

Industry ARPU might rise to INR 167-230 levels in case of implementation of a floor tariff Exhibit 31. Scenario 1 Scenario 2 Scenario 3 Comments

Average FY20 subscribers (mn) 943 943 943

of which broadband subscribers (mn) 590 590 590

Jiophone subscribers (mn) 100 100 100

Subscribers for whom MSC is applicable (mn) [A] 490 490 490 We have assumed TRAI would allow charging of MSC on higher ARPU broadband users only

FY20 Data usage (bn GB) [B] 63 63 63 Actual data usage for the telcos for FY20

Drop in data usage due to floor tariff (%) [C] 5% 10% 13% Assumed drop in data usage due to increase in prices

Floor tariff for data (INR/GB) [D] 20 30 35 As suggested by companies

FY20 Voice usage (bn minutes) 7,188 7,188 7,188 Actual voice usage for the telcos for FY20

Offnet calls (bn minutes) [E] 3,594 3,594 3,594 Assumed that voice tariff is applicable only for offnet minutes

Drop in voice usage due to floor tariff (%) [F] 5% 5% 5% Assumed drop in voice usage due to removal of unlimited voice

Floor tariff for voice (paisa/minute) [G] 6 6 6 Floor tariff for voice taken at same level as IUC charges

MSC (INR) [H] 75 75 75 As suggested by companies

Data Revenues (INR bn) { [I]=[B]*(1-[C])*[D] } 1,200 1,706 1,935

Voice Revenues (INR bn) { [J]= [E]*(1-[F])*[G] } 205 205 205

MSC Revenues (INR bn) { [K] =[A]*[H] *12} 479 479 479 MSC revenues are calculated on a 28-day cycle for 365 days

Total Revenue {[I]+[J]+[K]} 1,884 2,389 2,618

ARPU (INR/month) 167 211 231


Industry ARPUs need to rise to INR

230-250 levels by FY25E for a

reasonable pre-tax RoCE of 12-15%

considering the future investment

requirements

Industry ARPU might rise to INR

167-230 levels in case of

implementation of a floor tariff



Significant ARPU increase required to avoid a duopoly market

VIL requires a significant ARPU increase in order to meet its payment obligations and survive

without any further equity injection. Below, we have calculated the ARPU required for VIL to

meet its payment obligations in FY23E, in the absence of any additional equity injection. VIL

needs APRU to rise from the current INR 121 to INR +270 by FY23.

Required ARPU of INR +270 by FY23 for VIL to survive in the absence of any additional equity injection Exhibit 32.Cash outflow obligations FY23E Comments

Non-spectrum interest cost (INR bn) 17 Average gross debt of c.INR180bn at 9.5% interest rate; principal to be refinanced

Spectrum EMI (including interest) (INR bn) 158 Higher spectrum repayment (vs. INR 120bn currently) after moratorium

AGR EMI (INR bn) 66 Assumed net liability of INR 504bn, 15 years repayment period at 10% p.a. interest

Capex (INR bn) 82 Assumed capex in FY23E

Required Cash inflow (EBITDA) 323

EBITDA margin %(pre-IND AS) 40% We expect VIL to aggressively reduce costs, improving margins to 40%

Required revenues (INR bn) 817

Average subscriber base (mn) 245 Assumed average subscriber base in FY23E

Required ARPU (INR) 278


A significant ARPU increase for VIL would, however signify ARPU uplift for other players also.

Jio would be the biggest beneficiary given its large subscriber base. However, if the required

tariff hike doesn’t come through then VIL might not be able to meet its payment obligations.

We have calculated the incremental value for Jio in a scenario of duopoly market to be INR

67/share. Key assumptions are:

a) Additional 114mn subscribers for Jio assuming 60% of VIL’s broadband subscribers would

shift to Jio and only 25% of VIL’s 2G subscribers would shift to Jio (as they would have to

invest in a Jiophone). Although increased subsidisation of Jiophone would enable Jio to gain

further market share, it would be ARPU dilutive;

b) Incremental capex of INR c.180bn. Although our interactions with management indicate

that incremental capex to support incoming VIL subscribers could be marginal, we have

conservatively taken incremental capex to the tune of 8% of revenues every year and taken

its present value; and

c) An EV/EBITDA multiple of c.10x, lower than that for Jio, given the uncertainty in churn for

these new customers

Our base case continues to be a 4 player market (3 private players + BSNL/MTNL), despite the

adverse AGR verdict as the payments could be spread over 15-20 years. In the latest hearing

held on 20Jul’ 20 Supreme Court has reserved verdict on the payment timeline, while

making it clear that there would not be any reductions in the payments due. While Bharti and

VIL have asked for a 15 year payment period, Tata Teleservices has asked for 7-10 years,

possibly since it does not have any future capex requirements since they have ceased their

wireless operations. Any shorter than expected timeline for repayment of AGR dues would

put VIL’s survivability under question, given that apart from AGR instalments, VIL would also

require to undertake periodic network capex in the future to maintain market share. The

verdict would be announced on 10Aug’20.

Optional value for RIL of INR67/share in case of duopoly market Exhibit 33.

Additional subscribers for Jio (mn) 114

FY22E Subscriber ARPU (INR)** 171

Incremental revenue (INR bn) 234

Incremental EBITDA margin 60%

Incremental EBITDA (INR bn) 140

EV / EBITDA (x) 10

Incremental EV (INR bn) 1,447

Incremental capex (INR bn) 181

Incremental Equity value (INR bn) 1,267

Probability of duopoly market 50%

Optional equity value for RIL (INR/share)* 67

Source: Company, JM Financial.*after accounting for 32.95% minority interest in JPL. ** We assume Jio would maintain ARPUs from incoming VIL users and would not resort to ARPU dilutions for aggressive market share gains.

VIL require ARPU to rise from the

current INR 121 to +INR 270 by

FY23 to survive in the absence of

any additional equity injection

Optional value for RIL of

INR67/share in case of duopoly

market




Having comprehensively won the Telecom war, we expect Jio to train its eyes on the vast

untapped Digital opportunities. This foray into Digital services has been accelerated by

strategic investments by various marquee tech and private equity players in JPL. Covid-19 has

accelerated both data consumption due to virtual working and adoption of Digital apps. Jio is

ideally placed to capture a major share of this new and growing Digital pie given: a) the large

+390mn telecom subscriber base of Jio; b) network effects provided by participation of

marquee partners such as Facebook; and c) creation of a digital ecosystem, consisting of both

Jio and third-party apps, enabling cross-selling of solutions. We have looked at the value

arising from applications having greater visibility – namely, monetisation of video OTT apps,

audio OTT and ramp up of consumer IoT/smart sensors business. Cumulatively, these

contribute INR 105/share to our RIL target price.

Jio has evolved from a pure-play telecom provider to a tech enabler, after the reorganisation

of business into Jio Platform. RIL had undertaken the reorganisation of its telecom business,

Jio apps and acquired tech businesses into a wholly-owned platform (Jio Platform Limited,

JPL) in Oct’19.

Currently, JPL (standalone entity) houses the enterprise and consumer suite of apps as well as

the infrastructure business of Jio’s payment app (design, development and operation of the

app). Further, some tech and app investments made by RIL earlier have been transferred to

JPL as subsidiaries. Apart from direct subsidiaries, JPL has a few of RIL’s tech investments by

way of preference shares. Jio Infocomm Limited, the licensed company for telecom business

(wireless, FTTH and enterprise) is a wholly-owned subsidiary of JPL.

In line with expectations, the above re-organisation has enabled faster monetisation of the

digital business of RIL. JPL has already seen investments from Facebook and Google and a

multitude of private equity players. Given Jio’s large subscriber base, we believe the

participation of tech companies in the platform would create further network effects,

enabling a rapid scale-up of the digital business.

Jio Platform structure Exhibit 34.

Source: Company, JM Financial. Note: The cable operators Hathway and DEN are not part of the JPL platform. However, we expect the acquisition to be fully leveraged for rolling out of FTTH. Similarly KaiOS is not

part of the platform, but its OS is used in JioPhones



JPL key tech investments over the past few years Exhibit 35.App/ tech Investments Description Invested amount /Committed capital (INR mn) Invested on

Haptik Artificial Intelligence based conversational platform 7,500* Apr-2019

Radysis India Private Limited Open telecom solutions to service providers 1,144 Dec-2018

Embibe Artificial Intelligence powered learning platform 13,500* Jun-2018

Tesseract AR/VR startup 284 May-2019

Reverie Technologies Regional language capabilities for devices 2,670* Mar-2019

Netradyne Fleet management software 2,764 Sep-2018

NEWJ Curation and production of video content 30 Nov-2018

Sankhya Sutra Labs Software Simulation Services 2,160* Mar-2019

KareXpert Digital Health Service Provided 250 May-2018

Asteria Aerospace Drone based solutions 1,481* Dec-2019

EasyGov G2C Platform 680* Feb-2019

Jio Estonia OU Software development and consultancy 740 Nov-2018

Jio Saavn Music App 68,260 Mar-2018

Total 101,463

Source: Company, JM Financial. * Includes committed capital. Committed capital calculated using 1 USD = INR 75.

Key entities in JPL and outside JPL Exhibit 36.Key Entities in JPL Key Entities outside JPL

Apps Tech Connectivity business Investments Apps / others

My Jio Haptik Wireless

JioTV Radisys Enterprise KaiOS JioMart

Jio Cinema Embibe FTTH Hathway, Den Jio Money

Jio Saavn Tesseract Grab a grub Jio POS Lite

Jio News Reverie Technologies

C-Square Jio Payments Bank

Jio Cloud Netradyne Fynd

Jio Health Hub NEWJ

Skytran

JioTV+ Sankhya Sutra Labs VAKT Holdings

Jio Call KareXpert

All media investments

Jio Chat Asteria Aerospace InvITs

Jio Security EasyGov

Jio Switch Jio Estonia OU

Jio Browser Payment platform infrastructure

Jio Games


Minority investments in JPL to-date Exhibit 37.

Investor Amount (INR bn) Stake (%) Pre-money EV (INR tn)

Facebook 436 9.99% 4.62

Google 337 7.73% 4.62

Vista Equity Partners 114 2.32% 5.16

Saudi PIF 114 2.32% 5.16

KKR 114 2.32% 5.16

Silver Lake 102 2.08% 5.16

Mubadala Investment Company 91 1.85% 5.16

General Atlantic 66 1.34% 5.16

Abu Dhabi Investment Authority 57 1.16% 5.16

TPG 45 0.93% 5.16

L Catterton 19 0.39% 5.16

Intel Capital 19 0.39% 5.16

Qualcomm Ventures 7 0.15% 5.16

Total 1,521 32.95%




JPL capabilities to cater to solutions across industries Exhibit 38.

Source: Company.

Total digital market opportunity

India is still at a nascent stage of the digital ecosystem’s development. Apart from e-

commerce, OTT platforms, digital lending solutions and consumer IoT, to name a few, are

expected to grow exponentially. As per a MeiTY study, by FY24-25E, nominal value of India’s

digital economy would grow 4-5x to USD795-1,015bn by FY25 (vs. USD200bn in FY18). The

current digital economy of USD200bn is largely made up of e-commerce, digital payments,

digital communication services and IT-BPM services. While the government expects these to

grow to USD 500-650bn by FY25E, with tailwinds from digital media and entertainment

services and a robust electronics manufacturing ecosystem, it envisions new and emerging

digital use cases to contribute USD 385-505bn to the digital economy by FY25E.

India’s digital economy likely to grow 4-5x to USD 795-1,015bn by FY25 (USD Exhibit 39.bn)

Source: MeiTY.

As per MeiTY study, by FY24-25E,

India’s digital economy would grow

4-5x to USD795-1,015bn by FY25

(vs. USD200bn in FY18)



The new and emerging digital opportunities would be driven by tech-enabled healthcare

(USD 4-5bn), digitally enabled energy distribution (USD 10-15bn), government e-

marketplaces (USD 10-25bn), digital education platforms (USD 20-50bn), digital farmer

financing and agricultural market places (USD 50-65bn), online skill development (USD 65-

70bn), new digital financial services like flow based lending for enterprises (USD 90-120bn)

and digital supply chains including IoT (USD 135-155bn).

With over a billion mobile subscriptions (and growing), India is one of the largest markets in

the world. Smartphone penetration has also been on the rise, led by the availability of

affordable phones with best-in-class features. The current smartphone base, as per company

estimates, stands at 450mn. The total number of internet users has also been on the rise, and

as per TRAI’s latest report, stands at 719mn. The large base of smartphone and internet users

provides a platform for rapid growth in digital services and we expect RIL to capture a

significant portion of the market share.

a) Prepaid Payment Instruments (PPIs) has been growing in India at a rapid base due to the

digitisation of subscribers and regulatory thrust on digital spending. Using Big Data &

Analytics, ultimately these instruments could be utilised to lend digitally to the consumers,

based on their spending patterns and the requirements. According to a BCG report, the total

value of retail lending, for which consumers applied through online medium ,was USD 75bn

in FY18 and is expected to reach USD 350bn by FY23. This could grow further, given the

rapid advances in Big Data & Analytics.

b) Low cost of data, decreasing cost of sensors and consumer electronics and increasing

speed of computing have been catalysing the adoption of IoT, particularly among industries.

In the consumer segment, although a range of connected and smart devices are available in

India; the penetration is still at a nascent stage among consumers. We expect greater

adoption as cost of devices and sensors decrease further. Introduction of 5G, with its speed

and very low latency, is expected to provide another big boost to IoT. As per Industry

estimates, consumer IoT or Smart Devices market is expected to be a USD 8bn opportunity by

2024.

c) With increase in average data consumption, consumption through OTT has increased over

the last couple of years. Telco bundles of content, which are subsidised, have allowed users

to sample a wide variety of content. Simultaneously, as per a FICCI-EY report, 260mn

subscribers have accessed OTT video content through Telco bundles. Moreover, the total

number of SVOD (Subscription Video-on-Demand) is expected to reach 32mn by end of

2020, rising from just 7mn at the end of 2018. According to the consultancy firm, Media

Partners Asia, OTT market (excluding Telco bundles) is expected to touch USD 4bn by 2025,

with subscription accounting for USD 1.5bn and advertisement another USD 2.5bn. Also

consumer surveys by consultancy firm Ovum have indicated that around 47% of users said

the presence of bundled OTT content was a differentiating factor for them. We believe

monetisation of Telco bundles could significantly increase the market size for OTT platforms.

