This Heavyweight Can Drive Your Growth In Future!

Reliance Industries Limited is one of India’s largest private sector enterprises conducting business in energy and materials value chain. The company’s business portfolio ranges from energy to materials, retail to digital services and entertainment. RIL is focused on building platforms across its industry-leading businesses for the nation to realise its true potential. Admist challenging business environment and debt burden, RIL has been able to maintain a consistent business performance over the years with a positive future outlook. 

Recently the company has been proving its growth potential by entering into various strategic alliances, such as the investment worth Rs25,215 crore made by Brookfield Infrastructure Partners by buying the Jio’s tower arm. 

BUSINESS VERTICALS 

Refining and Marketing : With a 1.24 MBPD crude processing capacity, the refining and marketing segment of RIL includes propylene, LPG, high speed diesel, gasoline, petroleum coke, aviation turbine fuel, Reliance Gas, Reliance Petroleum Retail, Trans Connect, Relstar, A1 Plaza, etc. Due to the geopolitical tensions, supply disruptions from Venezuela, Iran and Libya as well as OPEC production cuts, FY18-19 witnessed 22 per cent increase in benchmark Brent oil prices. The decrease in global oil demand growth led to supply-demand mismatch, thus affecting the margins. As for RIL, the gross refining margins declined to US $9.2/bbl due to the pricing difference between the crude oil barrel and the petroleum products refined from it. But because of proactive crude sourcing, optimising of product yields and robust risk management in challenging environments, RIL was able to maintain a significant US $4.3/bbl premium over the regional benchmark – Singapore Refining Margins. For FY19 revenue, including inter-segment transfers, rose by 28.7 per cent to Rs393,988 crore from Rs306,095 crore for FY18. The EBIT reduced by 19.8 per cent to Rs19,868 crore in FY19 from Rs24,782 crore in FY18 because of higher crude prices, weak product cracks, lower light-heavy differential and unplanned shutdown of fluid catalytic cracking (FCC) unit. RIL intends to have a strategic transformation to obtain optimal oil-to-chemicals for the Jamnagar refinery, thus aiming for it to have much more better performance as compared to other global refineries. This will be achieved through the pet-coke gassification project by transforming Jamnagar into a 'bottom-less' refinery by upgrading low value refinery residue, pet-coke, into clean syngas, thus reducing the impact of LNG price volatility by substituting high cost LNG imports. 

Petrochemicals : As part of its petrochemicals segment, RIL offers a range of products in pharma and healthcare, infrastructure, transport and automotive, water storage supply, agriculture, plasticulture, sports, residential, packaging and industrial use products. As the global propylene demand increased, coal prices were able to soften due to capacities improvement in economies of coal to olefins (CTO) amidst environmental risks. The polymer margins weakened in FY19 compared to FY18 due to high feedstock prices in South-East Asia, but in India, the PE demand growth remained strong at 4 per cent YoY supported by increasing disposable incomes and growth in e-commerce sector. On financial basis, the revenue for RIL’s petrochemical segment increased by 37.3 per cent to Rs172065 crore in FY19 from Rs125299 crore in FY18 basically due to due to higher volumes and prices, which reflected the full benefits of ROGC and paraxylene capacity expansion projects. EBIT rose significantly by 51.9 per cent to Rs32173 crore in FY19 from Rs21179 crore in FY18. RIL’s petrochemical products are exported to over 100 countries. Thus, the company aims to deliver innovative products and solution offerings by leveraging the capabilities in polymer formulations, materials engineering, product design and 3D printing thus strengthening its new business line. 

