RELIANCE INDUSTRIES LTD: THE SLEEPING DRAGON NOT ANYMORE !!!

Scrip Code: 500325 / RELIANCE

CMP:  Rs. 1010.85; Market Cap: Rs. 3,27,017.04 Cr; 52 Week High/Low: Rs. 1043.30 / Rs. 796.45. 
Total Shares: 323,50,69,941 shares; Promoters : 146,39,61,977 shares –45.25 %; Total Public holding : 177,11,07,964 shares –54.75 %; Book Value: Rs. 609.07; Face Value: Rs. 10.00; EPS: Rs. 70.20; Divd: 95.00 %; P/E: 14.39 times; Ind. P/E: 17.02; EV/EBITDA: 10.03.

Total Debt: Rs. 89,141 Cr; Enterprise Value: Rs. 4,04,587.04 Cr.

RELIANCE INDUSTRIES LTD: The Company was founded on 11^th February 1966 by name of Reliance Textile Industries Pvt Ltd in Mumbai, Maharashtra. In November of 1977, the promoters Mr. Dhirajlal H Ambani & Mr. Natvarlal H Ambani along with some other existing shareholders offered for sale at par 28,20,000 equity shares to the public to get listed on Bombay Stock Exchange. In June 27 of 1985, company again changed its name from Reliance Textiles Industries Ltd to its current name Reliance Industries Ltd. Reliance Industries Limited (RIL) is a conglomerate with business in the energy and materials value chain. RIL together with its subsidiaries, primarily engages in the exploration and production of oil and gas in India and worldwide. The company operates two refineries and owns 1.24 million barrels per day of crude processing capacity. The company has till date delcared lucartive bonuses - it delcared its first bonus in 1983 at ratio of 3 new shares for every 5 held; second was declared on 1997 in ratio of 1:1 and last bonus was declared in the year 2009 in ratio of 1:1. The Company mainly operates in three segments: Petrochemicals, Refining and Oil & Gas segments. The Petrochemicals - includes production and marketing operations of petrochemical products namely, polyethylene, polypropylene, polyvinyl chloride, poly butadiene rubber, polyester yarn, polyester fiber, purified terephthalic acid, paraxylene, ethylene glycol, olefins, aromatics, linear alkyl benzene, butadiene, acrylonitrile, caustic soda and polyethylene terephthalate. The Refining - includes production and marketing operations of the petroleum products. The Oil and Gas - includes exploration, development and production of crude oil and natural gas. The Oil and Gas segment includes exploration, development and production of crude oil and natural gas. Reliance Industries subsidiaries include Reliance Retail Limited (RRL) serves customers, farmers, and vendors. RRL operates approximately 900 stores in 80 cities across 14 states in India. RRL operates Reliance Fresh, Reliance Mart & Reliance Super which offer a range of products for daily household usage; Reliance Digital focuses on consumer durables & information technology, Reliance Trends is into apparel & accessories, Reliance Wellness is into health, wellness & beauty, iStore focuses on especially Apple products, Reliance Footprint is into footwear, Reliance Jewels into Jewellery, Reliance TimeOut is into books, music & entertainment, Reliance AutoZone for automotive products & services; and Reliance Living focuses on home-ware, furniture, modular kitchens, furnishings. RRL has strategic partnerships with companies, such as Marks and Spencer, Office Depot, Pearle Europe (optical products) and Hamleys (toys). RRL has a direct engagement with approximately 5o lakh customers following a loyalty programme ‘Reliance One’. Reliance Ventures Ltd, a subsidiary of RIL, is a joint venture with Haryana State Industrial Investment Development Corporation (HSIIDC) formed a joint venture company Reliance Haryana SEZ Limited to develop SEZs. The project would function as an integrated package with all the required facilities for the development of medium and large scale industries and service activities. RIL has a refinery in the special economic zone (SEZ) at Jamnagar. The refinery has a crude oil processing capacity of 5,80,000 barrels of oil per day. The refinery has a Nelson Complexity Index of 14.0 enabling processing of heavy crudes and production of products. The Jamnagar SEZ commissioned a captive power plant and water desalination plant in 2008. The railway sidings for solid products were completed during the year 2008. The SEZ unit, the petroleum refinery and polypropylene plant (RPL) were successfully started in 2008. The company, as of March 2009, commenced production of hydrocarbons in its KGD6 block in the Krishna Godavari basin with the production of sweet crude of 42° API. Its other segment includes Telecom & Broadband business. During the fiscal year ended March 31, 2012; RIL further increased its interest to 18.53 % in EIH Limited. The company is compared locally with HPCL, BPCL, Mangalore Refinery, Chennai Petroleum Corp. Ltd, and Globally with Exxon Mobil Corp and Chevron Corp both from USA; Royal Dutch Shell PLC from Netherlands; BP from UK; Endesa SA from Spain; Rosneft Oil, LUKOIL and Gazprom Oao both from Russia; RWE AG and E.On AG both from Germany; China Petroleum & Petro China Corp both from China; Total SA from France; Petrobrass Brasileiro from Brazil.