Jio’s potential digital monetisation opportunities

Jio’s digital apps and capabilities cater to a wide range of solutions. However, we consider a

few such as OTT platforms, IoT solutions and payment solutions that we believe could be

monetised easily.

a) Video-on-Demand platforms – JioTV, JioTV+, and Jio Cinema: Jio platform currently has

two major Video-on-Demand (VOD) platforms, namely JioTV and Jio Cinema. JioTV is a

content aggregator app for Live TV channels while Jio Cinema aggregates movies. Also Jio

Fiber users have access to JioTV+, an app which aggregates content across OTT platforms. At

present, Jio does not charge for these apps and are being used to give additional benefits to

Jio customers so as to retain them. We believe that Jio has already aggressively positioned

itself in the carriage space, with its captive user base of 388mn and investment in leading

Cable TV companies (Den, Hathway and GTPL Hathway). Even in the content space, RIL has

invested in content producers such as Balaji Telefilms, EROS and Roy Kapoor Films and has

also signed non-exclusive content deals with marquee Indian and foreign players such as

Disney, Zee network and Sun network, to name a few, besides its majority investment in

Network18.

Given the abundance of OTT players and the still nascent stage of the industry, we do not

foresee immediate meaningful monetisation of content. However, recently Jio made available

the Disney+ Hotstar VIP plan for select higher ARPU and longer validity plans. We believe this

We expect Jio to position its video

OTT offerings as a one-stop shop

for content and subsequently

monetize it



would be followed by further initiatives to monetise content. Over the medium term, Jio

could monetise its OTT platforms by positioning it as a one-stop solution for a vast spectrum

of content, ranging from web-series to movies, which would be sourced from its marquee

investee companies and content partners. Given the vast spectrum of content that could be

made available to the consumers through such an aggregation, we believe there could be

strong traction and monetisation of the Video-on-Demand platforms.

We have estimated an additional upside to the tune of INR 80/share due to monetisation of

content, with the underlying assumptions:

i) Out of its captive subscriber base of c.499mn in FY25E, we believe around 30% could opt

to choose content in JioTV/Jio Cinema given that users would be able to access content from

multiple platforms for the price of one platform;

ii) An ARPU of INR 100/month. Currently, some of the prominent Indian OTT platforms

charge their users INR 99/month for premium content (INR 84 ARPU excluding GST). Given

the multitude of content in JioTV/Jio Cinema, we believe INR 100/month would be a

sustainable ARPU in the medium term and could gradually increase; and

iii) EV/revenue multiple of 6x. This is at a discount to the Netflix (8x), since we believe Indian

consumers would be more price-sensitive

We have not considered a scenario of advertisement led monetisation for Jio Cinema (JioTV

streams live TV and already consist of broadcaster advertisements). Advertisement ARPUs

(including video and banner ads) are generally low and given RIL’s investments, we believe

monetisation through subscriptions is the most likely scenario. Moreover advertisements tend

to reduce user experience. However, we do acknowledge that monetisation of content

through a freemium model is a possibility and would be a further upside to our value.

Additional value unlocked through monetisation of content Exhibit 40.

Jio subscribers in FY25E (mn) 499

% of subs paying for OTT 30%

No. of OTT subscribers (mn) 150

ARPU (INR) 100

Revenue (INR bn) 180

One year forward EV/revenue (x) 6

Enterprise value* (INR bn) 1006

Discounted to Sep’21 at company WACC 786

Equity value upside for RIL (INR/share) 83

Source: Company, JM Financial. * Since the apps are already up and running with content, we believe any incremental debt / capex would

be negligible. **After accounting for 32.95% minority interest in JPL

b) Other apps in JPL’s portfolio: The other applications in the platform include JioSaavn, Jio

News, Jio Health Hub and Jio Cloud. Apart from JioSaavn, other apps are not yet monetised

and advertisement revenues, if any would be small, in our view. JioSaavn is the music

streaming app whose main competitors include Gaana, Spotify and YouTube Music. It runs a

freemium model, similar to Spotify, where subscribers can either choose an ad-free

subscription plan or use the service for free with ads. However, unlike Spotify, which derives

90% of its revenues from paid services, the paid user base of JioSaavn is still low, at 20%, as

per media reports. As per media reports, the service currently has 100 mn Monthly Active

Users (MAUs). We have estimated an additional upside to the tune of INR 8/share due to

JioSaavn. The underlying assumptions are:

i) Subscription ARPU of INR c.50/ month and advertisement ARPU of INR c.11/month;

ii) 20mn paying subscribers every month out of the total 100mn monthly users. Though the

subscriber base could scale up, given the multitude of other options in the market, we have

conservatively assumed it at the current levels;

iii) EV/Revenue multiple of 3x. This is at a discount to that for Spotify (4x), given the price

sensitive nature of Indian consumers

Significant traction seen in JioSaavn,

expect sustained monetization from

JioSaavn



Additional upside from monetisation of Audio OTT platform Exhibit 41.

Saavn users (mn) 100

Non-subscribing users (80% of total users) (mn) 80

Subscribing users (20% of total users)(mn) 20

ARPU for paid subscribers (INR) 50

Subscription revenue (INR bn) 12

Advertisement ARPU (INR) 11

Advertisement revenue (INR bn) 11

Total Revenue (INR bn) 23

One year forward EV/Revenue (x) 3

Enterprise value* (INR bn) 77

Equity value upside for RIL (INR/share)** 8

Source: Company, JM Financial. * Since the apps are already up and running with content, we believe any incremental debt / capex would

be negligible. **After accounting for 32.95% minority interest in JPL

c) Consumer IoT / Smart Devices: RIL had done several tuck-in acquisitions to increase its

capabilities in AI/IoT like Radysis (open source telecom solutions enabling next generation

technologies) and Haptik (conversational AI platform). Currently, these are being used for

B2B applications; for example, the Haptik chatbot was used in GoI’s corona helpdesk.

However, many of these acquisitions could be leveraged for consumer applications, giving Jio

an edge in consumer IoT. While the ARPU per device is likely to be low, with average ARPUs

of INR 10-15, the number of such devices is potentially high.

Acquisition of tech companies and the potential uses for consumer IoT/ Smart Devices Exhibit 42.Company Likely consumer use-cases

Radysis Radysis would help in rapid innovation and solution development across Enterprises and Consumer segments

Haptik Provides ability to develop AI enabled multilingual devices, strongly positioning Jio against Amazon Alexa and Google Assistant

Tesseract Enables immersive media and also better online shopping experience, where consumers can try on products from their homes

Reverie Develops multi-lingual capabilities for apps and devices

Embibe Helps provide personalised learning experience using AI


We estimate the additional value of the consumer IoT business to be INR 13/ share based on

the following assumptions:

i) 600mn consumer IoT devices base by FY25E. Jio had estimated a potential market of 1bn

devices for its IoT business over the next three years. We believe, along with enterprise IoT,

there will be significant traction in consumer IoT business.

ii) ARPU of INR 15/month. At present other major IoT players like China Mobile have ARPU in

the range of INR 10-15/month;

iii) Moderate EBITDA margin of 20% and incremental capex of 2.5% of revenues; and

iv) EV/EBITDA multiple of 10x, lower than that for Telecom business, given that the churn

could be higher for this new business.

Optional upside for consumer IoT business Exhibit 43.

No. of consumer IoT devices on Jio by FY25E (mn) 600

ARPU (INR) 15

Revenue (INR bn) 108

EBITDA margin (%) 20%

EV/EBITDA (x) 10

Incremental EV (INR bn) 205

Discounted to Sep’21 at company WACC 162

Incremental capex (INR bn) 27

Incremental Equity Value (INR bn) 135

Equity value upside for RIL (INR/share)* 14

Source: Company, JM Financial. *After accounting for 32.95% minority interest in JPL

d) Digital lending opportunity: RIL recently launched its UPI payments feature in its MyJio app.

This is in addition to JioMoney, which is a mobile wallet app. While the wallet business could

not gain significant traction due to: i) already entrenched players such as PayTM; ii) need for

both payer and payee to have the same wallet; and iii) additional step of transferring to and

from the wallet to the bank account; also transfer from wallets to bank accounts incurred

charges. However, with the launch of RIL’s UPI, which is inter-operable with other UPI apps

and directly linked with the bank accounts, we believe that RIL could gain significant traction

Jio likely to leverage capabilities of

its tech investees to ramp up

consumer IoT/Smart devices

business



in the mobile payments space, given its large user base. Moreover, RIL also has a payments

bank license (Jio Payments Bank), which can be leveraged to enhance financial inclusion,

thereby further enhancing traction for its payment business. We believe that, over the

medium-to-long term, this could evolve into a digital lending platform. As per Jio, total UPI

payment is currently at 10% of GDP. We believe that given Reliance Retail’s e-commerce

venture JioMart and the large amount of consumer behavioural data from its telecom

business, RIL is advantageously positioned to scale up in this business. The recent launch of

JioPOSLite, in which users can recharge for others and earn commissions, also opens up the

possibility of scaling up P2P payment solutions. However, the traction in these apps is still low

for us to build in any meaningful upside from this opportunity, at this point of time.

Platform based business: A case of 1+1 > 2

From being a pure-play telecom operator four years ago, Jio has transformed itself into a truly

digital platform with a captive user base of c.+390mn, of which about c.290mn are higher-

ARPU smartphone subscribers. While the number of users is certainly impressive, that alone

cannot be the criterion to label a company as a platform-based one. For example, China

Mobile has c.950mn users, but is not considered a platform business. Even in India, Bharti

Airtel and VIL have a sizeable mobile broadband subscriber base of 160mn and 141mn,

respectively. However they are also not considered platform plays, despite the fact that these

telcos provide their own OTT applications to the subscribers. So what makes a platform

company different from a large Telco or one that provides an OTT platform?—the answer lies

in the creation of an ecosystem to connect diverse businesses.

Jio Platform currently has developed/is developing a suite of digital apps, which customers

have access to and provide them with varied value propositions. These are currently being

used as user retention tools for the captive telecom subscriber base. However, in the

medium-to-long term these could be monetised as standalone apps or app bundles. The

presence of a large number of apps also reduces search and transactional costs for users,

enabling Jio to cross-sell its offerings. For example, a probable scenario would be one in

which Jio Game users are provided with the option of paying through Jio Money/Jio UPI for

in-game purchases or Embibe providing learning outcomes for students and providing them

with the option of accessing learning materials through Jio Cloud. While at present the

visibility is low on these, we clearly see a situation where Jio evolves a ‘Super App’ like that of

WeChat in China. While the different digital apps in the Jio ecosystem may seem targeted at

different consumer interests, the synergy and cross – selling opportunities that they provide

can be truly immense, given the large subscriber base. Two key events have provided an

impetus to Jio in this journey to create a ‘Super App’, in our view.

a) Strategic partnership with Facebook: Jio can leverage Facebook’s domain expertise and

technical knowledge to build an app combining social media facilities, e-commerce, digital

payments etc. Given Whatsapp’s +400mn user base in India, this could potentially allow Jio

to integrate its offerings with Whatsapp and attract subscriber base of other telcos as well.

The use cases would be many, for example the partnership between JioMart and Whatsapp,

coupled with low cost smartphones, could enable Jio to reach the smaller kiranas with ease,

eventually converting them to users of Jio Money and providing financial services for these

kiranas in the long run. The supply chain can be extended to farmers and SMEs also, whereby

these kiranas could place orders through JioMart. As per RIL, through this partnership, it

would focus on India’s 60 million micro, small and medium businesses; 120 million farmers;

30 million small merchants and millions of small and medium enterprises in the informal

sector.

b) Jio opening up its Set-top box ecosystem, whereby third-party developers can launch and

monetise their offerings through Jio. We expect this to be a significant step in the journey to

become a ‘Super App’. While Jio has a range of enterprise and consumer digital apps

currently, it may not be in a position to organically cater to all consumer demands in the

future. Opening up of the Jio ecosystem to third-party developers would allow creation of a

large number of popular apps in the ecosystem, further attracting other app developers, thus

creating a strong moat for the ecosystem and enabling the creation of a ‘Super App’. For

developers, it could be an ideal opportunity to reach out to +390mn subscribers and

monetise their apps.

We expect development of a ‘Super

App’ in the long run, driven by the

creation of a Jio app ecosystem



Snapshots from Jio Developers website for third-party developers (1/2) Exhibit 44.

Source: Company website for developers.

Snapshots from Jio Developers website for third-party developers (2/2) Exhibit 45.

Source: Company website for developers.



Valuations and key assumptions for the Digital business

Focus now on growth in FTTH and Enterprise businesses

The ramp-up of the FTTH business has been slower than expected. After the beta testing

phase for customers, Jio has started charging customers over the past few months. We

believe that with the increase in data consumption expected due to virtual working, Jio

would start aggressively pursuing this opportunity. We are building in 3mn subscribers at the

end of FY21E (vs. 1mn subscribers at the end of FY20), reaching 24mn customers at the end

of FY25E. This is conservative, given the management’s target of 50mn homes and enterprise

in next 3 years. Given that Jio’s tariffs are in line with those of other players, unlike wireless

where Jio still maintains a discount, we believe that EBITDA margins should reach 50% in the

medium-to-long term. This is conservative in our view given that EBITDA margin for Bharti’s

Homes Services is c.50% with only 2.4mn customers.

On the 5G/enterprise front, we are building in revenues of INR 35bn in FY23E, growing to

INR 84bn by FY25E. Given the widespread network coverage, 5G ready infrastructure and

comfortable cash position, we believe Jio is poised to gain sizeable market share in the

5G/enterprise segment.

Strong FCF generation likely due to robust EBITDA growth and moderation in capex

We see the consolidated EBITDA margins improving to near 50% levels in the medium-to-

long term (vs. 38.8% in FY20) aided by operating leverage. Other key tailwinds for margin

would be: a) reduction in license fees from the current 8% levels; b) operational efficiencies

leading to lower employee expenses and SG&A costs; and c) a faster ramp-up of the high-

margin FTTH business.

With 99% coverage, the peak capex cycle for Jio is over. Any further network capex would

be only for capacity addition. Network capex decreased from INR 685bn in FY19 to INR

215bn in FY20, and we expect the capex intensity as a % of sales to moderate further.

However, we are building in a one-time spectrum renewal charge of USD 2.8bn in FY22E (for

erstwhile RCOM’s spectrum in the 800 MHz band). Given the impending auction for 5G, we

are building a cumulative capex of USD 6.1bn for 5G over FY23-25E. Moreover, we see capex

/ sales at 15% in the long term vs. 40% seen in FY20. Any larger than expected data

consumption leading to more pressure on the network, would be a key upside risk to our

capex numbers.

Increase in ARPU an operating leverage to improve Exhibit 46.margins


Jio’s peak capex cycle is over, long term capex intensity Exhibit 47.seen at 15% of sales


0%

20%

40%

60%

80%


Marg

ins

(%)

Jio EBITDA margin (%) Jio incremental EBITDA margin (%)

0%

80%

160%

240%

0

200

400

600


Caepx/ sa

les (%

)Capex

(IN

R b

n)

Capex (INR bn) Capex / sales (%) [RHS]

Factoring 24mn homes and

enterprise subscriber at the end of

FY25E, vs management’s target of

50mn in next 3 years

Expect EBITDA margin improving to

~50% in medium-to-long term (vs.

