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Calling Reliance Industries Ltd (RIL) America’s Exxon, AT&T and Amazon rolled into one, research firm Sanford C Bernstein & Co, LLC has said the Mukesh Ambani-led conglomerate is at the start of a secular growth phase driven by telecom, retail and new-economy related businesses.
Reliance’s metamorphosis since the 2000s has been nothing short of spectacular, Bernstein said in a recent research note while pegging the target price at ₹1,890 a share. Over the past decade, RIL has undergone a transformation that is almost unprecedented in corporate history, it added.
A decade ago, 100 per cent of RIL’s EBITDA came from energy-related business segments (refining, petrochemicals and E&P). In FY20, the contribution from energy is expected to fall to 64 per cent, said the note. In two years (FY22), Bernstein expects energy’s contribution will fall below 50 per cent of group EBITDA and, by FY25, it will be around 30 per cent.
By FY23, it expects telecom to overtake energy to become the largest EBITDA contributor of the group.
Case study for energy firms
“As Chairman and Managing Director, Mukesh Ambani has embraced the new economy and sold out of the old economy (with a timely sale of 30 per cent of upstream to BP in 2011 and an letter of intent with Aramco in 2019 for 20 per cent of the refining and petrochemical business), Reliance could be a case study for other oil majors on how to evolve their businesses to compete in the low-carbon world,” Bernstein wrote in the note.
“If our EBITDA forecasts are correct, Reliance will be trading on an EV/EBITDA multiple of 6.4 x by FY26 (current target price),” it said.
Refining and petrochemicals are the cash cows for Reliance. But to think of this as an ex-growth part of the business would be a “mistake”, it added. In India, there is strong secular demand growth ahead, with the country seen as the fastest-growing refined fuels market over the next 20 years (faster than China) and also one of the fastest-growing markets for petrochemicals, as per capita demand is expected to grow with GDP.
RIL is in one of the best positions to grow its capacity over time, given India’s expected structural growth in oil demand over the next 20 years. Moreover, it has one of the most profitable refining businesses relative to peers owing to the higher complexity of the Jamnagar refinery, said the note.
Deal with Aramco
“Whether Reliance will choose to expand its existing footprint is not clear, but the relationship with Aramco (assuming the deal goes through) suggests options for further expansion,” it added.
Bernstein estimates that India’s petrochemical demand will see significant growth ahead over the next 20 years.
The nation’s consumption of ethylene per capita has been growing rapidly, but it is still low at 5 kg a year. If India continues to follow a consumption trend similar to China’s, then ethylene consumption could increase 10-fold to reach 50-60 kg a year in the next 20 years. Beyond 2023, however, the outlook for margins is weak.
“We estimate FY20 EBITDA of ₹973 billion (₹97,300 crore), which is almost double what it was two years ago. In our estimates, EBITDA can double again through to FY25, mainly through growth in Jio and new business, while the energy-related business will be relatively flat (assuming the 20 per cent divestment to Aramco goes through),” Bernstein added.
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