Investment Rationale:

Reliance Industries is India’s largest private sector company, and the first Indian company to be featured in the Fortune Global 500 list. Reliance Industries is in the business of oil and gas exploration, refining and petrochemicals. The crude oil and gas produced is the raw material for refining and petrochemicals segment. Reliance is also a major importer of oil for its refining business. The major products under refining are LPG gas (Reliance gas), naphtha, gasoline, aviation turbine fuel, kerosene oil, high speed diesel etc. Petrochemical segment produces polyester, fibre intermediates, plastics and chemicals. Reliance is now focusing on other segments of its business like Retail and Telecom. RIL is investing Rs.85,000 crore in R-Jio, R-Jio has a pan-India licence in the 2300 megahertz (MHz) frequency band, which has not seen many international 4G launches using the so-called long term evolution (LTE) technology standard. That’s mainly because the higher the frequency, the lower the signal strength, although it offers higher data delivery speed. Reliance Jio Infocomm Limited (“RJIL”) plans to provide reliable fast internet connectivity and rich digital services on a Pan India basis. RJIL has finalized the key vendor and supplier partnerships that are required for the launch of services, and is making rapid progress in building the critical infrastructure needed to launch its services. RJIL has signed agreements with various telecom infrastructure providers to widen access to telecom tower and forfibre optics infrastructure to expedite the rollout of its 4G services. R-Jio intends to provide 4G service, using LTE technology, in the 800MHz, 1800MHz and 2300MHz bands through an integrated ecosystem. R-Jio has spectrum in 20 of the 22 circles in the country in the 800MHz band which accounts for 92 % of industry revenues and 14 circles in the 1800MHz band. Its licence for the flagship 2300 MHz covers all 22 circles. Reliance Jio Infocomm’s installation of 70,000 LTE sites for the launch network is mostly completed. Reliance Jio has completed roll-out of 100,000 Rkm of optic fiber cable, and the roll-out continues at a faster space. This is already comparable with the fiber rolled out by the rest of the industry over the last 10-15 years. More than 85 % of RJio’s fiber is intra-city fiber i.e. access fiber running up to the towers as of now. Till now, RCOM was believed to have the largest fiber network among private operators, with an intra-city network of 70,000 Rkm. Thus, it is possible that Reliance Jio already has the largest intra-city fiber network in the industry (excluding fiber leased from RCOM here!). Reliance Jio has already built 28,000-30,000 towers of its own including mix of poles and full ground based towers. Reliance Jio’s 4G deployment will also benefit from superior technology efficiency as compared with 2G/3G networks of other operators. Spectral efficiency refers to the amount of data throughput (in bits per second) that a technology can push through a given MHz of spectrum. It can be safer to conservatively assume that 3G is 1.25x better than 2G on spectral efficiency, and LTE is 1.25x better than 3G. Data clearly suggests that top 30 % customer accounts for 70 % of revenues in the India Wireless Industry. The Reliance Chairman clearly indicated at the shareholder meeting, that the company will offer data packages in the range of Rs. 300-500 per month which in just below the global average of Rs. 600- 650. In this backdrop the new entrant Reliance Jio Infocomm’s positioning would be more important to see. The SmartPhone handset changing cycle is less than 24 months for high end customers in India, so it can be safely assume that these customers could shift to 4G LTE handset very soon as long as the handsets are at the right price and Reliance has clearly said to launch its 4G LTE handsets below Rs. 4,000. Good quality video delivery is critical for forming perceptions about network quality. Nearly 50 % of consumers face some issues in data connectivity and quality & most commonly while trying to watch videos (and less frequently while using lower bandwidth apps such as messaging). In fact, 80 % believe that watching videos is important for their mobile usage experience and only 40 % of them have a seamless video watching experience. There is significant room for Reliance Jio to position them on the promise of better data network quality. RJio is betting big on the Fiber to the Home (FTTH) market and is justified looking at the 100,000 Km Intra-City Fiber rolled out which is growing by the day. Reliance Jio Infocomm has received provisional licence to operate as pan India Multi System Operator taking it step closer to becoming a nationwide distributor of television channels. It intends to use Fiber to home connectivity to offer host of services to its prospective customers thus bringing in true IPTV Experience. There are 17 Cr odd television sets in India. Of these, 2 cr are terrestrial like doordarshan, 4 to 4.5 Cr are connected through Direct To Home and around 10 Cr have cable television connections out of which 3 to 3.5 Cr are digitalized. So effectively R-Jio will be vying with the existing MSOs and DTH companies. So basically RJIO is looking to deliever to as much as 68 Cr sets if we assume that India has 17 Cr TV sets and when it is multiplied by four. So even if there are close to 5 Cr devices to offer your content it is too big market to be captured by anyone company. RJio is also expected to come out with Wi-Fi hotspot solutions for a ready market to tap into. Jio plans to start with 1,000 own “Jio Centre” (exclusive retail stores) which when combined with Reliance Retail’s Digital Express stores will bring Jio at par with leading operators. This appears to be in addition to Franchisees and Distributors chain but the answer was not totally clear. The biggest differentiator that R-Jio has talked about in its telecom offering is to be present in the entire value chain of the telecom and e-commerce business—something not done by any telecom company in India before