38.8% in FY20) aided by operating

leverage. Building a cumulative

capex of USD6.1bn for 5G over

FY23-25E; capex / sales estimated at

15% in the long term vs. 40% in

FY20



Key assumptions and financials for Jio Telecom business Exhibit 48.Particulars FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E

Wireless segment

Subscribers (mn, EoP) 187 307 388 445 457 472 485 499 509 514 519

AMDU (GB/month) 10.9 11.5 12.2 12.9 13.6 13.9 14.3 14.6 15.0 15.4

Average realisation per GB (INR) 12.2 11.3 12.2 13.2 14.0 14.9 15.8 16.8 17.9 18.6

ARPU (INR) 149 133 130 149 171 190 207 226 246 268 286

Revenues (INR bn) 202 393 543 746 923 1,058 1,190 1,334 1,489 1,646 1,771

5G/Enterprise

Revenues (INR bn)

0 0 35 56 83 117 159 211

FTTH segment

Subscribers (mn, EoP)

1.0 3.0 8.0 12.5 18.0 24.0 29.2 32.7 36.4

ARPU (INR)

750 765 780 796 812 828 845 862

Revenues (INR bn)

18 50 96 146 205 264 314 357

Key financials

Consolidated Revenue* (INR bn) 202 412 580 764 974 1,189 1,392 1,622 1,870 2,118 2,339

Consolidated Revenue growth (%)

105% 41% 32% 27% 22% 17% 17% 15% 13% 10%

Consolidated EBITDA* (INR bn) 67 153 225 332 463 567 667 781 904 1,029 1,141

Consolidated EBITDA growth (%)

128% 47% 47% 39% 23% 18% 17% 16% 14% 11%

Consolidated EBITDA margin (%) 33.4 37.2 38.8 43.4 47.5 47.7 48.0 48.1 48.3 48.6 48.8

Incremental EBITDA margin (%)

40.8 42.8 58.0 62.4 48.7 49.3 49.2 49.6 50.4 50.9

Capex (INR bn) (481) (685) (215) (191) (294) (275) (215) (243) (233) (235) (248)

FCF (INR bn) * (439) (589) (75) 49 66 168 306 365 469 562 635

Source: Company, JM Financial. * FY18, FY19 and FY20 Revenues and EBITDA also include other digital services

Digital business valuation

We value RIL’s 67.05% stake in JPL at an Equity value of INR ~950/share or INR 6trn

comprising of:

a) Telecom business at an enterprise value of INR 780/share or INR 4,952bn based on DCF

valuation (Exhibit 50); implied valuation of 14.3x Sep’21 EV/EBITDA;

b) Optional upside in Telecom business at an equity value of INR 67/share or INR 423bn

(Exhibit 33) based on 50% probability of duopoly market and Jio garnering 40% of VIL total

subscriber base without any ARPU dilution; and

c) Digital opportunities at an equity value of INR 105/share or INR 669bn (Exhibit 51) based

on potential monetisation of Video OTT apps, JioSaavn and Consumer IoT business.

The digital business is valued at INR ~950/share Exhibit 49.

Business segment Valuation

methodology

Valuation (INR

bn)

Valuation

(USD bn)

Valuation


Digital business (for RIL's 67.05% share)

6,044 81 952

a) Telecom business DCF 4,952 66 780 Based on DCF valuation; implied valuation of 14.3x

Sept'21 EV/EBITDA

b) Optional upside in Telecom business

423 6 67 50% probability of duopoly market; Jio garnering


c) Digital opportunities

669 9 105 Based on potential monetization of Video OTT apps,

JioSaavn and Consumer IoT business




DCF value of RIL’s share of Telecom EV at INR 780/share Exhibit 50. FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E

DCF (INR bn)

EBIT X (1-tax rate) 181 272 338 402 481 566 654 733

Depreciation & Amortization 90 99 116 130 138 147 154 161

Changes in net working capital 3 6 6 5 6 6 7 6

Capex (191) (294) (275) (215) (243) (233) (235) (248)

Free cash flow to the firm [FCFF] 83 84 185 323 382 486 580 652

FCFF growth (%)

1% 121% 74% 18% 27% 19% 12%

Sep-21E

WACC 10.4%

PV of cash flows (FY22E-28E) (INR bn) 1,756

PV of terminal value (INR bn) 5,630

Terminal value as % of Enterprise Value 76%

Total Enterprise Value (INR bn) 7,386

RIL number of shares (mn) 6,349

Enterprise Value for RIL (INR/share) 780


INR 172/share equity value for RIL from duopoly Exhibit 51.optionality and digital applications


USD 21bn of equity value from duopoly optionality and Exhibit 52.digital applications


Global telecom and digital comparable for Jio Exhibit 53. P/E FY20-22 EPS

CAGR CY21/FY22 RoE

EV/EBITDA

CY19/FY20 CY20/FY21 CY21/FY22 CY19/FY20 CY20/FY21 CY21/FY22

Rjio (JMFe) 130.9 49.9 28.6 109.7% 10.8% 34.1 22.3 16.0

Digital comparable

Tencent 34.1 39.4 31.8 24.8% 22.2% 21.2 27.1 22.6

Alibaba 60.9 35.2 29.2 32.7% 15.1% 32.4 29.0 22.5

Amazon 80.3 91.0 57.2 49.6% 23.7% 23.6 34.0 24.6

Alphabet 27.7 28.1 22.2 16.8% 15.7% 17.1 16.0 12.8

Facebook 25.1 27.6 21.1 29.8% 20.8% 17.5 15.8 12.4

Netflix 78.3 73.8 51.7 49.0% 30.2% 52.4 47.1 35.9

Apple 18.4 29.9 25.0 11.7% 134.9% 11.4 20.6 18.0

Telecom comparable

Bharti Airtel NM NM 141.4 106.8% 3.1% 10.1 12.6 10.0

Vodafone Idea NM NM NM -48.5% 393.2% 29.2 9.2 6.3

Vodafone Plc NM 20.4 22.4 NM 2.8% 7.3 6.2 6.4

AT&T 16.8 9.3 9.2 30.4% 11.6% 7.7 6.9 6.8

Verizon 11.5 12.1 11.7 2.9% 29.1% 7.5 7.4 7.2

China Mobile 11.2 9.2 8.9 2.1% 9.7% 2.9 2.2 2.2

XL Axiata 47.0 21.2 19.1 41.0% 5.7% 5.6 4.8 4.5

MTN Group 17.9 10.3 8.9 19.0% 15.5% 4.2 3.4 3.3

Source: Company, JM Financial. * Equity base includes minority investments to-date.

67

83 8

14172

0

20

40

60

80

100

120

140

160

180

200

Optional value -Telecom Duopoly

Video OTT Audio OTT ConsumerIoT/smart devices

Total

INR/s

hare

8

10

1 2

Optional value - Telecom Duopoly Video OTT

Audio OTT Consumer IoT/smart devices



Retail — driving omni-channel capabilities across segments

Reliance Retail has, in a short span of time, attained a strong leadership position in the Retail

segment, which reflects the ambition of the group of attaining leadership in every segment it

operates in. Reliance Retail was launched in 2006 with the opening of the first Reliance Fresh

store and the next two years witnessed launch of Reliance Digital and Reliance Trends.

Interestingly, it now leads in each of the three segments viz. Grocery, Fashion & Lifestyle and

Consumer Electronics and the fact that the feat was achieved in a decade is a testimony to

group’s ability for value creation. Even in FY20, these 3 segments contributed c.86% to the

Retail segment EBITDA and are expected to remain the major drivers of earnings in future.

The company exited the year FY20 with a total store count of 12,307 and a retail space in

operation of 28.7mn sq. ft. To put this in perspective, it is 3.7x the size of DMart in terms of

retail space while core-retail revenue and EBITDA are 3.7x and 4.1x that clocked by DMart.

The ambition for organised retail business is even larger now, as highlighted in FY20 AGM –

RIL expects to drive omni-channel capabilities across segments as well as extend JioMart to

Consumer Electronics and Fashion & Lifestyle – JioMart has started off in the grocery space at

present to begin with - similar to how Reliance Retail initially began. Given previous history of

successful execution, this could as well become a sizeable value-creation opportunity in the

future. For the near-term, we expect larger value-creation potential from the Grocery and

Consumer Electronics businesses over FY20-23 while Fashion & Lifestyle segment is likely to

take relatively more time to recover from the pandemic. But given that Fashion and Lifestyle is

intrinsically a much higher margin business, we forecast Core Retail EBITDA margin in FY23E

to be slightly below the level of FY20. This is expected to be entirely mix-led, as we expect

individual segments to all clock higher margins in FY23 vs FY20.

At an overall basis, we value the Reliance Retail business at 25x forward EBITDA to arrive at a

valuation of INR3.7tn (Sep’21 basis). On Jio Mart, we are presently factoring in only the

opportunity of digitisation of Kirana store where, we believe, the business has a real value

proposition. We are not yet factoring in any value from the other categories where the

market place capabilities can be extended to (like consumer electronics and apparels as brick

and mortar presence gives Jio Mart some edge in these segments). As explained in detail

later, we expect Jio Mart to garner at least 10% market share in the digitised General Trade

market (expecting it to be 50% of the total GT market by FY30) by FY30 and given the

profitability potential in this space, we are pegging the value of this business at INR1,600bn

by Mar’29 which implies INR732bn in present value terms.

Chronological milestones representing the progression of Reliance Retail over the past c.1.5 decade Exhibit 54.

Year Event

2006 Ventured into organised retail through Reliance Retail with its first Reliance Fresh store in Hyderabad

2007 Launched Reliance Digital, a consumer electronics retail chain

2008 Opened first fashion & lifestyle store under Reliance Trends and Reliance Footprint brand

2010 Crossed 1,000 stores mark. Announced partnerships with Zegna, QuikSilver & Steve Madden

2011 Launched wholesale cash-n-carry store chain - Reliance Market

2012 Reliance Trends became India’s largest fashion Retailer.

Announced partnerships with Iconix, Kenneth Cole, Thomas Pink and Brooks Brothers 2013 Reliance Market became India’s largest wholesales cash & carry store chain.

Reliance Retail achieved EBITDA break-even 2014 Launched Reliance Digital Express Mini, a chain of small stores dealing in mobility and communication devices

2015 Reliance Retail 2.0 unveiled with launch of multi-channel initiatives.

Announced partnership with BCBGMAXAZRIA, Juicy Couture and Cherokee 2016 Launched www.ajio.com a curated fashion e-commerce platform and www.Footprint360.com a multi-channel

e-commerce platform for Reliance Footprint 2017 Reliance Retail crossed USD 5bn revenue mark

Launched www.reliancetrends.com a multi-channel e-commerce platform for Reliance Trends

Announced partnership with Flormar, Bally and Scotch & Soda

Launched Project Eve, a mid-premium fashion and lifestyle destination store for women

2018 Crossed revenue milestone of USD 10bn

2019 Made first international foray with 100% acquisition of marquee British Toy retailer Hamleys.

2020 JioMart launched across all major cities for delivering essential grocery items.

JioMart goes live on Whatsapp after the deal between Facebook and Reliance Jio Source: Company, JM Financial

Focus on scale was accompanied by a strong delivery on throughputs: Reliance Retail was

established with the focus of attaining a sizeable scale which is quite evident from the fact

that its core retail revenue has nearly quintupled over FY16-20 despite having a revenue size



of INR190bn in FY16 – this represents revenue CAGR of 49%. While this can be also

attributed to its rapid expansion of store count but this has only doubled over the past 4

years. If we were to look at revenue per store, the same has more than trebled for both

grocery and consumer electronics and has grown by 34% for Fashion & Lifestyle segment.

This is quite commendable as rapid pace of expansion generally leads to a decline in

throughputs per store. The confluence of these factors helped the company deliver 8.9%

EBITDA margin in FY20. For the Retail business (including connectivity but excluding Petro

Retail), ROIC has scaled-up to 27.1% from mere 6.5% in FY16.

Store count has nearly doubled over FY16-20… Exhibit 55.


…while revenue has become 5x over the same period… Exhibit 56.


…driven by sharp scaling-up of throughputs per store… Exhibit 57.


…which is expected to improve further over next 3 years Exhibit 58.

except for Fashion and Lifestyle (being hit by pandemic)


Working capital rationalisation has also helped pare down debt and improve returns profile:

While scaling-up of revenue size coupled with improving operating margin is in itself

commendable, the company has also worked on driving efficient operations which would

help keep investments in business lower at least in relation to revenue. Noteworthy point

here is that Fixed Asset turnover has seen a marginal improvement from 7.2x in FY16 to 7.7x

in FY19 while a significant part of the improvement in the capital employed was driven by a

sharp reduction in working capital – revenue for the retail business in FY20 was 7x levels seen

in FY16 but net working capital was less than 2x over the same period. Entire improvement

was driven by inventory which fell from 104 days of sales in FY16 to 26 days in FY20.

The efficient management of working capital has also helped Reliance Retail report positive

operating cash flows in each of the 5 years over FY16-20 (both inclusive). On an average,

operating cash flows have been c.2x the net operating profit after tax over these 5 years –

this feat was possible partly on account of efficient working capital management during the

same period and was also aided by tax payments being nearly half that of tax provisions in

the PNL (possibly on carried forward losses in tax books). This has helped constrict net debt to

merely 16.5% of Invested capital – it was 10% in FY16 but 41% in FY19.

3,2453,616

7,573

10,415

11,784

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000


Store Count (ex-petro) - nos

190273

437

735

9281,020

1,323

1,732

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Core Retail Revenue - INR bnExpecting to double over next 3 years

146

41 49

491

155

65

0

100

200

300

400

500

600

Grocery Consumer electronics Fashion and Lifestyle

Revenue/store - INR mn

FY16 FY203.4x

1.3x

3.7x

491

155

65

681

213

60

0

100

200

300

400

500

600

700

800

Grocery Consumer electronics Fashion and Lifestyle

Revenue/store - INR mn

FY20 FY23E

Medium-termfallout from pandemic



ROIC has improved significantly from 6.5% in FY16 to 27.1% in FY20 aided by Exhibit 59.higher OPM and better asset turns


Lower tax payments and efficient working capital management helped in strong Exhibit 60.cash flow generation with operating cash flow being 225% of Operating Profit after Tax


Working capital as % of sales has come to below mid-Exhibit 61.single digit levels…


…which has aided reduction in net debt in the past one Exhibit 62.year


Expecting core retail revenue trajectory to moderate to 23% CAGR over FY20-23 on slower

growth in apparels: We continue to believe that retail business would largely normalize once

the pandemic is reasonably controlled over the course of next 12 months. Interestingly

though, Reliance Retail’s diversified revenue stream holds it in good stead to counter the

problems arising as a result of this pandemic.

