Reliance is firing on all cylinders: Jal Irani, Edelweiss Sec

15% of Reliance SOTP is coming from retail, about one-fourth from Reliance Jio and the balance is coming from its traditional businesses, Jal Irani, oil & gas analyst, Edelweiss Securities, tells ET Now. 65605720 65604835 65591232 Edited excerpts:How much of the Reliance market cap addition this year is based on the assumptions that the oil company/energy company has taken a giant step forward to become a telecom and a big data/retail company? It is fair to say that Reliance is firing on all cylinders. Telecom and retail is part of its core business now but rather importantly, its energy business will continue to dominate and going forward is poised for massive growth. One forgets is that $20 billion of investments have gone into its core energy businesses and $6 billion more is in the process of going into that business. Unlike the telecom business or the retail business which has a very long gestation, these projects are going to be very profitable. In fact, ROC is in excess of 20% but these projects have also started contributing to profits significantly and immediately. If you look at even this last quarter earnings, petrochemical alone has added much more profit than the Jio business. The Jio business added about Rs 3,000 odd crore of EBITDA but it is the petrochemical business which added Rs 4,000 plus crore of EBITDA to Reliance Industries. Reliance has got core competence in these businesses and these are businesses which in my opinion are understated in terms of profit potential. If you look at just the ethane import project from the US, it is about $1.5 billion and is already earning an EBITDA of about 0.4 billion per year. You get a pay back almost instantly within four years. So, like I said, Reliance is firing on all cylinders and the bigger contributor to the stock price gain is its traditional energy core business. Market cap addition for Reliance has come after the AGM. That is when it really blasted as a stock. In the AGM, Mr Ambani said they were on course to become a AI/data company with subscribers; they will use smart engines and then would be able to monetise or leverage them. Are markets now thinking that Reliance is trying to do what a Tencent has done or other global players have done? Is the appreciation in Reliance is still coming because of the core fundamental business? But Tencent is no longer a good word. It has lost some $150 billion of market cap very quickly. So perhaps you may not want to make a reference to that. Not only in this AGM but after the last AGM also, the stock did well after.A lot of things have been said in these AGMs and in the last AGM, Mukesh bhai had said that even the traditional energy business would make Rs 1 lakh crore EBITDA. It is not just one or the other and having said that, I think the Jio business is a fundamentally strong business. The value appreciation partly driven by Jio is also coming because of the market perception of risk mitigation. Two years back, everybody was saying LTE mobile phones do not exist below Rs 15,000. Who is going to buy them? LTE technology is not well established globally. Reliance does not have as many towers or cable network and essentially everybody was giving a 50% discount to the enterprise value on Jio. The driver on Jio is coming more in the minds of investors where from considering a negative value, now they are willing to consider a positive value. You said that the move in the stock price is largely being driven by the performance of the core energy business. The market perception is that lot of it is coming in because of Jio and partly retail. How much would you give credence to the SOTP story for Reliance? We estimate about 15% of Reliance SOTP is coming from retail, about one-fourth from Reliance Jio and the balance is coming from its traditional businesses. So about 55% is coming from its traditional businesses. We speak essentially to institutional investors, some of the largest in the world and a lot more is going on in the energy space globally as well. The refining business globally is poised to have its golden era. Certain regulations are coming up which is potentially going to drive up refining margins rather sustainably and very significantly, going forward. Besides, Reliance is also one of the biggest beneficiaries of rising oil prices. Essentially, three of its projects get very cheap raw materials and value adds and sells at value added rates. The higher the oil prices, the higher the difference between the two. Like I said, Reliance is firing away on all cylinders. One may just see a lot of news in Jio because it is more consumer facing, but in reality, it is being driven by several businesses and not just one.

from The Economic Times https://ift.tt/2ooBRWy