Analyst Corner: ‘Buy’ Reliance Industries with Target Price of Rs 2,250 – The Financial Express

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.

Also Read: Reliance Industries share price jumps 148% from March lows; does it make sense to invest now?

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.