2%

2% 2%3%

5%6.5%

8.8%

15.9%

21.2%

27.1%

3.2

5.0

6.4 6.25.9

0

2

4

6

8

0%

6%

12%

18%

24%

30%


NOPAT margin - % ROIC - % Invested capital turns - RHS

287%

473%

39% 49%

275%

104% 96% 95%

0%

250%

500%

FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

CFO - % of NOPAT

Impacted due to working capital investments

5 Yr Avg:

31

19

39

100

58

17%

7% 8%

10%

4%

0

40

80

120

0%

6%

12%

18%


Working capital - INR bn WC - % of sales

6

-11

28

89

38

-20

0

20

40

60

80

100


Net Debt - INR bn



- Of the core-retail business revenues, 37% comes from the grocery segment which

would largely remain unaffected during the pandemic. We expect throughputs per

store to grow at 11% per annum which coupled with store expansion should help

drive a 30% revenue CAGR over FY20-23 (vs 41.5% over FY16-20)

- Consumer electronics on the other hand being partly discretionary in nature is

expected to face some headwinds in the short-term. Some parts of the business like

mobile phones and laptops continue to remain essential and to that extent would

be lesser impacted. Furthermore, lockdowns have also forced people to look for

more options for convenience leading to higher sales of some household durable

products like refrigerators, washing machines, microwaves etc. Overall, we expect

this segment to normalise soon and we are building in 11% CAGR in throughputs

and 22% CAGR in revenue over FY20-23 (vs. 64.4% over FY16-20).

- We expect Fashion & Lifestyle to be the worst hit amongst these three categories. In

our view, revival in apparels would be more gradual which is in-line with our belief

that normalisation of social gatherings to pre-Covid levels will take some time even

after the crisis is largely over. We are forecasting revenue per store for Apparels in

FY23 to be 7% lower than that seen in FY20 and we are building in 5% revenue

CAGR in this segment completely led by store expansion.

Overall we are factoring in 23% revenue CAGR over FY20-23 in the Core Retail business. We

expect EBITDA CAGR to be lower at 21.4% which would completely be on account of mix

change – high margin (23.9% in FY20) apparels business would be mere 9.1% of core retail

revenues relative to 14.6% FY20.

Overall business valuation estimated at INR3.7tn; JioMart’s GT venture would contribute

another 20% to the overall value: We are valuing Reliance Retail at 25x on 12M fwd EBITDA

to arrive at a valuation of INR3.7tn. This also implies EV/sales of 1.5x. The valuation compares

quite favourably to peers like Trent and Page which are quoting at 31-32x on EV/EBITDA

(FY22) and 5-6.5x on EV/Sales (FY22). This would also be a sharp discount to DMart’s

valuation of 44.6x on EV/EBITDA (FY22) and 3.5x on EV/Sales (FY22). We have used a lower

multiple as the business also includes low margin categories like connectivity and petro-

retailing and we are also factoring in a possibility of peers quoting at prices which are above

their respective fair values.

For JioMart, its current proposition of digitising the General Trade (Kirana stores) could really

develop in to a huge opportunity and we believe the underlying strengths in the business can

help develop a strong moat in this segment. However, if were to assume that JioMart is able

to garner at least 10% market share of digitized General Trade segment (would be c.50% of

GT market pegged at USD1,355bn in FY30 on our estimates) over the next 10 years and earn

a commission of 3% on sales, the company could clock a revenue of INR152bn on a GMV of

INR5,080bn. Furthermore, a 30% EBITDA margin would imply it could clock an operating

profit of about INR46bn in FY30. Using a 35x EV/EBITDA multiple we derive an Enterprise

Value of INR1,600bn in FY29 and would be worth INR732bn in present value terms as at

Sep’22.This implies JioMart has a potential to add another 20% to our valuation of Reliance

Retail.



Based on back-of-envelope assumptions, the JioMart New-commerce kirana store Exhibit 63.grocery initiative, if successfully scaled-up, could itself be worth another c.USD9-10bn – and add c.20% to current retail business valuation

FY30

General Trade (GT) market - USD bn 1,355

% of market assumed to be digitised 50%

GT market-size for E-commerce - USD bn 677

Estimated JioMart New-Commerce Market Share by FY30- % 10%

JioMart New-Commerce GMV from grocery -USD bn 68

JioMart New-Commerce GMV from grocery – INR bn 5,080

Commission - % 3.0%

Estimated JioMart New-Commerce Revenue - INR bn 152

EBITDA margin 30%

JioMart New-Commerce EBITDA - INR bn 46

Target EV/EBITDA multiple 35

JioMart New-Commerce Enterprise Value - INR bn (Mar’29 basis) 1,600

Discount Rate 11.0%

JioMart New-Commerce EV (discounted to Present Value) INR bn - Mar'21 basis 732

Source: Technopak Research & Analysis, JM Financial

Note: Our assumptions for JioMart are based on global peers in the same field like Alibaba

and JD.com. Alibaba earns a 4% distributor commission on GMV and has a 42% margin. We

have assumed lower commissions and margin as we are presently factoring in only the

grocery business. On valuations, JD.Com is presently quoting at 23x on FY21 EV/EBITDA

while Alibaba is around 27x. We are valuing JioMart at a premium as the growth would still

remain quite high even post achieving this scale.

Comparable listed peer valuations for Jio Mart Exhibit 64.

PE EV/EBITDA EV/Sales ROCE (pre-tax)

FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY22E

ADITYA BIRLA FASHION AND RETAIL 294.9 -35.0 72.4 27.3 110.3 17.5 1.4 1.7 1.2 10.3%

TITAN COMPANY 60.8 76.4 45.1 41.0 49.8 31.0 4.5 4.8 3.6 26.9%

TRENT 157.1 760.6 67.4 39.5 58.8 30.1 6.2 7.1 4.8 14.7%

PAGE INDUSTRIES 62.2 77.6 48.6 40.2 46.2 31.4 7.4 7.8 6.3 52.1%

AVENUE SUPERMARTS 100.5 98.3 67.4 64.0 67.3 44.9 5.2 4.9 3.6 17.2%





We expect refining and petchem margin outlook to be subdued in the near term given the

huge ~8% global oil demand contraction likely in CY20, ongoing capacity additions and the

resultant excess inventory build-up. However, RIL is relatively better placed to mitigate this

challenge due to its integrated and complex facility, locational advantage and its strength for

feedstock sourcing and product placement. Hence, we expect RIL to continue to operate its

plants at optimum utilisation despite near-term demand concerns. We expect RIL’s GRM at

USD 7.5/9.0/10.0/bbl in FY21/22/23 (vs. USD 8.9/bbl in FY20) and petchem EBITDA margin at

USD 192/221/243/tn in FY21/22/23 (vs. USD 218/tn in FY20). We value Refining and Petchem

business at an EV of INR 346/share and INR424/share, respectively, based on 7.5x

EV/EBITDA.

Refining margin recovery to be gradual along with recovery in oil demand

Global oil demand expected to return to pre-Covid levels only in CY22

The IEA - in its July’20 oil market report (click here) - expects CY20 oil demand at

92.1mmbpd, i.e. unprecedented contraction of 7.9mmbpd due to the pandemic (contraction

of 10.75mmbpd in 1HCY20, moderating to contraction of 5.1mmbpd in 2HCY20). Further,

CY21 oil demand is expected to grow only by 5.3mmbpd YoY to 97.4mmbpd, still

2.6mmbpd below CY19 level (of 100mmbpd) due to expectations of significantly lower

demand for Jet fuel and Kerosene until at least CY22. The IEA estimates jet fuel demand to

decline by 3mmbpd YoY in CY20 (from 8mmbpd in CY19) and only rise by 1mmbpd in

CY21, still ~2mmbpd below pre-crisis level. Data from the International Air Transport

Association show that passenger traffic in CY20 will be 55% vs. CY19. EIA’s expectation is

also along similar lines (click here for its July’20 short-term energy outlook)

IEA and EIA expects global oil demand to return to pre-Covid levels only in CY22 Exhibit 65.

CY14 CY15 CY16 CY17 CY18 CY19 CY20e CY21e

IEA

Global demand (mmbpd) 93.4 95.3 96.5 98.2 99.3 100.0 92.1 97.4

Demand growth (mmbpd, YoY) 1.9 1.1 1.7 1.1 0.7 -7.9 5.3

EIA

Global demand (mmbpd) 93.5 95.3 96.9 98.8 100.4 101.0 92.9 99.9

Demand growth (mmbpd, YoY) 1.8 1.6 1.9 1.6 0.6 -8.1 7.0

Source: IEA, EIA

Expectation of product-wise monthly global oil demand contraction trend in CY20 Exhibit 66.(mmbpd)

Source: IEA

IEA and EIA expects CY20 global oil

demand to decline by ~8mmbpd;

expects demand recovery to pre-

Covid levels only in CY22

https://www.iea.org/reports/oil-market-report-july-2020

https://www.eia.gov/outlooks/steo/pdf/steo_full.pdf



Expectation of region wise break-up in global oil demand contraction in CY20 and Exhibit 67.recovery in CY21 (mmbpd)

Source: EIA

Global refining capacity additions continue due to lagged impact

Despite the massive demand contraction of ~7.9mmbpd in CY20, refining capacity is

expected to witness net additions in CY20 and CY21 due to the lagged impact of capacity

expansion decisions take 3-5 years ago. IEA expects net refining capacity addition of

1.5mmbpd in CY20-21; China to add 530kbpd of capacity, India to add ~140kbpd capacity

and Middle East to add 710kbpd capacity.

Region-wise capacity additions across the world over the years Exhibit 68.

Source: BP statistical review, IEA, JM Financial

GRM to stay subdued due to low capacity utilisation and oil product inventory build-up

Hence, global refining utilisation decline could record lows of ~75% in CY20 vs. the past

decade’s average of ~82%.

Global refining utilisation to decline to record low of ~75% in CY20 vs. past decade average of ~82% Exhibit 69.

Source: BP statistical review, IEA, JM Financial

kbpd CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20e CY21e

Americas 115 119 487 310 6 9 246 20 10

Europe & CIS 89 19 111 -150 20 235 172 0 0

Middle east 173 383 393 164 121 239 313 120 590

India 40 0 -12 313 79 272 0 19 120

China and Rest of Asia Pacific 865 865 865 865 865 865 789 341 280

Africa 14 9 0 0 -14 -5 6 0 0

Total 1,296 1,149 436 479 492 1,428 1,526 500 1,000

70%

74%

78%

82%

86%

-3.0

-1.5

0.0

1.5

3.0

CY

1980

CY

1981

CY

1982

CY

1983

CY

1984

CY

1985

CY

1986

CY

1987

CY

1988

CY

1989

CY

1990

CY

1991

CY

1992

CY

1993

CY

1994

CY

1995

CY

1996

CY

1997

CY

1998

CY

1999

CY

2000

CY

2001

CY

2002

CY

2003

CY

2004

CY

2005

CY

2006

CY

2007

CY

2008

CY

2009

CY

2010

CY

2011

CY

2012

CY

2013

CY

2014

CY

2015

CY

2016

CY

2017

CY

2018

CY

2019

CY

2020e

CY

2021e

Global refining capacity addition Global refinery utilisation rate (%) (RHS)

IEA expects net refining capacity

addition of 1.5mmbpd in CY20-21;

GRM to stay subdued due to low

capacity utilisation and oil product

inventory build-up



Further, this capacity glut has resulted in built up in oil products inventory. IEA expects large

implied product stock build-up of ~550mmbbl during Jan-May’20; published OECD product

inventory data for Apr’20 confirms the directional trend.

OECD oil products stocks jump due to demand contraction Exhibit 70.

mmbbl 1QCY18 2QCY18 3QCY18 4QCY18 1QCY19 2QCY19 3QCY19 4QCY19 1QCY20 Apr2020

OECD Americas 625 621 667 647 648 649 658 647 651 682

OECD Asia Oceania 200 203 220 212 214 216 232 212 213 210

OECD Europe 869 842 853 863 864 866 875 863 908 932

Total OECD oil product stocks 1,693 1,666 1,740 1,721 1,727 1,732 1,764 1,721 1,772 1,824

Source: IEA, JM Financial

Hence, Singapore Dubai GRM has collapsed to record low levels in the last few months

(reported negative USD1.0/bbl in 1QFY21), well below the cash cost of USD2-3/bbl for

refiners across various regions. The excess oil products inventory also needs to be eliminated

before we see GRM return to historical levels. Hence, we expect Singapore Dubai GRM to

average at USD 2.5/4.5/5.5/bbl in FY21/22/23 (vs. USD 3.2/bbl in FY20 and average of USD

6.2/bbl during FY11-FY20 and USD 5.5/bbl during FY01-FY20).

Product wise margin trend Exhibit 71.

Source: Company, Reuters, Bloomberg, JM Financial

S’pore Dubai GRM has collapsed to record low levels and below cash cost due to huge global demand contraction Exhibit 72.

Source: IEA, Reuters, JM Financial

Is low crude price a positive for refiners?

Crude price is a function of global a) oil product demand growth and b) global crude supply

growth. However, GRM is a function of global a) oil product demand growth and b) refining

capacity additions. Hence, while the demand side of equation is common for determination

of both crude price and GRM, the supply side of the equation is different for both. For crude

price, supply side is not purely determined by economics, as OPEC+ tries to artificially regulate

crude supply with an objective to put a floor to crude price given their dependency on oil

export revenues. However, for GRM, supply side is the net refining capacity addition (net of

permanent shutdowns) which is based on economic factors. However, refining capacity

addition has a 3-5 year lead time, which means capacity addition always comes with a lag

and hence leads to the cyclicality in the refining margin.

