Reliance Industries: Roadway to $ 50 billion Value creation

A refining Golden Age, tightening global gas markets, and improving telecom subscriber quality heads towards a $20 billion EBITDA run rate for Reliance Industries by the end of 2022. The new energy business, along with the five-pronged tailwinds, could add to Reliance Industries’ $ 50 billion value creation in 2022.

The five-pronged tailwinds seen for Reliance Industries’ $ 50 billion value creation:

1. Recovering Petrochemical Margins:

Petrochemical margins are recovering as prices are rising with oil prices moving up. The expected inflation in the global cost curve and supply chain challenges are likely to drive margins for two-thirds of Reliance Industries' product portfolio to above its mid-cycle levels by the end of CY2022.

2. Higher gas ASPs: 

Reliance Industries is producing 18+ units of gas from its KG basin, which is expected to rise to 30 units peak production over the next two years, which will increase starting in January 2023. The rising production, along with a tailwind from rising global gas prices, could increase Reliance's profitability multi-fold over the coming years. Gas price for Reliance's KG gas fields rose to $9.9/MMBtu in Apr-22, from $6.13/MMBtu in Q4FY22, and management expects further increases in the six-monthly reset in Oct-22. This should help nearly double Reliance’s EBITDA by the end of CY2022.

3. Telecom - Improving subscriber trend and quality: 

Reliance lost 10.8 million subscribers in Q4FY22, vs 8.4 million in Q3FY22, with the active subscriber base rising to 94% in February 2022 from 85% in Q3FY22. Gross subscribers were added by 35.3 million, so a reduction in churn should drive net additions to be positive in FY23, as a large part of sim consolidation challenges are decreasing.

4. Scaling up the Digital revenues: 

Digital EBITDA (ex-telecom) for FY22 stood at $200 million, but earnings contribution was limited. The scale-up of digital revenues is key for Reliance to command higher than telecom multiples. 

In its earnings presentation, management highlighted incremental focus on providing an end-to-end product suite for enterprises and offering managed services solutions around cloud, IoT, and, security solutions, thereby shifting them from Capex to Opex. 

The company's investments in Two Sigma for artificial reality and the JV with SES offering satellite-based broadband to enterprises should come in handy over the medium term. 

Net debt and CAPEX:

Reliance's FY22 investments of $13 billion increased 25% YoY, and it is believed that this should be sustained at such levels for the next few years. About 30% of the CAPEX was in telecom, 20% in oil to chemicals, 30% in retail, and 11% in new energy. Including spectrum acquisition, total investments were at $19 billion. Net interest cost was nearly zero for the first time in nearly three years as net debt declined. Including spectrum liabilities, total debt at the end of FY22 was $ 10 billion, with Jio's net debt at $ 5.4 billion. 

5. Retail: Significant inflection in investments in FY22: 

Retail revenue grew at a 16% CAGR over 2 years, compared to 11% for DMART and 17% for Titan. A large part of the growth was driven by new store additions. Revenue per sqft declined at a 4% CAGR during the period, which implies room for improvement as the economy opens and footfalls rise. Reliance highlighted synergies between online and offline consumer bases, with consumers in omnichannel platforms having 35% higher revenues than normal.

Reliance now has 500 stores in electronics, 600 in fashion and lifestyle, and 2000+ in groceries. Footfalls are now 4% above pre-Covid levels and Q4FY22 saw double-digit growth across all consumption baskets. The company is strengthening its warehousing capabilities, which have doubled, and now has 22.7 million sqft of warehousing space with 334 warehouses.

EBITDA margin for Q4FY22 is at 7.1% with a growth of 10bps QoQ.

On the e-commerce front, while it saw good traction on Jiomart downloads, the company had 193 million consumers, up by 24% YoY, with dairy orders doubling in FY22 YoY. Kirana stores added to the network rose 4 times YoY with increased traction as older merchants on the network bought significantly and more frequently across categories. In fashion and lifestyle, revenue from new commerce rose 3.5 times over the past year, and the e-commerce platform is seeing two-thirds of orders come from Tier-3 and small towns. The company plans to add more stores in FY23 and onboard new merchants.