Motilal Oswal Suggests Buying Reliance Industries, O2C Segment Outpaced Other Segments

Brokerage firm Motilal Oswal suggests buying the stock of Reliance Industries. The high crude prices led to 56% YoY EBITDA growth in the O2C business of RIL, while Retail grew 28% YoY; Reliance Jio growth, however, decelerated to 22% YoY.

Stock To Buy: Target Price

The Current Market Price (CMP) of Reliance (RIL) is Rs. 2585. Motilal Oswal has estimated a Target Price for the stock at Rs. 2880. This stock has the potential to give 11% return, in the upcoming 1 year. It is a large-cap stock with a market capitalization of around Rs. 1,757,783 crore.

Stock Outlook
Current Market Price (CMP)	Rs. 2585
Target Price	Rs. 2880
Potential 1 year return	11.00%
52 week high share price	Rs. 2,856.15
52 week low share price	Rs. 2,180

RIL's Financials

RIL's FY22 belonged to the O2C segment performance that outpaced other segments, even as RJio retained its market share and Retail business saw a steady recovery.

RJio posted healthy revenue/EBITDA growth of 10%/22% YoY, respectively, fueled by 7% ARPU growth in FY22. Subscribers declined by 16m during FY22 while during FY19-21, the company added 80m subscribers annually. RJio's operating cash flow decreased to Rs. 313b in FY22 (from Rs. 326b in FY21), owing to higher working capital.

Capex and growth momentum

Reliance Jio's capex stood at Rs. 288b, though, capitalized capex was 3x of it. RoE/RoCE/RoIC stayed in single digit, albeit, improved marginally. Additionally, RIL's total capex stood at Rs. 970b, primarily for the Digital, Retail, and O2C businesses along with the forex impact, while capitalized capex stood at Rs. 1.5t primarily due to Reliance Jio.

The growth momentum and improved margin profile across the sector will drive RIL's revenue/EBITDA growth of 25%/32% in FY23E, respectively. These, however, do not factor in any incremental growth from 5G capex, new energy and other segments. Over the next two-to-three years, RIL is likely to create the next engine of growth but it could put pressure on its near-term return ratios.

Stock Advantages: Motilal Oswal

"Post-equity raise during the last couple of years, FY22 saw a strong capex with heavy investments, especially in RJio, which included a large-scale spectrum investment. Retail witnessed aggressive footprint additions, while new energy reported aggressive acquisitions."

"Using SOTP, we value the Refining and Petrochemical segment at an FY24 EV/EBITDA of 7.5x, arriving at a valuation of Rs. 721/share for the standalone business. We ascribe an equity valuation of Rs. 1,027/share to RJio and Rs. 1,202/share to Reliance Retail, factoring in the recent stake sale. Our higher EV/EBITDA multiple of 41x for Retail and 19x for Digital Services, underscore new growth opportunities in the Digital space and steady market share gains," the firm added.

Reliance Jio

Reliance Jio bought spectrum of 488.35 MHz for Rs. 571b in Mar'21. Further, it bid for additional 5G spectrum of Rs. 881b in Aug'22 across different bands, which is good enough to launch a full-fledged 5G network.

"RJio is valued at 19x Mar'24E EV/EBITDA, to arrive at a valuation of Rs. 1,027/share (adjusted for its 66% stake). The higher multiple captures the revenue growth opportunity in Digital, potential tariff hikes, and steady market share gains," Motilal Oswal said.

O2C segment

O2C segment is benefiting from higher crude prices, the brokerage firm thinks. RIL restructured its Refining and Petrochemical segments into the O2C segment to attract strategic partnerships. Demand improved in FY22 YoY (on a lower base), which led to expanded margins in refined products. Gasoline margin improved sharply to USD11.4/bbl in FY22; Gasoil margin increased to USD12.3/bbl in FY22, while ATF margin spiked to USD9.1/bbl in FY22. "We value the Refining and Petrochemical segment at 7.5x FY24E EV/EBITDA for standalone business to arrive at a valuation of Rs. 721/share. RIL believes that a recovery in aviation demand, waning pandemic woes and lower exports from China will support product margins going forward," Motilal Oswal thinks.

Reliance Retail Business

"We value Reliance Retail's core business at 41x FY24E EV/EBITDA and assign 5x to Connectivity, to arrive at a valuation of Rs. 1,202/share - after excluding the 10% stake sale. Our premium valuation multiples capture the accelerated growth in new store openings, aggressive acquisition programs to improve product portfolio and its focus on improving the digital segment," the brokerage firm stated.

Disclaimer

The above stock was picked from the brokerage report of Motilal Oswal. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.