USD/bbl F Y11 F Y12 F Y13 F Y14 F Y15 F Y16 F Y17 F Y18 F Y19 F Y20 1QF Y21

Reuters Singapore complex margin 5.2 7.9 7.7 5.9 6.3 7.5 5.8 7.2 4.9 3.2 -1.0

Product -crack s

Gasoline-Dubai crack 8.3 11.5 15.4 12.7 14.5 19.2 13.9 14.6 8.0 6.7 0.9

Gasoil-Dubai crack 13.8 17.8 19.5 17.4 15.7 12.0 11.3 13.3 15.1 14.1 4.7

Jet kero-Dubai crack 14.8 18.3 18.9 16.7 15.9 12.5 11.5 13.3 14.6 12.6 -1.2

FO-Dubai crack -7.1 -2.6 -5.0 -10.5 -8.4 -6.7 -5.4 -4.0 -2.8 -8.1 -2.7

Naphtha -Dubai crack 0.4 -4.6 -5.0 -4.3 -1.5 2.9 0.1 0.3 -4.1 -5.5 -4.6

L ight heav y crude spread

Arab Light-Arab Heavy crude spread 3.2 3.6 3.6 4.2 4.3 3.0 2.8 2.2 2.3 2.2 0.5

Brent-Dubai crude spread 2.7 4.2 3.5 3.0 2.2 1.7 2.3 1.8 1.1 0.4 0.7

0

2

4

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8

-8

-4

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D/b

bl

mm

bp

d

Refinery capacity addition (LHS) World oil demand growth (LHS) S'pore Dubai GRM (RHS) S'pore Dubai GRM 20 year average (RHS)



We looked at the past 3 instances of crude price crashes to understand this:

a) Crude price crash in CY08-09 was led by oil demand shock; hence, GRM also declined

sharply along with crude prices: During the global financial crisis in CY08-09, the crash in

crude price from high of USD 146/bbl to USD 38/bbl was purely due to oil demand shock -

global oil demand contracted by 0.6mmbpd in CY08 and by another 1.0mmbpd in CY09

(after strong annual growth of 1.1-3.1mmbpd reported during CY03-07). Further, as refining

capacity addition fell short of robust oil demand growth during 2004-07, the market saw a

golden refining cycle in 2004-07 (with Spore Dubai GRM at USD 6-8/bbl); hence lot of

refining capacity addition planned during that period was commissioned during the CY08-09

downturn, further aggravating the weakness in GRMs. Hence, GRM declined sharply from

USD 6-8/bbl in 2004-07 to USD 5.8/3.7/4.6/bbl in CY08/09/10.

b) Crude price crash during CY14-16 was due to crude supply shock; hence GRM was at

record high levels as oil demand growth continued to be robust: Crude price started to

gradually decline from +USD 100/bbl level prevailed since Feb 2011-13 and bottomed at USD

26/bbl in Feb 2016 purely due to crude supply shock as the market realised the potential risk

from a continuous rise in US shale oil production - US crude production grew sharply from

5.5mmbpd in CY10 to 9.4mmbpd in CY15. However, global oil demand was growing at a

record pace during the period– reported growth of 1.2/1.9/1.1/1.7/mmbpd in

CY14/CY15/CY16/CY17. On the other hand, refining capacity addition was muted at

1.4/0.5/0.5/0.6mmbpd in CY14/CY15/CY16/CY17. Hence, despite the crude price crash,

refining industry was in a golden cycle during the period with Spore Dubai GRM of USD

5.8/7.7/6.1/7.1/bbl in CY14/CY15/CY16/CY17.

c) Current crude price crash is due to huge unprecedented oil demand shock: The current

sharp fall in crude price is primarily due to an unprecedented large oil demand contraction.

Hence, GRM will continue to be weak for few quarters till we return to normalcy in global oil

demand.

However, the weakness in GRM is likely to be partly offset by following benefits on account

of low crude price (as witnessed during 2014-16): a) lower fuel and loss cost for refiners

(given fuel & loss is ~6-10% across refiners); b) high crude price discounts from Middle East

crude suppliers to large Asian buyers in their desperation to maintain market share amidst

crude supply glut and c) lower working capital requirements.

GRM decline in CY08-09 & CY20 due to demand led fall Exhibit 73.in crude, unlike supply led fall in crude in CY14-16

-2.5

0.0

2.5

5.0

7.5

10.0

0

35

70

105

140

1Q

FY

09

1Q

FY

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1Q

FY

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FY

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1Q

FY

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1Q

FY

16

1Q

FY

17

1Q

FY

18

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FY

19

1Q

FY

20

1Q

FY

21

US

D/b

bl

US

D/b

bl

Brent (LHS) Spore Dubai GRM (RHS)

Source: Reuters, Bloomberg

GRM decline in CY08-09 & CY20 due to demand led fall Exhibit 74.in crude, unlike supply led fall in crude in CY14-16

0.0

2.5

5.0

7.5

10.0

0

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70

105

140

FY

02

FY

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US

D/b

bl

US

D/b

bl

Brent Spore Dubai GRM (RHS)

Source: Reuters, Bloomberg

Current crude price collapse is due

to unprecedented oil demand

contraction; hence GRM to stay

weak till demand normalises

Low crude price to benefit refiners

via reduction in fuel & loss cost and

working capital needs and increase

crude price discounts from crude

suppliers



RIL relatively better placed to tide the crisis

Light-heavy crude spread has moderated over past 1-2 years due to shortage of a heavy

crude supply (produced mostly by Middle East countries) and rise in supply of light crude

(produced by the US). This has had some moderating impacting in GRM premium for

complex refiners such as RIL. However, RIL has largely been able to offset this via its superior

crude sourcing strategies.

Brent – Dubai crude spread continue to be lower (USD/bbl) Exhibit 75.

Source: Bloomberg, JM Financial.

Arab light – Arab heavy continue to be lower (USD/bbl) Exhibit 76.

Source: Bloomberg, JM Financial.

OPEC and non-OPEC countries monthly crude production trend (mmbpd) Exhibit 77.

Source: IEA, EIA JM Financial

RIL’s GRM premium should see some gains due to commercialisation of its ~USD 6bn petcoke

gasification project by end FY20. Assuming stabilisation of petcoke gasification project by

end FY21, we have factored in additional GRM contribution of ~USD 0.5/bbl in FY21 and

USD1.0/bbl in FY22. However this is lower than original expectations and guidance as project

economics have deteriorated since its conceptualisation (in 2012-13) due to the following

reasons: a) Petcoke gasifier capacity is at 10mmtpa as opposed to 6mmtpa initially planned;

b) Spot LNG prices have collapsed to USD2-3/mmbtu from high of USD 14-15/mmbtu

prevailing pre-2014; and c) Petcoke prices have only seen only a moderate decline (following

the global coal prices) vs. 2014 levels.

Countries CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20

OPEC

Saudi Arabia 8.1 9.0 9.5 9.4 9.5 10.1 10.4 10.0 10.3 9.8 9.7 9.7 9.7 11.9 8.5 7.6

Iran 3.7 3.6 3.0 2.7 2.8 2.9 3.6 3.8 3.8 2.4 2.1 2.1 2.0 2.0 2.0 2.0

Venezuela 2.5 2.5 2.5 2.5 2.5 2.5 2.2 2.0 1.5 0.9 0.8 0.8 0.7 0.6 0.6 0.3

Nigeria 2.1 2.2 2.1 2.0 1.9 1.9 1.5 1.5 1.6 1.7 1.7 1.7 1.8 1.8 1.5 1.4

Libya 1.6 0.5 1.4 0.9 0.5 0.4 0.4 0.8 1.0 1.1 0.8 0.1 0.1 0.1 0.1 0.1

Iraq 2.4 2.7 3.0 3.1 3.3 4.0 4.4 4.5 4.5 4.7 4.5 4.6 4.6 4.5 4.2 3.7

UAE 2.3 2.5 2.7 2.8 2.8 2.9 3.1 2.9 2.9 3.1 3.1 3.2 3.5 3.9 2.5 2.4

Kuw ait 2.0 2.2 2.5 2.6 2.6 2.7 2.9 2.7 2.7 2.7 2.7 2.7 2.9 3.1 2.2 2.1

Angola 1.7 1.7 1.8 1.7 1.7 1.8 1.7 1.6 1.5 1.4 1.4 1.4 1.4 1.3 1.3 1.2

Other OPEC 3.1 3.0 3.0 2.9 2.8 3.3 2.7 2.5 2.3 2.2 2.1 2.1 1.9 1.7 1.3 1.4

Total OPEC crude 29.5 29.9 31.3 30.5 30.3 32.4 32.8 32.4 32.0 30.0 28.9 28.3 28.6 30.8 24.1 22.2

Non-OPEC

Russia 10.5 10.6 10.7 10.9 10.9 11.1 11.3 11.4 11.4 11.6 11.6 11.3 11.3 11.4 8.6 8.5

US 5.5 5.7 6.5 7.5 8.8 9.4 8.9 9.3 10.4 12.3 13.0 13.0 13.0 12.3 11.5 10.9

RIL relatively better placed to tide

the crisis due to its integrated and

complex facility, locational

advantage and superior crude

sourcing/ product placement

strategies



Asia spot LNG prices have come down to record lows of Exhibit 78.~USD2-3/mmbtu

0

3

6

9

12Ju

l-1

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Nov-1

5

Ma

r-16

Ju

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Nov-1

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tu

Source: JM Financial, Bloomberg

Coal prices though have corrected from recent peak, is Exhibit 79.flattish from 2014 levels

40

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RIL GRM premium over Spore Dubai GRM to be capped due to moderation in light heavy crude spread (USD/bbl) Exhibit 80.

0.0

2.0

4.0

6.0

8.0

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

RIL GRM premium over Singapore Dubai GRM Arab Light- Arab Heavy Spread Brent-Dubai Spread

Source: JM Financial, Company

Further, RIL, due to its locational advantage and superior product placement strategies, was

able to operate its refineries (and its petchem units) at more than 90% utilisation during the

lockdown from Mar’20 to May’20, during which domestic demand saw contraction of 20-

45%. This compared with utilisation declining to 50-80% for other refiners.



RIL’s refinery continues to operate at +90% utilisation during lockdown Exhibit 81.

40%

60%

80%

100%

120%

Nov'1

9

Dec'1

9

Ja

n'2

0

Fe

b'2

0

Ma

r'2

0

Ap

r'2

0

Ma

y'2

0

IOCL BPCL HPCL RIL Essar

Source: PPAC, JM Financial

As discussed earlier, we expect Singapore Dubai GRM to average at USD 2.5/4.5/5.5/bbl in

FY21/22/23 (vs. USD 3.2/bbl in FY20 and average of USD 6.2/bbl during FY11-FY20 and USD

5.5/bbl during FY01-FY20). We are building in RIL’s steady state GRM premium at USD

4.5/bbl over our Singapore Dubai GRM assumption; hence we expect RIL’s GRM at USD

7.5/9.0/10.0/bbl in FY21/22/23 (vs. USD 8.9/bbl in FY20). We value Refining business at an EV

of INR 346/share based on 7.5x EV/EBITDA.

RIL’s GRM composition (USD/bbl) Exhibit 82.


RIL’s refining segment — key assumptions and estimates Exhibit 83.



EBITDA (INR Bn) 268 286 290 261 245 198 271 316 322 329

Volumes (mmtpa)

Crude throughput 69.6 70.1 69.8 68.3 70.6 65.7 70.6 70.7 70.7 70.8

Margins (USD/bbl)

S'pore Dubai GRM 7.5 5.8 7.2 4.9 3.2 2.5 4.5 5.5 5.5 5.5

RIL's total GRM premium 3.3 5.2 4.4 4.3 5.7 5.0 4.5 4.5 4.5 4.5

a) RIL normal GRM premium 3.3 5.2 4.4 4.3 5.7 5.0 4.0 3.8 3.5 3.5

b) Petcoke gasif ication addition to GRM 0.0 0.0 0.5 0.8 1.0 1.0

RIL's GRM 10.8 11.0 11.6 9.2 8.9 7.5 9.0 10.0 10.0 10.0

Refining cash opex 2.8 2.7 2.8 1.8 2.3 2.0 2.0 2.0 2.0 2.0

Refining EBITDA 8.0 8.3 8.8 7.4 6.6 5.5 7.0 8.0 8.0 8.0

Expect RIL’s GRM at USD

7.5/9.0/10.1/bbl in FY21/22/23;

value Refining business at an EV of

INR 346/share based on 7.5x

EV/EBITDA



Petchem margins subdued due to oversupply amid demand contraction

RIL has 3.6mmtpa capacity to produce ethylene, which is used as a primary feedstock for the

production of PE, MEG, and PVC. Global ethylene capacity additions (of 6mmtpa/7mmtpa in

CY18/CY19) continue to outpace demand growth (of 4mmtpa/6mmtpa in CY18/CY19).

Further, ethylene capacity of around 8mmtpa is expected to come online in 2HCY20. This is

likely to continue to exert downward pressure on ethylene prices despite assuming demand

posts a 4% CAGR (or ~6mmt annually) over CY2019-21 like witnessed in CY2016-19.

Asia’s ethylene and propylene capacity additions schedule (mmtpa) Exhibit 84.

Source: Platts, JM Financial

Recovery in PE-Naphtha spreads temporary: Crude prices fell steeply (~30%) in the first half

of CY20 given the unprecedented ~11% contraction in global oil demand in 1HCY20. As a

result, Naphtha prices shrank (~35-40%) to USD400/mt during 1HCY20. This enabled several

idled Naphtha based PE producers to compete against the low cost ethane based US

producers. Global PE demand in CY20 saw slight improvement due to sudden spike in

demand from the medical and food packaging sector on account of coronavirus pandemic.

However, going forward, we expect the PE demand to normalise and PE prices to head

downwards due to already apparent oversupply scenario coupled with significant capacity

additions in US (~0.8mmtpa) and China (~2mmtpa).

Naphtha prices (USD/MT) fell ~35-40% during 1HCY20 Exhibit 85.

Source: Bloomberg, JM Financial

PP demand struggling due to slowdown in automotive sector: Polypropylene (PP) is widely

used to manufacture various automobile components and its demand has been hit sharply by

weak economic cycles and Covid-19 led disruptions. We expect PP demand to recover

gradually; however, impending one LPG cracker and 4 PDH plants (expected by 2HCY20) are

likely to create demand-supply imbalance.

Company Ethylene Propylene Expected start date

China

Sinopec SABIC Tianjin 1.0 0.5 Jul'20

BASF YPC 0.7 0.3 Jul'20

Sinopec SK Wuhan 0.8 0.4 Oct'20

CNOOC & Shell 1.0 0.6 Q4-20

South Korea

SK Energy 0.7 0.4 Nov'20

Lotte Chemical 1.2 0.5 Dec'20

YNCC 0.6 0.3 4QCY20

Taiwan

Formosa 1.2 0.6 Aug-Sep-20

Indonesia

Chandra Asri 0.9 0.4 Jul-Aug 20

Total 8.0 3.9

100

250

400

550

700

Jan-

19

Feb-

19

Mar

-19

Apr

-19

May

-19

Jun-

19

Jul-1

9

Aug

-19

Sep

-19

Oct

-19

Nov

-19

Dec

-19

Jan-

20

Feb-

20

Mar

-20

Apr

-20

May

-20

Jun-

20

Jul-2

0

Petchem margins to remain weak in

near-term due to oversupply amid

sharp demand contraction



PP capacity additions in CY2020 Exhibit 86.


PX markets to exacerbate further due to oversupply: During FY20, PX-Naphtha margins were

hampered by start-up of new large PX units in China. The supply glut in the global PX market

was caused by capacity addition of 12mmt against consumption of merely 3mmt. Going

forward, we expect margins to continue to remain under pressure due to a) additional

capacity of around 2.6mmtpa coming online in CY20-21; b) uncertainty in demand caused by

the Covid-19; and c) gradual easing of excess inventories.

