Consumer and petchem segments did very well; demerger of tower and fibre arms to reduce leverage; TP up to `1701
RIL is maximising value through capital allocation changes. Divestment of utility-like businesses, such as tower and fibre arms (to which we ascribe a 43% premium to invested capital) and
6 VLEC’s to Mitsui monetises NPV gains upfront. Moreover, the fibre/tower divestment will lower leverage at RIL in the future due to lower capex intensity. Part-monetisation of refinery and retail businesses may similarly be on the anvil. We demonstrate that demergers during 2005/06 had triggered a 38% stock price rally. We feel the proceeds will fuel future value-accretive investments into upstream, refinery, media, retail and broadband. We revise our SOTP based target price upwards by 4% to Rs 1701/share, based on a valuation hike of Rs 380 bn (vs Rs 780 bn by RIL) of fibre assets. Retain Buy with an upside of 20% based on CMP of Rs 1386/share.
Q4FY19 earnings beat estimates by 6.8%
RIL reported a 9.8% YoY jump in consolidated PAT to Rs 103.6 bn (6.8% above estimate) led by a beat on refining, other income and lower tax rate.
Consumer and petchem shine; lower opex offsets lower GRM
Lower opex led to refining EBITDA/bbl declining by just 3% despite 7% fall in GRM. The premium versus benchmark GRM widened to $5/bbl due to a declining Brent-Dubai differential as RIL sourced lighter crudes. Petchem EBITDA margins increased to an all-time high of 23% due to lower opex and strong polyester margins. Retail margin expanded to 5.2% due to higher share of higher margin fashion and grocery segments. RJIO’s revenue market share rose to 40% with 27 mn net subscriber additions. Capex remained flat QoQ at `300 bn, with Jio accounting for 70% of capex.
Outlook & valuations: Demerger +4% to TP; Retain BUY
We estimate that the demerger will lead to value creation of Rs 380 bn as the fibre business will be sold at a premium to book value given 5G readiness of the assets. Our value estimate is at a 43% premium to invested capital of `880 bn, resulting in a 4% hike in our target price to `1,701/share (SOTP-based). Our value is half that of the fair value ascribed by Reliance Industries of Rs 780 bn (preference capital). Completion of sale to investors may lead to fuller value recognition. With capex shifting to the InvIT’s, the risk profile will reduce at Reliance Industries. Even after Ind AS 116, the assets will remain off balance sheet at Jio (no lease liability) as the assets will be managed by a separate entity. Maintain Buy rating on the stock.