We think the key disappointment was the likely delay in equity investment by Saudi Aramco to take a 20% stake in the oil to chemicals (O2C) business due to unforeseen circumstances in the energy markets
and the COVID-19 pandemic.
With substantial funds raised, RIL’s equity requirements have already been met. That being said, it seems committed to a long-term partnership with Aramco. To facilitate this partnership, RIL plans to approach the National Company Law Tribunal (NCLT) to spin off the O2C into a separate subsidiary and expects to complete this process by early 2021.
We use a SOTP valuation to value RIL’s different businesses. For its refining / petchem businesses, we use 7x / 8x FY22F EV/EBITDA. We use DCF to value the E&P business (discounted back to Mar-22). We assign 9x FY22 EV/EBITDA for RIL’s 90% stake in R-Jio and 22x FY22F EV/EBITDA multiple to Reliance Retail. We reaffirm our Buy rating and target price of Rs 1,900. The stock currently trades at 9.9x FY22F EV/EBIT.
Reliance Jio's emphasis on 5G and driving subscribers away from the 2G network indicate a shift in strategy from price-led differentiation to service-led differentiation. This bodes well for the sector's pricing environment.
While we expect 5G spectrum to be auctioned next year with operators only buying it the year after that to lower its exorbitant $7 billion price, Reliance's move on 5G could result in an earlier than expected 5G capex cycle, which would impact the FCF and ROCE profile of the sector, but accelerate market share shifts towards companies with stronger balance sheets. We maintain BUY on Bharti Airtel.
We do not believe affordability is the real issue for smartphone adoption and that a cheaper smartphone alone would not crack the nut. Separately, the company announced it has developed a complete 5G solution, which would be ready for field deployment next year. RJIO also plans to export this solution once it is proven at India-scale. We expect large scale commercial 5G launch by operators by 2024–25, and advancement to the next one – two years is likely to entail significant capex, which can be negative for the sector. Watch out for the 5G rollout timelines. Retain ‘BUY’ on Bharti Airtel and Bharti Infratel with target prices of Rs 712 and Rs 235, respectively, and ‘REDUCE’ on Vodafone Idea with a target price of Rs 9.
Antique Stock Broking
RIL is not only developing JIO platforms as an independent vector but also exploring cross-function synergies with its other consumer-facing vertical i.e. Reliance Retail, which in itself is also growing at a rapid pace. In light of the above we feel compelled to raise our valuation multiples for JIO Platforms and Reliance Retail in our SOTP, thereby revising our target price to Rs 1,960/share (from Rs 1,600/share), even as we maintain our BUY rating on the stock.
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