Oil and gas : RIL’s oil and gas segment includes operations in conventional deep water acreages and the unconventional coal bed methane (CBM) block such as KG D6, Panna-Mukta, Tapti, etc. Along with this, the company has two joint ventures in North American shale plays – Pioneer Natural Resources and Chevron. The global oil demand growth is largely driven by China, India and the US. The Government of India has offered many initiatives to promote Indian oil and gas industry such as Open Acreage Licensing Policy (OALP). As per the policy, operators are able to select exploration areas on their own. Under OALP bid round-I, 55 blocks were awarded and hence launched OALP bid round-II offering blocks under petroleum operation contract for international competitive bidding. For FY19, the revenue was Rs5005 crore, thus registering a fall of 3.8 per cent compared to Rs5204 core in FY18. The segment incurred an operating loss of Rs1379 crore in FY19 and of Rs1536 crore in FY18. Because of natural decline and slowdown in development activity, the volumes from domestic upstream fields and US shale were lower. So, for the year, RIL’s share in domestic production stood at 58.9 Bcfe, which is down by 25.4 per cent YoY, and in the US, the shale business stood at 94.5 Bcfe, down by 32 per cent YoY. The company continues to focus on value maximisation and thus restructuring its shale gas assets through cross-border mergers allowing shale gas assets to be benefited from the upcycle in the commodities. Other than application of new technology for its oil and gas segment, RIL’s strategy is to explore prospects that may eventually leverage the existing infrastructure. 

Retail : In the retail sector, RIL is considered to be one of the largest retailers in terms of reach, scale, revenue and profitability. Its main product offerings include fresh and packaged food products, consumer electronics and fashion retailing. As on March 31, 2019, it operates around 10,415 retail stores in more than 6,600 towns and cities, thus covering and area of 22 million sq. ft. In FY19, the revenue was Rs130,566 crore, which is a substantial increase by 88.7 per cent compared to Rs69198 crore in FY18. As for FY19, the business was able to deliver an EBIT of Rs5546 crore, thus increasing by 168.7 per cent from Rs2064 crore for FY18. In FY18-19, the business witnessed a huge consumption growth and was thus able to have various long-term strategic partnerships, co-branding opportunities, exclusive partnerships with popular brands and acquisitions. The company’s new commerce initiative for its retail segment is currently in the pilot phase. This business model aims to provide a technological platform for many small merchants across India to strengthen and grow their businesses. By leveraging technology and connectivity, this platform can drive efficiency and value creation for everyone in India’s retail market, thereby mainly affecting the producers, brand owners, supply chain, merchants and customers. This is a US $700 billion opportunity to be using blockchain, IoT, AI and other new technologies across India for business development. 

Digital services : Reliance Jio offers highest quality and affordable price for data and broadband connectivity under the company’s tagline – ‘Connect everyone and everything, everywhere’. Jio has been able to build a world-class all-IP data, strong future-proof network with the latest 4G LTE technology. It is the only greenfield all-IP network supporting Voice over LTE (VoLTE) technology. The Indian markets have given a good response in terms of growing demand for Jio products. In India, the adoption of LTE and improving device has led to a transition in data consumption trends, with more than 90% of wireless data in the country carried on 4G network now. With the growing mobile broadband consumption, a need for high speed fibre connectivity at homes and enterprises is being felt. Data localisation aims to spur investment in creating server and cloud capacity in India thereby incentivising research and development and creating employment in line with the Government of India’s 'Make in India' initiative. The segmentwise digital service has given promising financial numbers with gross revenue being Rs46506 crore in FY19, thus increasing by 94.45 per cent YoY compared to Rs23916 crore in FY18. For FY19, EBIT grew by 176.74 per cent to Rs8784 from Rs3174 crore for FY18. With focus on its commitment to wireline services, the company continues to invest and build in digital infrastructure so as to provide affordable data network and best coverage of network quality. Penetrating into the smartphones market, the company has launched a few affordable and user-friendly JioPhones with variety of functions. 

Media and entertainment :Media and entertainment : Network 18 is RIL’s media and entertainment powerhouse with its foothold in television, film entertainment, digital business, magazines, mobile content and allied businesses. It is a diversified media conglomerate with operations in television broadcasting, movie production and distribution, digital content and commerce, print magazines, mobile content and other media services. Post ad-revenue hiccup because of GST implementation, Indian media and entertainment industry is set to grow at 12 per cent CAGR by CY2021, thus reaching a size of Rs2.35 trillion in CY2021. Even as TV continues to be the dominant medium, digital is likely to overtake film and print media by 2021. With increasing consumption growth drivers, for FY19, the segment reported a revenue of Rs5116 crore, an increase of 178 per cent YoY as compared to Rs1839 crore in FY18. The digital expansions and new media partnerships have allowed in delivering good numbers. RIL plans to increase free-toair channels, more regional movie channels and expanding its telecom portfolio. The TRAI tariff orders and consolidation of peer channels pose a threat for this segment’s growth. 

