Our optimistic case assumes Reliance’s dominance rises from 22%/32%/4.5% of the organised retail market in grocery/electronics/fashion to 33%/50%/7.5% or an implied 13.7%-22.7% of the overall organised retail market.
400%+ seven-year rally may slow; downgrade from ‘buy’ to O-PF. We raise our target price for Reliance Industries (Reliance) from Rs 1,753.38 to Rs 2,250 as we factor in a street-high valuation for Reliance Jio (Jio) ($100 billion+) and Reliance Retail (Retail) ($70 billion+). However, this implies only 4% upside after its 400%+ rally the past seven years and 150%+ the past four months. This makes us downgrade our rating from O-PF to ‘buy’ even as we project Reliance’s market cap to rise to $220 billion by March 2022 in our lenient valuation framework. While its long-term promise and underweight position in portfolios may support its stock price, large valuation surprises may be difficult in the near term.
Reliance’s annual report predicts India’s retail market to grow from $822 billion to $1.32 trillion by FY26 (8% CAGR). Within this, organised retail is expected to rise at a 17% Cagr from $89 billion to $230 billion as its share is slated to rise from 11% to 18% of the market. Our optimistic case assumes Reliance’s dominance rises from 22%/32%/4.5% of the organised retail market in grocery/electronics/fashion to 33%/50%/7.5% or an implied 13.7%-22.7% of the overall organised retail market. With this, margin expansion and scenarios assuming lenient multiples versus large global retailers we get a Mar 2025 value of $72-110 billion for Retail. Discounted to Mar 2022 this implies a value of $53-81 billion. This is not very different from our new $71 billion Mar 2022 EV that we assign to Retail using a 27.5x EV/Ebitda which is based on a 15% premium to the weighted average peer valuation of listed Indian retailers.
Acknowledging its dominance and promising technology offerings, we use 15% premium to Bharti’s India mobile unit, which equates to a lenient 11.5x EV/Ebitda for Jio. This returns Mar’22 equity value of $102 billion — this is 57/77% higher than recent deal value for a total of 33% stake sold to financial/strategic investors.
Re-aligning to global peers, we raise our EV/Ebitda for refining and petchem from 7x to 8x, valuing this piece at $66 billion by Mar 2022. This takes our Mar 2022 fair value to $207 billion, implying a market cap of $220 billion including treasury shares.