Global research and investment management firm Morgan Stanley says that Reliance Retail’s earnings will gather pace by calendar year 2024, as it leverages investments made both at the front-end and back-end of the business.
The global brokerage estimates that Reliance Retail may see earnings (in terms of topline) grow at a compounded annual growth rate (CAGR) of 24% between financial years 2024 and 2026. Between financial years 2020 and 2023, Reliance Retail grew at a CAGR of about 19% in terms of topline. Earnings before interest tax depreciation and amortisation (Ebitda) grew at a pace of about 30% between FY20 and FY23, with Morgan Stanley estimating that this may accelerate as Reliance Retail drives scale in its business.
“Historically, Reliance Industries has outperformed estimates, when there was tangible evidence of revenue. We expect a ramp-up in revenue to start by the end of 2023, with sustained growth over the course of the next year,” Morgan Stanley said in its report dated August 24 about the retail business.
Reliance Industries (RIL) is expected to make some significant announcements with regard to its retail business at its annual general meeting (AGM) today. This may include a likely roadmap on future investments and plans for the business, analysts tracking the company said. RIL gave an indication of this last week when it announced that Qatar Investment Authority (QIA) was picking up a nearly 1% stake in Reliance Retail Ventures (RRVL), the holding company of Reliance Retail (RRL), for $1 billion at a valuation of $100 billion.
Media reports have since suggested that some more investors could be onboarded by the firm, with RIL diluting about 8-10% more in RRVL to those investors. RRVL is a wholly-owned subsidiary of RIL. A Reliance Retail spokesperson declined comment on the issue.
So far, RIL has divested 11.08% in RRVL, including last week’s investment by QIA. Previously, a clutch of private equity investors had picked up a 10.09% stake in RRVL, for Rs 47,265 crore (or nearly $6 billion), valuing the firm at over Rs 4.2 trillion (or $57 billion).
The latest fund-raising by RIL for its retail business had valued the firm at 10% higher than the $92-96 billion valuation of the company by two global consultants (BDO and EY) last month.
RIL had appointed the two independent valuers, ahead of a proposed move to reduce the share capital of its unlisted subsidiary RRL by buying it back from shareholders, other than promoters and holding company, at Rs 1,362 per share.
Reliance Retail’s June quarter results stood in stark contrast to rival Avenue Supermarts, which runs the DMart chain of stores, and Shoppers Stop, the country’s oldest department store chain, which had reported muted numbers for the period.
Morgan Stanley says that RIL is moving into a phase where monetization and investment cycles will run concurrently till 2027. “This multi-decade profile shifts offers under-appreciated opportunities, especially, as the earnings cycle turns,” Morgan Stanley said.
The brokerage said that RIL’s capex to cashflow cycles were becoming shorter – from 5-6 years to 2-3 years – and that investments in growth areas were accelerating.