FINANCIAL OVERVIEW 

Looking at the financials on a quarterly consolidated basis for Reliance Industries, for Q1FY20 the revenue grew by 22.1 per cent to Rs172965 crore from Rs141699 crore for Q1FY19 due to better revenue contribution by retail and digital service segment, thus offsetting low revenues by other segments. In Q1FY20, the profit before tax was Rs14366 crore, thus reporting a gain of 4.66 per cent as compared to Rs13726 crore in Q1FY19. For Q1FY20, RIL gained a net profit of Rs10141 crore as against Rs9485 crore for Q1FY19. Among other obstacles, higher interest and tax expenses also contributed towards marginal rise of 6.91 in net profit YoY. On the annual front, the company’s revenue increased by 42.31 to Rs581,020 crore for FY19 from Rs408,265 crore for FY18. For FY19, PBT stood at Rs55,227 crore, thus showing a stable increase of 11.74 per cent YoY. Even as refining and oil & gas segments suffered blows due to rise in oil prices and reduced demand in FY19, RIL gained a net profit of Rs39,837 crore for the year, which is an increase of 10.41 per cent compared to Rs36,080 crore in FY18. 

OUTLOOK 

In April 2019, RIL was downgraded by many credit rating agencies due to increasing debt concerns and its core refining and petrochemical segments. Since then, the stock price of the company had previously witnessed a 20 per cent reduction. At the recently held AGM, all concerns were clarified and a positive future outlook was given. RIL’s decision to offload 20 per cent stake in its oil-to-chemicals segment to Saudi Aramco for an enterprise value of US $75 billion is a huge step towards debt reduction. The consumer business of the company is expected to contribute towards 50 per cent of RIL’s consolidated EBITDA as against 32 per cent in FY19. RIL announced numerous digital services, i.e Reliance Jio related launches. With an aim to reach 500 million subscribers, it launched home and enterprise services after its beta launch programme. Even as the company intends to rapidly increase the number of subscribers by providing affordable broadband connection, there was no news about the launch of Jiophone3. Customers opting for annual plans also called Jio Forever will be getting a free HD or 4K LED television and a 4K set-top box. The company has set to launch Jio First-Day-First-Show by mid-2020, thus allowing Jio Fiber customers to watch movies on the same day as their release in the theatres. As for the media segment, it plans to add more channels to its basket. RIL announced acquisition of Hamleys, thus becoming a global retailer. The retail merchant POS Solution, which is a Jio Prime partner, POS is part of Reliance Retail’s plan to create a user-friendly digital ecosystem for small merchants for the purpose of inventory management, customer relationship management, financial services and other services. With these business plans, RIL will be able to increase its revenue, thus expanding its market presence and competitive advantage. 

CONCLUSION 

There is instability and volatility in refining and petrochemical industries. Thus, the financial performance of these segments will continue to receive headwinds. However, as suggested, the debt reduction will ease the burden on RIL. A decrease in debt can bring respite to Rs288 billion of interest cost projected in FY21. According to market reports, a decrease in debt of Rs100 billion can result an increase by 1.2 per cent in EPS for FY21. With new product launches and reducing stake in volatile business through new strategic partnerships, RIL has gained the confidence of investors for a promising future by introducing stability in the company’s business and financial performance. Deleveraging of consolidated balance sheet with transferring of the telecom infrastructure to infrastructure investment trusts and selling of stakes in the downstream business, backed by continued high growth in retail and telecom businesses can be considered as RIL’s growth drivers. Thus, based on our analysis, we recommend BUY.