In its latest report titled "Indian Telecom/ 5G Puts Focus Back on Tariffs' dated September 26, Jefferies has set a 'buy' target on RIL. It said, "Our ₹3,080 price target is based on a SOTP. Risks: Lower than anticipated tariff hikes in Jio, elevated cash burn in e-commerce, lower refining and/or petrochemical margins, FCF disappointment, and inadequate returns in new energy investments."
In a separate report on RIL dated September 20, Jefferies said, "RIL's green hydrogen foray is part of its Net Carbon Zero target by 2035. Falling renewable cost and scale economics will lower green hydrogen cost. Given the CAPEX intensity, RIL's strong balance sheet and backward integration put it in the driver's seat in the $ 74 billion opportunity. RIL's hydrogen business is worth $ 8 billion ( ₹100/share) at a 20% disc to European benchmark."
Jefferies note added, "We value RIL's electrolyzer manufacturing business at a 20% discount to the European benchmark and add the capitalized value of its captive H2 consumption. We discount its FY30E fair value at 12% WACC to get a Jun-23E FV of $ 8 billion. We revise PT to ₹3,080 and maintain Buy."
In its investment thesis, Jefferies note highlighted the following on RIL:
- Sustainable competitive advantage on scale economics, cost leadership, financial strength, recurring +ve FCF FY22E onwards
- Rs2 trillion FCF invested in consumer businesses created ₹9 trillion in equity value
- New growth engines with large addressable markets: Digital in Jio, e-comm in RR, COTC in energy
- Interesting optionalities with likely financial services foray and partnerships with FB, GOOGL
In the report, Jefferies spoke about three scenarios for RIL's share price.
In the base case, where the target price of ₹3,080 apiece is set, Jefferies on RIL listed out the following key triggers:
- 27% EBITDA CAGR in Jio over FY22-25E, helped by ~ 475m subs at Rs210 ARPU
- 32% EBITDA CAGR in Retail over FY22-25E
- 12% EBITDA CAGR in refining over FY22-25E
- 4% EBITDA CAGR in petchem over FY22-25E
- SOTP valuation implies 8x EV/EBITDA for O2C Business, 10x for India mobile, and 32x for core offline Retail
In the upside scenario, Jefferies target is ₹3,500 apiece on RIL. The triggers are:
- Recovery in GRMs ahead of our estimates
- Faster consolidation in telecom leads to tariff upside in Jio
- Possible public listing of Jio re-rating valuation multiple
- RR gains market share faster than expected
- Jiomart GMV comes ahead of expectations
However, in the last scenario which is the downside, Jefferies has set a target price of ₹2,350 apiece on RIL. The triggers for the downside on RIL will be:
- Lower-than-expected telecom ARPU or subscribers, valuation multiple de-rates
- Refining/petchem margins may be lower due to extended impact from pandemic
- Elevated cash burn in e-commerce, valuation multiple de-rates
- Free cash flows don't materialize
RIL has announced ₹2 lakh crore investment to build its Pan-India true 5G network. In the 45th AGM, Ambani said, RJio plans to roll out Jio 5G by this Diwali 2022 across multiple key cities including metropolises of Delhi, Mumbai, Kolkata, and Chennai. By December 2023, which is less than 18 months, the company plans to deliver Jio 5G to every town, every taluka, and every tehsil in the country.
Jefferies in the 5G report, said, "With recently launched 5G smartphones priced US$150, we believe 5G smartphones will form over 50% of the 500m smartphone base by endCY23. However, to spur adoption, 5G services will have to be priced similarly to 4G services limiting meaningful Arpu upside, as seen in China and S. Korea. While 5G may drive further market share gains for Bharti/Jio, tariff hikes will still be required for delivering healthy ROCE amidst rising CAPEX."
Jefferies estimates CAPEX spends to remain elevated over FY23/24E for the telecom companies. For Jio, it estimates a 35-46% CAPEX/sales.
On BSE, RIL shares closed at ₹2,392.50 apiece up by ₹15 or 0.63%. RIL shares have been under pressure in the past few days due to volatile markets as uncertainties in macroeconomic conditions fuel selloffs broadly.
RIL's market cap is around ₹16,18,611.41 crore.
On BSE, RIL shares closed at ₹2,395.40 apiece up by ₹17.90 or 0.75%. RIL shares have been under pressure in the past few days due to volatile markets as uncertainties in macroeconomic conditions fuel selloffs broadly. The shares touched an intraday low of ₹2,360.15 apiece earlier today.
In a month, RIL shares have dipped by at least 9.87% on BSE (taking into consideration September 27 low). Compared to their historic high of ₹2,855 apiece that was recorded on April 29 this year, RIL shares have dropped by 17.3% as of now.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.