Shares of Reliance Industries Ltd (RIL) fell by more than 1% on Tuesday, a day when the Nifty 50 index closed slightly higher. The company concluded FY24 on a softer note, with the March quarter results (Q4FY24) not providing any significant triggers for the stock.
Understandably, growth has moderated in RIL’s retail business, a significant variable from valuation perspective forming a large part of the company’s sum-of-the parts. Gross retail revenues fell sequentially in Q4, following the festival season led bump in Q3. But sequential performance may not be a fair comparison. Year-on-year, retail put up a good show, clocking an Ebitda growth of 18%.
The concern isn’t solely the financial performance of the retail business but rather the rich valuations that many retailers enjoy. A case in point is Avenue Supermarts Ltd, which operates the DMart supermarket chain. Avenue’s shares hit a lifetime high of ₹5,900 each in October 2021 but have since dropped nearly 20%. This has happened even as DMart’s Ebitda more than doubled in FY23 compared to FY21, reaching ₹3,637 crore, indicating that the valuation multiple has come off. Of course, one can argue that DMart’s valuations were expensive to start with.
Reliance Retail is valued at a minimum EV/Ebitda of 30x by most brokerages for FY25 or FY26 projections. However, assuming an EV/Ebitda of 20 times after five years of 20% CAGR growth, the returns for investors purchasing today would be barely in double digits. Therefore, either the growth rate must exceed expectations, or the premium valuation of 30x must continue beyond five years to yield meaningful returns.
On the other hand, the telecom vertical Jio is being valued in line with Bharti Airtel Ltd at a one-year forward EV/Ebitda of 10x-11x, but it has good potential as far as generation of free cash flow is concerned. Jio has already completed major capex on 5G and 6G is not on the horizon anytime soon.
A 20% hike in telecom tariffs is widely expected post the general elections and analysts have baked in growth in Arpu, or average revenue per user, on the back of that along with higher data consumption. An Arpu of ₹250 per month from almost 500 million subscribers with 50% Ebitda margin would translate into Ebitda of ₹75,000 crore per year from mobile subscribers alone excluding home broadband and enterprise services. Now, with no inorganic growth opportunities in India, it remains to be seen if Jio follows Airtel that acquired telecom companies in Africa.
RIL’s oil-to-chemicals (O2C) segment, which includes refining and petrochemicals, has maintained a consistent feedstock throughput of around 80 million tonnes each year from FY22 to FY24, with an Ebitda per tonne ranging from $100 to $120. O2C, along with the energy production business, continues to be the cash cow for standalone RIL, generating an Ebitda of ₹82,584 crore for FY24. Although these older energy sectors are not expected to drive growth, they are projected to generate sufficient cash to support the capital expenditures of RIL’s emerging new energy business. The company plans to develop 20 GW of solar capacity and venture into green hydrogen, energy storage, etc., with a total investment estimated at ₹1.5 trillion.
As RIL’s new energy business continues to develop, the primary catalysts for its stock will likely be the consumer-facing businesses. The shares have risen by 36% over the past year. With telecom tariff hikes already factored into analyst estimates, investors will closely follow news flow on the listing of the retail and telecom businesses.
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Published: 23 Apr 2024, 05:27 PM IST