                                                                                         

Outlook and Valuation:

Reliance Industries (RIL) is one of the world's most vertically integrated and horizontally diversified groups, from its origins in trading in polyester and fibers to a move into textiles and branded showrooms, it has integrated forward and backward into textile intermediates, including fiber, petrochemicals, naphtha crackers, plastics, refining, and oil exploration in stages. Oil and Gas sector in India is dominated by public sector companies. The major players are ONGC, Oil India, Reliance Industries, Crain Energy, GAIL, Bharat Petroleum, Indian Oil, Bharat Petroleum and Hindustan Petroleum. Reliance Industries and Crain Energy are the two major private players in oil and gas sector. The oil and gas sector consists of three segments upstream, midstream and downstream. The upstream segment primarily comprises of companies that are engaged in exploration and production activities, while the midstream segment comprises of players in storage and transportation, and the downstream segment comprises of players that are engaged in refining, processing and marketing of petroleum products. The oil and gas sector is regulated at two levels, policy level and regulatory level. At the policy level, the oil and gas sector is regulated by the finance ministry and planning commission. At the regulatory level, the sector is administered by the Ministry of Petroleum and Natural Gas, Directorate General for Hydrocarbons and Petroleum and Natural Gas Regulatory Board. During FY 2013–14, the total consumption of petroleum products in India was 158.2 million tonnes (MT). The consumption stood at 14.2 MT in March 2014, according to data released by the Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas. The share of fuels in the country's exports surged from 5.59 % in 2003–04 to 20.05 % during 2013–14. Total exports of fuel products stood at US$ 62.69 billion in value terms during FY 2013–14. The country had total reserves of 1354.76 billion cubic meters (BCM) of natural gas and 758.27 million metric tonnes (MMT) of crude oil at the end of FY 2012–13. The use of shale gas can be the first step in the road to ‘economic freedom’. The petroleum ministry of India feels that the country could do something similar to the US, which became a net exporter of energy from a net importer of energy, on the back of shale gas and oil. By 2015–16, India’s demand for gas is expected to touch 124 MTPA, as per projections of India’s Petroleum and Natural Gas Ministry. More recently, Relaince Industries has diversified into unrelated areas like retail chains, media and telecom through Reliance Jio, which will be launched sooner in 2015. Reliance JIO commercial launch is delayed to December 2015 a combination of significant expected declined in the 4G handset price to Rs. 4,000 by December 2015 and significant capacity of JIO planned at launch date with already 100m wireless subscribers would lead to increased activity in telecom data market. Reliance JIO’s voice strategy remains uncertain as no particular details were shared from company about how it would be providing voice services which currently constitute 80 % of the Indian wireless market revenue. So there can be potential tie up with existing operators for circuit