PX capacity additions in CY2020-21 Exhibit 87.


High inventory, huge capacity additions to hurt PTA margins: The polyester market has seen a

large amount of demand destruction due to the pandemic and this has taken the PTA

inventories in China to a mammoth ~3.5mmt in May’20 (vs. normal average of ~1-1.5mmt).

Despite huge inventories, the PTA market has been flooded with supply as Chinese producers

continued to operate at 85-95% capacity since Apr’20. Moreover, in 2HCY20, around

7.2mmtpa of new PTA capacity additions would come online (taking PTA capacity to

59.8mmtpa in China and 79.8mmtpa in Asia). Hence, we believe PTA margins are likely to

remain subdued due to huge oversupply amid demand concerns.

PTA capacity additions in CY2020-21 Exhibit 88.


RIL’s petchem margins are likely to see only a gradual recovery: Petchem margins are likely to

remain weak in the near term due to steep demand contraction and the huge capacity

additions in China and US across polymers and fibre intermediates. We have assumed RIL’s

petchem EBITDA margin to be lower at USD 192/tn in FY21E, USD 221/tn in FY22E and

USD243/tn in FY23E (vs USD 218/tn in FY20). We value RIL’s Petchem segment at an EV of

INR 424/share based on 7.5x EV/EBITDA, in-line with the implied Saudi Aramco deal.

RIL's petchem segment - key assumptions and estimate Exhibit 89.


Company Type Capacity (ktpa) Expected start date

Fujian Meide PDH 660 4QCY20

Zhejiang Huahong PDH 450 4QCY20

Oriental Energy PDH 660 2HCY20

Hyosung Chemical PDH 300 Aug'20

Yantai Wanhua Chemical LPG cacker 130 4QCY20

Total 2,200

Company Product Capacity (ktpa)

Shangond Dongjying PX 1,000

Sinochem Quanzhou PX 800

Aramco Jazan PX 850

Total 2,650

Company Product Capacity (ktpa) Expected start date

Hengli Petrochemcial PTA 2,500 Jul'20

Xinfengming Group PTA 2,200 Sep'20

Fujian Baihong Group PTA 2,200 Oct'20

Others 300

Total 7,200


EBITDA (INR Bn) 137 165 259 379 309 266 337 381 401 421

Margin

EBITDA/ton (USD/ton) 155 176 234 273 218 192 221 243 248 253

Sales volumes (mmtpa)

Polymers 4.6 4.5 4.9 5.8 6.0 5.6 6.1 6.2 6.3 6.3

Polyesters 2.2 2.3 2.6 2.9 2.9 2.7 3.0 3.0 3.0 3.1

Fiber intermediaries 6.4 6.9 9.3 10.9 10.8 10.0 11.0 11.2 11.3 11.4

Total 13.5 13.9 17.1 19.8 20.0 18.6 20.5 20.7 20.9 21.1

Assumed RIL’s petchem EBITDA

margin to be lower at USD 192-

243/tn in FY21-22E (vs USD 218/tn

in FY20); value Petchem segment at

an EV of INR 424/share based on

7.5x EV/EBITDA



Global refining peer valuation table Exhibit 90.


Global petchem peer valuation table Exhibit 91.


Company FY21CY20 FY22CY21 FY21CY20 FY22CY21 FY21CY20 FY22CY21 FY21CY20 FY22CY21 FY21CY20 FY22CY21

US peers

Holly Corporation 11.4 6.3 5.4 8.0 NM 18.7 0.8 0.8 -1.9 5.1

Valero Energy 16.0 6.9 3.2 6.1 NM 15.9 1.3 1.3 -5.3 5.0

Marathon Petroleum 13.1 7.6 10.0 NM NM 21.2 1.1 1.2 -5.1 4.0

US peers average 13.5 6.9 6.2 7.0 NM 18.6 1.1 1.1 -4.1 4.7

European peers

Galp Energia 7.3 5.4 13.4 15.0 39.9 14.8 2.0 2.0 4.3 13.1

Motor Oil Hellas 6.5 5.1 5.6 6.2 10.0 6.4 1.3 1.2 10.7 17.0

New Zealand Refining 9.1 5.9 21.0 28.4 NM NM 0.3 0.3 -7.0 -4.6

PKN Orlen 4.0 3.2 10.2 10.1 9.3 6.5 0.6 0.6 6.6 8.8

Saras 4.3 2.8 3.2 4.1 NM 7.5 0.5 0.5 -0.9 6.7

MOL Hungarian oil & gas plc 4.8 3.6 13.1 14.5 21.3 6.0 0.8 0.8 2.2 7.5

OMV Ag 5.5 3.9 21.2 24.7 16.4 7.8 0.8 0.7 4.5 9.1

European peers average 5.9 4.3 12.5 14.7 19.4 8.1 0.9 0.9 2.9 8.2

Asian peers

GS Holdings 6.2 6.6 9.2 11.9 4.5 4.9 0.4 0.3 8.2 7.3

SK Energy Co Ltd 9.2 8.6 -0.4 6.1 18.3 18.9 0.8 0.7 -8.8 3.8

MRPL 15.0 6.0 3.6 5.8 NM 5.4 0.9 0.8 1.0 12.9

CPCL 16.0 7.3 2.3 3.9 NM 4.0 0.5 0.5 1.7 20.2

BPCL 12.4 9.4 6.4 6.5 15.0 10.5 2.2 2.0 14.8 19.2

HPCL 7.7 5.9 4.7 4.9 7.9 5.6 1.0 0.9 14.8 13.1

IOCL 7.2 5.9 7.9 7.7 7.7 5.7 0.8 0.7 9.7 11.1

RIL 17.8 13.5 17.3 18.5 30.2 21.1 2.5 2.2 8.9 11.1

Asian peers average 11.4 8.0 5.6 7.9 13.9 10.6 1.1 1.0 4.6 11.4

Global peers average 9.6 6.4 8.3 10.4 16.4 11.1 1.0 1.0 2.6 9.2

Global peers median 8.4 6.0 6.4 7.1 15.0 7.6 0.8 0.8 2.2 8.8

EV/EBITDA (x) EBITDA Margins (%) P/E (x) P/B (x) ROE (%)

Company FY21/CY20 FY22/CY21 FY21/CY20 FY22/CY21 FY21/CY20 FY22/CY21 FY21/CY20 FY22/CY21 FY21/CY20 FY22/CY21

Global (ex Asia) peers

DoW 9.8 7.8 12.9 15.1 53.8 19.7 2.7 2.9 4.8 12.6

Du Pont 11.8 11.3 23.6 24.9 18.6 16.4 1.0 1.0 4.3 5.3

Wacker Chemie 9.5 6.9 11.5 14.9 72.3 26.4 2.1 2.0 3.3 8.8

Johnson Matthey 9.5 8.1 15.7 17.3 15.8 11.9 1.5 1.4 9.6 12.0

LANXESS 6.8 5.9 13.5 14.7 14.9 11.5 1.3 1.2 8.3 9.4

BASF 9.8 8.2 12.2 13.7 21.4 14.4 1.1 1.1 3.8 6.9

Indorama ventures 9.7 8.4 10.7 11.4 15.0 10.3 1.0 1.0 7.1 9.4

SABIC 12.6 9.9 21.4 24.1 86.6 30.5 1.7 1.6 1.9 5.5

Honam Petrochemical 5.2 3.6 10.2 13.3 16.3 7.8 0.4 0.4 2.6 5.5

Eastman Chemical Co 9.3 8.5 21.0 21.6 12.9 11.0 1.7 1.6 12.7 14.2

AKZO Nobel 13.5 11.8 15.7 16.9 24.4 19.5 2.6 2.5 8.9 12.0

Global (ex Asia) peers average 9.8 8.2 15.3 17.1 32.0 16.3 1.6 1.5 6.1 9.2

Asian peers

Mitsubishi Gas Chem 7.8 6.4 10.1 11.6 20.0 12.9 0.7 0.7 3.4 5.4

Sinopec Shanghai Petrochemical 11.9 7.5 3.0 4.4 13.0 7.7 0.6 0.6 5.9 7.4

LG Chem 12.3 9.5 12.1 13.0 47.0 27.3 2.2 2.1 4.7 7.7

Formosa Chemicals & Fibre Corp 15.9 14.4 10.8 10.4 23.6 18.0 1.2 1.2 4.3 5.8

Nan Ya Plastics 18.8 17.2 10.5 10.6 24.1 18.3 1.3 1.3 5.0 7.9

Formosa Plastics 18.2 15.3 15.0 15.8 21.9 15.0 1.4 1.4 6.5 9.2

Hanw ha 8.9 7.9 11.2 11.5 15.5 10.3 0.7 0.7 4.6 6.4

Asahi Kasei Corp 6.9 5.8 11.9 13.4 13.0 10.1 0.8 0.8 5.9 7.8

Toray Industries 8.9 7.6 9.7 10.6 21.1 12.7 0.7 0.7 3.8 5.1

Kuraray Co 6.0 5.3 17.6 19.1 19.0 12.9 0.7 0.7 3.4 5.3

Teijin Ltd 6.2 5.5 12.0 12.6 13.8 10.3 0.8 0.7 5.3 7.2

Mitsui Chemicals 8.3 6.4 9.5 11.5 21.5 10.5 0.8 0.7 3.8 7.7

RIL 17.8 13.5 17.3 18.5 30.2 21.1 2.5 2.2 8.9 11.1

Asian peers average 11.4 9.4 11.6 12.5 21.8 14.4 1.1 1.0 5.0 7.2

Global peers average 10.6 8.7 13.1 14.5 26.5 15.3 1.3 1.3 5.4 17.6

Global peers median 9.5 7.9 12.0 13.5 20.6 12.9 1.1 1.1 4.8 7.7

P/E (x) P/B (x) ROE (%)EV/EBITDA (x) EBITDA Margins (%)



Debt concerns behind us; entering strong FCF generation phase

We take comfort from RIL’s deleveraging efforts via stake sale in JPL and rights issue to

become zero-net-debt ahead of its Mar’21 target. Though RIL- Aramco deal for a proposed

20% stake in RIL’s O2C has been delayed due to challenging energy market outlook, we still

see a possibility of this deal going through in future given its strategic importance for Saudi

Arabia to secure its future crude markets. RIL is entering strong FCF generation phase with

major capex phase behind us and expectation of strong 17-18% EPS CAGR over the next 3-5

years led by growth potential in the Digital and Retail businesses. We expect RIL’s FCF yield to

improve from 2% in FY20 to 7% in FY25 as RIL will generate FCF of INR 235bn in FY21,

which will grow to INR 993bn by FY25.

Stake sale in JPL helped achieve zero net debt target ahead of timeline

We take comfort from RIL’s effort to address balance sheet concerns as it expedited its

deleveraging exercise via stake sale in JPL and rights issue to become zero net debt ahead of

its Mar’21 target. RIL’s reported net debt at end FY20 was INR 1,610bn. However, in FY21 so

far, RIL has managed to raise INR 2,128bn via: a) INR 1,520bn via stake sale of 32.95% in

JPL; b) INR 531bn via rights issue (including 75% of proceeds to be received in FY22); c) INR

76bn from BP for 49% stake sale in petro-retail JV. Hence, RIL has effectively become zero

net debt ahead of its Mar’21 target. However, there also exists other liability of ~INR 950bn

at end FY20 (which includes capex for creditors, spectrum dues and other current and non-

current liability). Hence, net debt including other liabilities has declined to INR 432bn (from

INR 2,560bn at end FY20).

Further, despite some delay due to challenging energy market conditions, RIL continues to

pursue with Saudi Aramco (Aramco) for its proposed 20% stake in its O2C (oil to chemical)

business at an enterprise value of USD 15bn. RIL is simultaneously working with NCLT to

carve out O2C business into a separate subsidiary to facilitate this partnership and expects

this process to complete by early 2021. This deal, once finalised, should result in potential

inflows of ~USD 15bn (or INR 1,125bn) and further strengthen its balance sheet.

Details of RIL’s historical consolidated debt, capex and cash flow break-up Exhibit 92.

Source: JM Financial, Company. Note: FY20 debt calculations is after accounting for both Fibre and Tower InvIT, * Interest accrued but not due on deferred payment liabilities and creditors for capex, **Advances from customer and statutory dues, *** Balance with tax authorities and prepaid expense, deposits etc

INR bn FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Gross debt

Non-current long term borrow ing 710 1,010 1,205 1,416 1,521 1,442 2,075 1,976

Current portion of long term borrow ing 179 49 123 155 129 372 156 449

Working capital borrow ing 184 328 276 235 315 374 644 938

Reported Gross debt (a)1,072 1,387 1,604 1,807 1,966 2,188 2,875 3,363

Less: Cash and cash equivalent (b) 844 906 878 900 772 781 1,330 1,753

Reported Net debt (c=a-b)228 481 725 907 1,194 1,407 1,545 1,610

Other liabilities that should be considered as debt

Other non-current f inancial liabilities* 0 8 15 22 90 85 100 113

Deferred payment liabilities (Spectrum) 0 0 74 133 201 202 188 188

Other current f inancial liabilities (Creditor for capex) 58 121 307 741 916 880 580 500

Other current liabilities** 0 0 34 100 209 432 529 476

Less: Other current assets *** 18 33 -85 -163 -199 -328 -368 -328

Other liabilities (d) 75 162 345 833 1,218 1,272 1,030 950

Total gross debt (incl other liabilities) (e=a+d)1,148 1,549 1,949 2,639 3,184 3,459 3,905 4,313

Total Net debt (incl other liabilities) (f=c-d)304 643 1,070 1,740 2,412 2,679 2,574 2,560

Equity 1,821 1,987 2,087 2,316 2,637 2,935 3,871 4,533

EBITDA 351 379 415 507 525 712 877 922

PAT 209 225 236 299 299 361 398 399

CFO 369 433 344 381 496 715 423 981

FCF 62 -168 -290 -88 -286 -25 -513 216

Capex 323 691 1,002 1,130 1,147 793 1,235 805

Net Debt to Equity (x) 0.2 0.3 0.5 0.8 0.9 0.9 0.7 0.6

Net Debt to EBITDA (x) 0.9 1.7 2.6 3.4 4.6 3.8 2.9 2.8

RIL achieved zero net debt ahead of

its Mar’21 target via stake sale in

JPL and rights issue



RIL’s net debt flow chart based on recent and proposed stake sale (INR bn) Exhibit 93.


