Buy Reliance Industries, target price Rs 1,523: Motilal Oswal

Motilal Oswal has given a buy rating to Reliance Industries Ltd (RIL) with a target price of Rs 1,523 (Rs 1,820 earlier) showing an upside of 37 per cent to CMP. Considering that the tide would soon turn in favor of the core segment, the brokerage has highlighted RIL as one of the top picks in the sector. Continued stress in core and retail segments remain a risk. At a CMP of Rs 1,112, the core business implies a mere 2.5 times FY22E EV/EBITDA.

The potential revenue loss due to the shutdown of Reliance’s retail network (except grocery), given the ongoing lockdown in India, is estimated at ~50 per cent in first quarter FY21E with monthly cash burn of around Rs 7.6 billion. Recovery is expected to be slow with potential EBITDA cut of ~60 per cent/30 per cent for FY21/FY22E. The ongoing lockdown should have limited impact on RJio as telecom companies are expected to see recharge upgrades given the increase in data consumption. For FY21/FY22E, we estimate subscribers at 469 million/ 483 million and ARPUs of Rs 158/ Rs 163.

As demand for both air/road transportation fuels have been drastically affected due to Covid-19, cracks of ATF, petrol and diesel have slumped. Petrochemical margins have shown marginal improvement quarter-on-quarter. The brokerage believes that petrochemical margins would come off as demand destruction across the globe becomes a sore point.

The share price of the company moved down by -4.87 per cent from its previous close of Rs 1113.75. The last traded price is Rs 1059.55. Incorporated in 1973, Reliance Industries has a market cap of Rs 705211.81 crore.

Investment Rationale
On a conservative note, the brokerage has cut EV/EBITDA for the core segment from 7.5 times to 6 times. After adding the equity valuation of retail and telecom, it arrived at a revised valuation of Rs 1,523 (from Rs 1,820 earlier). The valuation for RJio remains intact at Rs 500/share with potential higher valuation of Rs 747/share. This could be due to additional ARPU increase or market share gains as RJio remains well placed to gain from the bleeding industry situation.

Given the current shutdown of retail stores (except grocery), Reliance Retail could see 4-5 per cent revenue loss; however, the pace of recovery is key. The brokerage has reduced its target multiple to 19 times EV/EBITDA to capture this impact (21 times earlier), with a revised target price of Rs 450 (Rs 500 earlier).

Financials
For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 152939.00 crore, up 2.97 per cent from last quarter sales of Rs 148526.00 crore and down -2.21 per cent from last year same quarter sales of Rs 156397.00 crore. The company reported net profit after tax of Rs 11784.00 crore in the latest quarter.