switched fall back (CSFB). Large scale population coverage planned by JIO combined with low 4G handset prices can enable mass adoption of 4G services. However rate of subscriber up-take would be the key as JIO would be largely targeting churn from existing subscribers with proposition of cheaper and better data offering. RIL’s acquisition of control in Network 18 Media & Investments Limited through Independent Media Trust including its subsidiary TV18 Broadcast Limited will differentiate Reliance’s 4G business by providing a unique amalgamation at the intersect of telecom, web and digital commerce via a suite of premier digital properties. TV18 Broadcast ltd had posted excellent result for FY15 inspite of Rs. 220 Cr write-offs. With finance costs also coming down the share price is likely to rise significantly in next 2 quarters. Reliance Retail has continued its growth momentum crossed three significant milestones during past couple of period; it has surpassed turnover of Rs. 4,000 Cr in a quarter with more than 2,000 operating stores and with establishing its presence in over 150 cities. Despite persistent inflation and slow consumption growth, first half of FY 14-15 revenue for Reliance Retail grew by 17.3 % Y-o-Y to Rs. 8,166 Cr. PBDIT for the retail business more than doubled to Rs. 357 Cr from Rs. 165 Cr in the same period last year. All format sectors grew through store additions as well as consistent like for like growth ranging up to 21 %. Reliance witnessed sharp improvement in complex refining margin and delivered record performance taking benefit of being an integrated energy Company. Declining gas production in KG basin as a concern will remain for some more time. However, a positive point could trigger from its start of projects worth $25 billions in next 18 months, also new launch of Reljio and the growth shown by its Retail Business could contribute around $17 billion. The start of downstream expansions could lift Ebitda by around 75 % over next 3 year so it can be expected that RIL Eps can grow double in next three years. The fair value of RIL on Sum of the parts basis comes at Rs. 1050 per share, while the valuation of RIL including its treasury shares comes to Rs. 1140 per share. At the current market price of Rs. 1010.85, the stock is trading at 11.85 x FY16E EPS of Rs 85.30/share and at 9.73 x FY17E EPS of Rs 103.80/share. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.

SOTP valuation (FY2016E) 

BUSINESS SUBSIDIARY	Value per Share (₹)
Core Business
Refining	562.00
Petro Chemicals	427.00
E&P INITIATIVES
KG - D6 Gas (KG Basin)	44.00
KG - D6 MA1 Oil (KG Basin)	13.00
KG - DWN - 2003/1 (D3)	12.00
NEC - 25 (Mahanadi Basin)	14.00
Sohagpur East & West (CBM)	23.00
PMT	14.00
INVESTMENTS
In Shale Gas	35.00
In RGTIL, RIIL	11.00
In SEZ	14.00
In BWA	36.00
In Reliance Retail	84.00
Less: Net Debt	239.00
TOTAL VALUE PER ( Ex Treasury stock )	1,050.00
Add: Treasury Stock of 29.35 cr shares	91.70
TOTAL VALUE PER	1,141.70

KEY FINANCIALS	FY14	FY15	FY16E	FY17E
SALES (₹ Crs)	3,90,100	3,57,300	2,84,800	3,42,900
NET PROFIT (₹ Cr)	22,000	22,700	25,000	30,800
EPS (₹)	75.20	77.50	85.30	103.80
PE (x)	13.10	12.70	11.50	9.50
P/BV (x)	1.30	1.20	1.10	1.00
EV/EBITDA (x)	9.40	9.80	9.00	6.80
ROE (%)	11.70	11.00	11.00	12.30
ROCE (%)	11.10	10.50	10.60	12.40

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