RIL-Aramco deal delayed, but still likely given its strategic importance for Saudi Arabia

RIL- Aramco deal for a proposed 20% stake in RIL’s O2C has been delayed due to sharp fall

in crude oil prices post covid-19 outbreak. This has led to Saudi Aramco’s FCF declining to

USD 15bn in 1QCY20 (vs USD 17bn in 1QCY19) and is expected to come under further

pressure due to weak crude price outlook. However, to ensure its commitment of annual

dividend of USD 75bn (as announced ahead of its IPO) amid weakness in global oil demand

outlook, Aramco would like for some stability in the oil market before finalizing the deal.

Earlier, Aramco had also extended payment period for its 70% stake purchase in SABIC for

USD 69bn and also cut its capex for CY20 to USD 25-30bn (from earlier guidance of USD 35-

40bn) to provide a cushion against weak oil prices.

However, we still see a possibility of this deal going through in future given its strategic

importance for Saudi Arabia to secure its future crude markets. As part of the agreement, RIL

is likely to increase its crude offtake from Aramco to 500kbpd on long term basis (from

existing ~280kbpd). This is consistent with Aramco’s strategy to invest in downstream assets

in growing Asian countries to secure their future crude markets. Aramco’s downstream

business is the largest customer for its upstream business’ crude production, consuming 38%

of its crude production in 2018 as per its IPO document.

Saudi Aramco historical financials Exhibit 94.


2,560 436337

747

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300

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USD bn CY16 CY17 CY18 CY19 1QCY20

PAT 13 76 111 88 17

Balance sheet

Cash and cash eq. 13 22 49 47 63

PP&E 169 200 233 262 266

Total assets 251 294 359 398 393

Total borrwoings 14 21 27 47 49

Total liabilites 55 74 85 119 75

Total equity 196 220 274 279 288

Cash flow

Operating cash flow 29 89 121 111 22

Investing cash flow -31 -32 -35 -47 5

Financing cash flow 1 -48 -59 -65 -12

Capex -28 -33 -35 -33 -7

Free cash flow 2 56 86 78 15

Ratios

ROACE 6.6% 33.8% 41.1% 28.4% 26.3%

Net Debt/Equity 0.6% -0.4% -8.6% -0.2% -4.9%

RIL- Aramco deal delayed due to

challenging energy market outlook;

we still see a possibility of this deal

going through given its strategic

importance for Saudi Arabia to

secure its future crude markets



RIL’s major capex phase behind us; entering strong FCF generation phase

RIL ended a major capex phase - incurring INR 6,680bn during FY14-FY20 - primarily to build

its Digital business and also for capacity expansion in its O2C business. With major capex

completed, we expect it to moderate to a more normalised level of ~ INR 400-500bn p.a.

going forward. Further, we expect RIL’s EPS to post a strong 17-18% CAGR over next 3-5

years led by growth potential in the Digital and Retail business. Hence, we estimate RIL’s FCF

yield to improve from 2% in FY20 to 7% in FY25 as RIL will generate free cash flow of INR

235bn in FY21, which will grow to INR 993bn by FY25.

RIL’s major capex phase is behind us (INR bn) Exhibit 95.

101

269 246

327

706

1,003

1,135 1,149

757

1,200

731

418

516 493429 452

0

250

500

750

1,000

1,250

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

E

FY22

E

FY23

E

FY24

E

FY25

E

RIL's major capex phase is behind us


RIL’s segment-wise capex break-up – major capex phase is behind us (INR bn) Exhibit 96.

0

250

500

750

1,000

1,250

FY

17

FY

18

FY

19

FY

20

FY

21

E

FY

22

E

FY

23

E

FY

24

E

FY

25

E

Refining Petchem E&P Retail Digital Others

1,149

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RIL’s Net Debt - Equity on a steep declining trend Exhibit 97.

0.36

0.23

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0.51

0.75

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0.67

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0.2

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FY

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FY

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FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

E

FY

22

E

FY

23

E

FY

24

E

FY

25

E


RIL’s FCF and FCF yield to rise sharply Exhibit 98.

-5%

-1%

3%

7%

11%

-550

0

550

1,100

1,650

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

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FY

19

FY

20

FY

21

E

FY

22

E

FY

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FY

24

E

FY

25

E

(%)

INR

bn

FCF (INR bn) FCF yield (%) (RHS)


RIL’s major capex phase ended in

FY20; entering strong FCF

generation phase



Key assumptions and estimates

RIL – key assumption and estimate Exhibit 99.



Brent crude price (USD/bbl) 47.5 49.0 57.6 70.2 60.9 40.0 50.0 50.0 50.0 50.0

Exchange rate (INR/USD) 65.5 65.5 64.5 69.9 70.9 74.5 74.5 76.0 77.5 79.1

Refining

EBITDA (INR Bn) 268 286 290 261 245 198 271 316 322 329

Crude throughput 69.6 70.1 69.8 68.3 70.6 65.7 70.6 70.7 70.7 70.8

Margins (USD/bbl)

S'pore Dubai GRM 7.5 5.8 7.2 4.9 3.2 2.5 4.5 5.5 5.5 5.5

RIL's total GRM premium 3.3 5.2 4.4 4.3 5.7 5.0 4.5 4.5 4.5 4.5

a) RIL normal GRM premium 3.3 5.2 4.4 4.3 5.7 5.0 4.0 3.8 3.5 3.5

b) Petcoke gasif ication addition to GRM 0.0 0.0 0.5 0.8 1.0 1.0

RIL's total GRM 10.8 11.0 11.6 9.2 8.9 7.5 9.0 10.0 10.0 10.0

Refining cash opex 2.8 2.7 2.8 1.8 2.3 2.0 2.0 2.0 2.0 2.0

Refining EBITDA 8.0 8.3 8.8 7.4 6.6 5.5 7.0 8.0 8.0 8.0

Petrochemicals

EBITDA (INR Bn) 137 165 259 379 309 266 337 381 401 421

EBITDA/ton (USD/ton) 155 176 234 273 218 192 221 243 248 253

Sales volumes (mmtpa)

Polymers 4.6 4.5 4.9 5.8 6.0 5.6 6.1 6.2 6.3 6.3

Polyesters 2.2 2.3 2.6 2.9 2.9 2.7 3.0 3.0 3.0 3.1

Fiber intermediaries 6.4 6.9 9.3 10.9 10.8 10.0 11.0 11.2 11.3 11.4

Total 13.5 13.9 17.1 19.8 20.0 18.6 20.5 20.7 20.9 21.1

E&P

EBITDA (INR Bn) 69 13 17 16 4 7 34 62 81 87

Gas production (mmscmd) 32 25 21 14 11 7 21 26 30 30

Gas realisation (USD/mmbtu) 4.7 3.8 4.3 5.1 5.3 5.5 5.4 6.4 6.4 6.4

Digital

EBITDA (INR Bn) 67 153 225 332 463 567 667 781

EBITDA marrgin (%) 33.4% 37.2% 38.8% 43.4% 47.5% 47.7% 48.0% 48.1%

Wireless segment

Subscribers (mn - EoP) 187 307 388 445 457 472 485 499

ARPU (INR) 149 133 130 149 171 190 207 226

5G/Enterprise

Revenues (INR bn) 0 0 35 56 83

FTTH segment

Subscribers (mn - EoP) 3 8 13 18 24

ARPU (INR) 750 765 780 796 812

Retail

EBITDA (INR Bn) 9 12 25 62 97 90 127 170 220 283

EBITDA margin (%) 4.1% 3.5% 3.7% 4.7% 5.9% 5.0% 5.9% 6.3% 6.7% 7.2%

Net Store additions (#) 960 483 4,004 2,863 1,376 195 990 890 890 930

Gross revenue per average store (INR) 55 56 73 112 131 137 155 180 207 237

- YoY grow th (%) -3% 1% 31% 54% 17% 4% 13% 16% 15% 14%

EBITDA break-up (INR Bn)

Refining 268 286 290 261 245 198 271 316 322 329

Petchem 137 165 259 379 309 266 337 381 401 421

E&P 69 13 17 16 4 7 34 62 81 87

Digital 67 153 225 332 463 567 667 781

Retail 9 12 25 62 97 90 127 170 220 283

Financial Services & Others 25 51 54 6 42 3 4 5 5 6

Total 507 526 712 877 922 895 1,235 1,500 1,697 1,907

Energy business 474 463 565 656 557 470 641 759 804 837

Non-energy business (incl others) 33 62 146 221 364 425 593 742 892 1,070

EBITDA proportion

Refining 53% 54% 41% 30% 27% 22% 22% 21% 19% 17%

Petchem 27% 31% 36% 43% 34% 30% 27% 25% 24% 22%

E&P 14% 2% 2% 2% 0% 1% 3% 4% 5% 5%

Digital 0% 0% 9% 17% 24% 37% 37% 38% 39% 41%

Retail 2% 2% 4% 7% 10% 10% 10% 11% 13% 15%

Financial Services & Others 5% 10% 8% 1% 5% 0% 0% 0% 0% 0%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Energy business 93% 88% 79% 75% 60% 53% 52% 51% 47% 44%

Non-energy business (incl others) 7% 12% 21% 25% 40% 47% 48% 49% 53% 56%



RIL’s historical EBITDA bridge –majorly led by Petchem expansion and ramp-up in Digital and Retail business Exhibit 100.


RIL's EBITDA bridge – Digital and Retail business to be key driver of EBITDA growth Exhibit 101.

882

-47 -43

3

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107 0 89573 71 28 37

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RIL’s EBITDA contribution from various business segments Exhibit 102.

0%

12%

24%

36%

48%

60%

0%

20%

40%

60%

80%

100%

FY

10

FY

11

FY

12

FY

13

FY

14

FY

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FY

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FY

17

FY

18

FY

19

FY

20

FY

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E

FY

22

E

FY

23

E

FY

24

E

FY

25

E

Refining Petchem E&P Retail Digital Others % EBITDA contribution from Consumer business (RHS)


462 4

94 4 14

68

-3

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120

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Initiate coverage with a BUY rating with TP of INR 2 ,500

Our Target Price for RIL of INR 2,500/share (Sept’ 2021 basis) is computed on a sum-of-the-

parts (SOTP) valuation method:

a) Petchem segment at an EV of INR 424/share based on 7.5x forward EV/EBITDA, in-line with


b) Refining segment at an EV of INR 346/share based on 7.5x forward EV/EBITDA, in-line with


c) E&P segment at an EV of INR 68/share based on 9.0x forward EV/EBITDA; higher multiple

as EBITDA is likely to jump due to a rise in gas production from new fields;

d) Digital segment (RIL’s 67.05% stake in JPL) at an EV of INR 952/share comprising: i)

Telecom business at INR 780/share based on DCF valuation; implied valuation of 14.3x

Sept’21 EV/EBITDA; ii) Option value of duopoly market at INR 67/share; and iii) Digital

opportunities at INR 105/share based on potential monetisation of Video OTT apps, audio

OTT and Consumer IoT business.

e) Retail business at an EV of INR 584/share based on 25x forward EBITDA. Further, we value

Jio Mart at an EV of INR 115/share, factoring the opportunity of digitisation of Kirana store.

RIL is entering a strong FCF generation phase with major capex completed and expectation of

strong 17-18% EPS CAGR over the next 3-5 years led by Digital and Retail businesses. Hence,

we initiate with a BUY rating and TP of INR 2,500/share (Sep’21 basis). We have also

computed a 3-year Target Price (Sept’23 basis), which comes to INR 3,350/share, implying a

potential ~17% CAGR return. Given the sharp +100% rally in the share price in the last 4

months, there could be near-term weakness given that EPS growth is likely to be muted in

the next 1-2 quarters. However, we suggest using this opportunity to BUY as our 3-year TP

implies a potential return CAGR of ~17%.

We also take comfort from the company’s effort to address balance sheet concerns by

expediting its deleveraging exercise and getting to zero net debt ahead of its end FY21

target. At CMP, stock is trading at FY22E P/E of 23.3x (3 yr avg: 18.6x), FY22E P/B of 2.3x (3

yr avg: 1.7x) and FY22E EV/EBITDA of 11.3x (3 yr avg: 10.8x).



Business segment

Valuation

methodology

EBITDA

(INR Bn)

Valuation

multiple

Valuation

(INR bn)

Valuation

(USD bn)

Valuation









E&P EV/ EBITDA 48 9.0 431 6 68

Valued at 9x EV/EBITDA; higher multiple used as

EBITDA to jump 3x

Digital business (for RIL's 67.05% share) 6,044 81 952


Based on DCF valuation; implied valuation of

14.3x Sept'21 EV/EBITDA







Retail business EV/ EBITDA 4,437 60 699



valuation range






Less: Net Debt -70 -1 -11

Factoring: a) Rs1,521bn from 32.95% stake sale

in JPL; b) Rs76bn from BP; and c) rights issue

proceeds of INR531bn


CMP 2,097

% upside 19%





Risks along with EPS and valuation sensitivity

a) Refining margin sensitivity: Every USD 1/bbl increase/decrease in GRM has a


EBITDA. An unexpected decline in refining margin could have a negative impact on RIL’s

earnings and valuation.

b) Petchem margin sensitivity: Every USD 20/ton increase/decrease in EBITDA margins has a


EBITDA. An unexpected slide in petchem EBITDA margins could hurt RIL’s earnings and

valuation.

c) Retail margin sensitivity: Every 50bps increase/decrease in retail EBITDA margins has a

positive/negative impact of 1% of our valuation, FY22E EPS, and FY22E EBITDA. Any

downside to retail profitability could have a negative impact on RIL’s earnings and valuation.

d) ARPU and subscriber sensitivity: Every INR 10 increase/decrease in ARPU has a

positive/negative impact of 2% of our valuation, 3% our FY22E EPS, and 2% of our FY22E

EBITDA. Every 20mn increase/decrease in subscribers has a positive/negative impact of 1% of

our valuation, 1% our FY22E EPS, and 1% of our FY22E EBITDA. Lower than expected ARPU

and subscriber growth could have a negative impact on RIL’s earnings and valuation.

RIL Earnings and valuation sensitivity Exhibit 105.


