Reliance Industries Limited (RIL) saw its shares decline by more than 1% on Tuesday, contrasting the modest gains made by the Nifty 50 index during the same trading session. The company’s conclusion of the fiscal year 2024 (FY24) lacked notable stimuli for its stock performance. Notably, RIL’s retail business, a substantial variable in its valuation, has experienced a moderation in growth. Gross retail revenues witnessed a sequential decline in the fourth quarter (Q4) following a festive season-driven surge in Q3. However, in a year-on-year comparison, the segment displayed an 18% increase in Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Concerns regarding retail valuations are amplified by the performance of Avenue Supermarts Ltd., which operates the DMart supermarket chain. Avenue’s shares reached an all-time high of 5,900 each in October 2021 but have since fallen by approximately 20%. This decline has occurred despite DMart’s EBITDA more than doubling in FY23 compared to FY21, reaching 3,637 crore, indicating a reduction in valuation multiples. It is important to note that DMart’s valuations were considered expensive from the outset. Most brokerages value Reliance Retail at a minimum EV/EBITDA of 30x for FY25 or FY26 projections. However, assuming an EV/EBITDA of 20 times after five years of 20% Compound Annual Growth Rate (CAGR) growth, investors purchasing today would experience returns barely in double digits. Consequently, either the growth rate must surpass expectations or the premium valuation of 30x must continue beyond five years to yield meaningful returns. In contrast, Jio is being valued similarly to Bharti Airtel Ltd., with a one-year forward EV/EBITDA of 10x-11x. However, Jio possesses strong potential in terms of free cash flow generation. The company has completed major capital expenditure (capex) on 5G, and 6G is not anticipated to emerge in the near future. A 20% hike in telecom tariffs is widely anticipated post-general elections, and analysts have incorporated growth in Arpu (Average Revenue per User) into their projections based on this expectation, along with higher data consumption. An Arpu of 250 per month from approximately 500 million subscribers with a 50% EBITDA margin would translate into an EBITDA of 75,000 crore annually from mobile subscribers alone, excluding home broadband and enterprise services. With no inorganic growth opportunities in India, it remains to be seen whether Jio will follow Airtel’s lead in acquiring telecom companies in Africa. RIL’s oil-to-chemicals (O2C) segment, encompassing refining and petrochemicals, has maintained consistent feedstock throughput of around 80 million tonnes per year from FY22 to FY24, with an EBITDA per tonne ranging from $100 to $120. O2C, along with the energy production business, remains the cash cow for standalone RIL, generating an EBITDA of 82,584 crore for FY24. Although these legacy energy sectors are not expected to drive growth, they are projected to generate sufficient cash to support the capital expenditures of RIL’s emerging new energy business. The company intends to develop 20 GW of solar capacity and venture into green hydrogen, energy storage, etc., with a total investment estimated at 1.5 trillion. As RIL’s new energy business continues to evolve, the company’s primary stock catalysts will likely be its consumer-facing businesses. The shares have ascended by 36% over the past year. With telecom tariff hikes already factored into analyst estimates, investors will closely monitor news related to the listing of the retail and telecom businesses.
RIL’s Shares Dip Amidst Growth Moderation and Rich Retail Valuations
