Valuing Reliance's different businesses

Reliance Industries’ (RIL) diverse business streams have an interesting combination of exposures. The thrust into e-commerce is unsurprising. Given the rapid expansion of the revenue market share (RMS) for Reliance Jio to around 26 per cent, and a substantial physical retail footprint, RIL is in a unique position when it comes to offering a sort of hybrid online-offline retail model. 

It has 7,500-odd physical stores, with the backup of warehouses, private brands, etc. It has 280-million-plus telecom subscribers, all of whom are on data plans. It also has a sequence of e-commerce policy changes, which are probably in its favour vis-a-vis the established players such as Flipkart-Walmart and Amazon. If everything works out, the retail and telecom operations combined will eventually contribute as much to the bottomline as refining-petrochemicals. 

However, while the RJio expansion has been pretty impressive, grabbed the RMS, and established dominance in the data segment, the telecom arm is not yet a stable cash generator. RJio is reporting profits. But, the massive capex means it is still burning cash. The retail arm is also still very much in expansion mode.

As a result of capex, debt has expanded significantly. RIL’s debt rose to Rs 2.74 trillion by Q3 end, from Rs 2.19 trillion on 31 March, 2018. That’s about 3.5 times its consolidated Earnings before interest, tax, depreciation and amortisation (Ebitda) for RIL. Some analysts estimate RJio’s liabilities alone amount to Rs 2.1 trillion — about 14x its Ebitda for the last four quarters. 

The group is looking to hive off tower and fibre assets into separate subsidiaries, with optic fibre cable assets going to Jio Digital Fibre, and tower assets to Reliance Jio Infratel. RIL may then sell stakes to reduce consolidated debt. 

The ambitious expansion plans in telecom, retail, e-commerce, among others will depend on RIL’s ability to continue generating big cash flows from the energy-petro businesses. In turn, that depends on the price of crude, and gas, and the ability to maintain reasonable refining margins. Can RIL do that? 

Refining margins depend to a large extent on the price of feedstock. There is also an ongoing change in the demand mix, with shipping mandated to change to low-sulphur fuels. Broadly, the lower the price of crude, the better the gross refining margins (GRM). 

The last two quarters saw wild swings in crude prices after almost four years of low prices. As a result of higher prices, the GRM reduced to a 16-quarter low of $8.8 per barrel, down from $11.6 per barrel in Q32017-18. This is well above the benchmark Singapore GRM but obviously, it is a cause for worry since it is not something the company can control. As Opec’s production cuts have taken effect in January, crude prices seem to have stabilised at somewhat higher levels. If the current prices hold up, the GRM is likely to travel down. 

Analysing multiple separate businesses divisions and setting a composite valuation for a conglomerate is a difficult art. It’s even more difficult when the businesses are so diverse. The RIL energy-petro businesses, which generate 80 per cent of the profits could be under pressure if crude prices don’t fall again.  

The telecom business and e-commerce/ physical retail will absorb cash for a while, as expansion continues. The debt on the balance sheet is approaching worrying proportions, and the hiving off could mean the group is also going to cut down on the intensity of capex. 

There are even “sell” recommendations on RIL, with Kotak Institutional Equities assessing a sum of the parts fair value of Rs 1,070. However, the stock’s trading at Rs 1,200-plus, and it seems to be in a fairly strong bull run.