Business segment

Valuation

methodology

EBITDA

(INR Bn)

Valuation

multiple

Valuation

(INR bn)

Valuation

(USD bn)

Valuation









E&P EV/ EBITDA 84 5.5 464 6 72 Valued at 5.5x EV/EBITDA

Digital business (for RIL's 67.05% share) 7,169 96 1,129


Based on DCF valuation; implied valuation of 12x

Sept'23 EV/EBITDA







Retail business EV/ EBITDA 7,191 97 1,133



valuation range






Less: Net Debt -931 -12 -147 Net debt at end end Sept'2023


CMP 2,097

% upside 60%

Change

FY22e Base case

assumption INR bn % change INR % change INR % change

GRM (USD/bbl) 9.0 +/- USD 1/bbl 39 3% 4.2 5% 50 2%

Petchem EBITDA margins (USD/ton) 221 +/- USD 20/tn 31 2% 3.3 4% 42 2%

Retail EBITDA margins (%) 5.9% +/- 0.5% 11 1% 1.2 1% 21 1%

Jio w ireless ARPU 171 +/- INR 10 26 2% 2.9 3% 39 2%

Jio w ireless subscriber (mn) 457 +/-20mn 10 1% 1.1 1% 28 1%

Base case 1,235 90 2,500

Impact on FY22 EBITDA Impact on FY22 EPS Impact on TP



Bull vs Bear case valuation

Our bull case valuation for RIL at INR 2,685/share factors in the following upside scenarios:

a) Higher refining margins: FY22E GRM rise to USD 10.0/bbl (i.e. up USD 1.0/bbl from our

base case assumption); this could increase our valuations by INR 50/share.

b) Higher petchem margins: RIL’s FY22E Petchem EBITDA margins rising by USD 15/ton vs our

base case assumption; this could increase our valuations by INR 31/share.

c) Higher Jio ARPU: RIL’s FY25E ARPU doubling to ~INR 260 from INR 130 at the end of FY20

(vs. our base case of INR 226). This could add ~INR 171/share to our base value. However, in

such a scenario chances of a VIL exit would be negligible and RIL would lose the option value

of a duopoly, resulting in a net increase of INR 104/share.

Our bear case valuation for RIL is INR 1,849/share factors in the following concerns:

a) Lower refining margins: RIL’s FY22E GRM decline to USD 7.0/bbl (i.e. down USD 2.0/bbl

from our base case assumption); this could hit our valuations by INR 103/share.

b) Lower petchem margins: RIL’s FY22E Petchem EBITDA margins declining by USD 30/ton vs

our base case assumption; this could hit our valuation by INR 64/share.

c) NIL value to JioMart New commerce business: Challenges in ramping-up New commerce

business amid heightened competition, this could hit our valuations by INR 115/share.

d) Lower Jio ARPU: RIL’s ARPU is stagnant over FY21-23e similar to FY20 levels of INR 130 (vs.

our base case of INR 190 in FY23), could hit our valuation by INR 264/share, but assuming VIL

survives based on fresh equity infusion.

e) Nil value for Digital opportunities: Challenges in monetisation of various Digital

opportunities, could hit our valuations by INR 105/share.

Bull-Bear case September 2021 valuation range for RIL (INR) Exhibit 106.

1,849103

64115

264105

2,500 50 31104 2,685

1,200

1,600

2,000

2,400

2,800

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Relative Valuation

RIL’s valuation has historically been driven by its potential for high earnings growth. RIL’s EPS

during FY92-FY08 posted an ~18%-20% CAGR, but slowed considerably over FY09-FY16 to

~7% CAGR, despite commissioning of the RPL refinery, and gas production from KG D6.

However, RIL’s EPS growth has picked up since FY17 and has posted a 13% CAGR during

FY17-FY20 due to earning contribution from commissioning of +USD 50bn projects. We

expect EPS growth trajectory to continue with a 17-18% CAGR in the next 3-5 years led by

strong earnings growth in both Digital and Retail business. Hence, strong EPS growth

trajectory is likely to continue to support RIL’s valuation.

1 year forward P/E chart – RIL valuation re-rating led by EPS growth from Digital and Retail business Exhibit 107.

0

550

1,100

1,650

2,200

Jul-04 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14 Jul-16 Jul-18 Jul-20

25x

16x

8x

FY09-16 EPS CAGR of 7%

FY17-20 EPS CAGR of 13%; FY20-23e EPS CAGR at 18%


1-year forward P/B chart Exhibit 108.

0

550

1,100

1,650

2,200


2.0x

1.5x

1.0x

Re-rating led by EPS grow th due to commissioning of +USD50bn projects aided by

strong performance in Digital and Retail business




1-year forward EV/EBITDA chart Exhibit 109.

0

550

1,100

1,650

2,200


14x

10x

8x

Re-rating led by EPS grow th due to commissioning of +USD50bn projects aided by strong performance in

Digital and Retail business


RIL’s underperformance v/s the Sensex has narrowed over past 2 years Exhibit 110.

0

8

16

24

32

Jul-06 Jul-08 Jul-10 Jul-12 Jul-14 Jul-16 Jul-18 Jul-20

RIL 1 yr forward PE Sensex 1 yr forward PE

Over past 3 years, RIL had made up for past under-performance due to grow th momentum in Digital and Retail busines




Company profile

Reliance Industries Limited (RIL) is a Fortune 500 company and the largest Indian company in

terms of market cap. RIL was founded in 1966 by Mr. Dhirubhai Ambani as a small textile

manufacturer unit under the name Reliance Textiles Engineers Pvt. Limited. In 1985, the

company changed its name to Reliance Industries Limited. Over the years, the company has

diversified into other businesses like Petchem, Refining, Telecom, Retail and Media &

Entertainment.

The energy business of RIL includes Refining and Marketing, Petrochemicals, and Oil & Gas

Exploration and Production. In 2006, the company entered into organized retail under the

brand name ‘Reliance Fresh’. Reliance Retail is the largest retailer in India and has established

its business across five key consumption baskets of Consumer Electronics, Fashion & Lifestyle

Grocery, Petro Retail and Connectivity. Reliance Jio, the telecom business, was launched in

2016 as a 4G only network. In just over 3 years, Jio has become the largest telecom service

provider in term of subscribers and revenues. The company also has an associated suite of ‘Jio

app’ catering to various consumer needs. Media & Entertainment assets include Network 18’s

portfolio of 56 channels, across news and entertainment genres and 16 international

channels. Apart from this, Network 18 includes filmed entertainment and digital news and

entertainment platforms. Other assets include publishing business, distribution platform and

cable TV providers. RIL has also started focussing on financial services driven by its digital

payment solutions and payment bank.

Board of Directors

- Mr. Mukesh Ambani – Chairman and Management Director

- Mrs. Nita M. Ambani – Non-Executive, Non Independent Director

- Mr. Hital R. Meswani – Executive Director

- Mr. Nikhil R. Meswani – Executive Director

- Mr. P.M.S Prasad – Executive Director

- Mr. P.K. Kapil – Executive Director

- Mr. R.A.Mashelkar – Independent Director

- Mr. Adil Zainulbhai – Independent Director

- Mr.Dipak C. Jain – Independent Director

- Mr. Yogendra P. Trivedi – Independent Director

- Mr. Raminder S. Gujral – Independent Director

- Mr. Shumeet Banerji – Independent Director

- Mrs. Arundhati Bhattacharya – Independent Director

- Mr. K.V. Chowdary – Non-Executive Director

- Mr. Pawan Kumar Kapil – Executive Director



Financial Tables (Consolidated)

Income Statement (INR mn)

Y/E March FY19A FY20A FY21E FY22E FY23E

Net Sales 56,92,090 59,67,430 51,27,431 66,04,605 74,87,221

Sales Growth 45.3% 4.8% -14.1% 28.8% 13.4%

Other Operating Income 0 0 0 0 0

Total Revenue 56,92,090 59,67,430 51,27,431 66,04,605 74,87,221

Cost of Goods Sold/Op. Exp 39,44,870 40,52,400 34,81,968 44,85,097 50,84,469

Personnel Cost 1,24,880 1,40,750 1,47,788 1,55,177 1,62,936

Other Expenses 7,80,670 8,92,110 6,02,176 7,29,608 7,39,660

EBITDA 8,41,670 8,82,170 8,95,500 12,34,724 15,00,156

EBITDA Margin 14.8% 14.8% 17.5% 18.7% 20.0%

EBITDA Growth 31.2% 4.8% 1.5% 37.9% 21.5%

Depn. & Amort. 2,09,340 2,22,030 2,61,691 3,09,805 3,40,177

EBIT 6,32,330 6,60,140 6,33,809 9,24,919 11,59,978

Other Income 83,860 1,39,560 1,40,416 1,32,495 1,35,660

Finance Cost 1,64,950 2,20,270 1,72,081 1,11,794 86,255

PBT before Excep. & Forex 5,51,240 5,79,430 6,02,143 9,45,620 12,09,383

Excep. & Forex Inc./Loss(-) 0 -44,440 0 0 0

PBT 5,51,240 5,34,990 6,02,143 9,45,620 12,09,383

Taxes 1,53,900 1,37,260 1,61,060 2,51,879 3,19,212

Extraordinary Inc./Loss(-) 0 0 0 0 0

Assoc. Profit/Min. Int.(-) -1,030 -1,070 49,319 85,931 1,07,539

Reported Net Profit 3,98,370 3,98,800 3,91,765 6,07,810 7,82,632

Adjusted Net Profit 3,98,370 4,43,240 3,91,765 6,07,810 7,82,632

Net Margin 7.0% 7.4% 7.6% 9.2% 10.5%

Diluted Share Cap. (mn) 5,926.0 6,339.0 6,444.7 6,761.6 6,761.6

Diluted EPS (INR) 67.2 69.9 60.8 89.9 115.7

Diluted EPS Growth 10.4% 4.0% -13.1% 47.9% 28.8%

Total Dividend + Tax 46,410 49,650 38,668 54,093 74,378

Dividend Per Share (INR) 6.5 6.5 6.0 8.0 11.0


Cash Flow Statement (INR mn)


Profit before Tax 5,51,240 5,34,990 6,02,144 9,45,620 12,09,383

Depn. & Amort. 2,09,340 2,22,030 2,61,691 3,09,805 3,40,177

Net Interest Exp. / Inc. (-) 1,10,380 1,14,530 31,666 -20,701 -49,405

Inc (-) / Dec in WCap. -2,87,820 2,19,040 -1,09,364 59,189 4,792

Others -37,770 -25,990 0 0 0

Taxes Paid -1,21,910 -83,860 -1,41,667 -2,22,229 -2,81,525

Operating Cash Flow 4,23,460 9,80,740 6,44,469 10,71,683 12,23,423

Capex -9,36,260 -7,65,170 -4,09,281 -6,08,017 -5,90,178

Free Cash Flow -5,12,800 2,15,570 2,35,188 4,63,666 6,33,245

Inc (-) / Dec in Investments -38,210 -17,110 4,79,086 -34,336 -79,003

Others 29,400 25,340 1,40,416 1,32,495 1,35,660

Investing Cash Flow -9,45,070 -7,56,940 2,10,221 -5,09,858 -5,33,521

Inc / Dec (-) in Capital 2,320 1,300 5,53,586 4,00,738 626

Dividend + Tax thereon 0 0 0 0 0

Inc / Dec (-) in Loans 8,64,560 3,55,810 -7,47,766 -6,98,486 -2,62,578

Others -3,07,820 -3,82,520 -2,10,749 -1,65,887 -1,60,633

Financing Cash Flow 5,59,060 -25,410 -4,04,929 -4,63,635 -4,22,585

Inc / Dec (-) in Cash 37,450 1,98,390 4,49,761 98,191 2,67,317

Opening Cash Balance 73,360 1,10,810 3,09,200 7,58,961 8,57,152

Closing Cash Balance 1,10,810 3,09,200 7,58,961 8,57,152 11,24,469


Balance Sheet (INR mn)


Shareholders’ Fund 38,71,120 45,33,310 52,98,537 62,52,992 69,61,873

Share Capital 59,260 63,390 64,447 67,616 67,616

Reserves & Surplus 38,11,860 44,69,920 52,34,090 61,85,376 68,94,256

Preference Share Capital 0 0 0 0 0

Minority Interest 82,800 80,160 2,70,935 3,56,867 4,64,406

Total Loans 27,19,420 29,14,170 22,61,012 16,52,401 14,75,202

Def. Tax Liab. / Assets (-) 4,51,470 5,12,230 5,31,623 5,61,272 5,98,959

Total - Equity & Liab. 71,24,810 80,39,870 83,62,107 88,23,532 95,00,439

Net Fixed Assets 57,78,370 64,17,640 65,65,230 68,63,442 71,13,442

Gross Fixed Assets 58,47,100 74,29,350 78,44,224 84,57,722 90,53,271

Intangible Assets 1,19,970 1,02,590 1,02,590 1,02,590 1,02,590

Less: Depn. & Amort. 19,83,330 22,05,360 24,67,051 27,76,856 31,17,033

Capital WIP 17,94,630 10,91,060 10,85,467 10,79,986 10,74,614

Investments 23,56,350 27,67,670 23,06,690 23,33,301 24,01,160

Current Assets 18,41,580 24,44,840 29,01,037 31,92,174 35,69,259

Inventories 6,75,610 7,39,030 7,26,425 8,70,610 9,41,014

Sundry Debtors 3,00,890 1,96,560 2,33,707 2,74,744 3,02,965

Cash & Bank Balances 1,10,810 3,09,200 7,58,961 8,57,152 11,24,469

Loans & Advances 59,970 2,24,010 2,06,694 2,12,490 2,20,102

Other Current Assets 6,94,300 9,76,040 9,75,250 9,77,178 9,80,710

Current Liab. & Prov. 28,51,490 35,90,280 34,10,850 35,65,386 35,83,423

Current Liabilities 10,83,090 9,67,990 8,83,169 11,27,579 12,30,995

Provisions & Others 17,68,400 26,22,290 25,27,682 24,37,807 23,52,428

Net Current Assets -10,09,910 -11,45,440 -5,09,814 -3,73,211 -14,164

Total – Assets 71,24,810 80,39,870 83,62,107 88,23,532 95,00,439


Dupont Analysis


Net Margin 7.0% 7.4% 7.6% 9.2% 10.5%

Asset Turnover (x) 0.9 0.8 0.6 0.8 0.8

Leverage Factor (x) 1.9 1.8 1.7 1.5 1.4

RoE 11.7% 10.5% 8.0% 10.5% 11.8%

Key Ratios


BV/Share (INR) 653.2 715.1 822.2 924.8 1,029.6

ROIC 11.2% 11.3% 10.1% 13.8% 16.3%

ROE 11.7% 10.5% 8.0% 10.5% 11.8%

Net Debt/Equity (x) 0.5 0.4 0.0 -0.1 -0.2

P/E (x) 31.2 30.0 34.5 23.3 18.1

P/B (x) 3.2 2.9 2.6 2.3 2.0

EV/EBITDA (x) 19.2 18.3 16.3 11.3 9.0

EV/Sales (x) 2.8 2.7 2.8 2.1 1.8

Debtor days 19 12 17 15 15

Inventory days 43 45 52 48 46

Creditor days 82 69 76 77 75




APPENDIX I

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Definition of ratings

Rating Meaning

Buy Total expected returns of more than 15%. Total expected return includes dividend yields.

Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.

Sell Price expected to move downwards by more than 10%

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All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and

No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research

report.

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RELIANCE INDUSTRIES A Giant Digital Leap · Reliance Industries 30 July 2020 JM Financial Institutional Securities Limited Page 4 Key charts Exhibit 1. Jio’s ARPU to be driven by

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