JM Financial

Target: ₹2,900

CMP: ₹2,235.25

The recent weakness in Reliance Industries’ share price, primarily due to concerns over high capex and resultant rising debt, has resulted in its CMP closing in on our bear-case valuation of about ₹2,000/share, which is based on: pessimistic earnings and valuation multiple across businesses and attributing NIL value to its digital assets and JioMart’s new commerce business and valuation at which RIL sold stake in JPL and the retail business in 2020.

Though high capex is a near-term worry, we reiterate our high-conviction Buy on RIL given its industry leading capabilities across businesses, which is likely to drive robust 13-15 per cent EPS CAGR over the next 3-5 years.

We expect Jio’s ARPU to rise at 10 per cent CAGR over FY23-28 as ARPU is on a structural uptrend given the consolidated industry structure, future investment needs and the need to avoid a duopoly market. Our calculation suggests that the industry needs an ARPU of ₹256-285 in the next 3-5 years for a pre-tax RoCE of 12-15 per cent, considering future investment needs.

Further, strong growth momentum continues in the company’s retail business as RIL is driving omni-channel capabilities across segments and taking newer initiatives (foray into FMCG, acquisition of Metro) to build a large portfolio of brands and strengthen the supply chain. Despite being contingent on global macros, RIL’s O2C business earnings are also relatively well-placed.

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