Reliance has become a portfolio stock and one must have this stock in portfolio if you want to play India, says Naveen Kulkarni, CIO.
What do you make of this Rs 13,000 crore net profit number?
I think it is a one-time gain. We will have to adjust for that number before making any sense about the profit number. I am pretty sure there should be some one-time factors because the revenue is significantly lower than what we were estimating.
The exceptional item is almost Rs 4,900 crore. If you adjust say Rs 5,000 crore from the Rs 13000 odd crore, the number is in line with estimates. So if we strip this exceptional item of the BP gain, how would the number look like to you?
There could be even more gains because the revenue number is definitely lower than what we were estimating. Second, the Jio revenues largely seems to be in line. So, primarily the lower numbers are in petrochemical and retail and the other businesses. The profit number, adjusting for one-offs, might be lower than expected.
Do you think that the three segments which because of the lockdown got fully captured this quarter, trough out from here?
Jio ARPU numbers stand at Rs 140. That means the Jio business will continue to improve even in quarter two. As far as the other businesses are concerned, we will see things improving slowly. The petchem business should improve in the forthcoming quarter; refining should start improving, retail business has a lot of scope for improvement as we start to unlock. So, from here on, things are more likely to improve only. That is where we can see the business progressing from here.
Retail is looking weak this time. We are going through a difficult phase but as it is clearly Jio all the way for now, in terms of forward looking outlook, are you concerned about the numbers that we are seeing on the retail front?
This quarter’s retail numbers were very difficult to gauge and Reliance has a fairly large business in retail even the next quarter (Q2) numbers will be difficult to gauge because there are localised lockdowns and opening up and things like that.
So, from a first quarter perspective there is not much to make out what exactly is happening in retail because it is still in a phase of huge challenges. Q2 will provide better perspective and Q3 onwards, we should start seeing stability coming through. So, after at least one more quarter we will start seeing stability but the action is going to be on integration and other aspects which are going to happen on the retail front. There are going to be more interesting developments, and fundraising is going to be the key to watch out for rather than the quarterly performance which is going to be a challenge.
If you look at the sum of the parts valuations for Reliance, targets as high as Rs 2,500 have started to pour in because different ends of the business are getting valued in different multiples. How many times multiple would you give the refining and petrochem business? Would you give 25-30 times to The Jio platform, which is almost seen as a technology business? What about the retail business?
We look at mostly the core enterprise value of each entity. For Jio, most of the valuations have happened at around Rs 5.2-5.3 lakh crore. There can be an upside from current levels considering the money that has come in. It could be an integration play and we could be looking at around Rs 6 lakh crore kind of a valuation. The current market cap for the company is roundabout Rs 13 lakh crore and of that Rs 6-6.5 lakh crore could be Jio itself.
So, we are looking at roughly around 50% of the company’s value is coming from Jio which means roughly Rs 1,000 is coming from Jio. Second business is the O2C business where there have been benchmark valuations in the past.
Of course, there has been downward revision also. Now the question will be whether that valuation will settle at around Rs 5 lakh crore or Rs 4 lakh crore. But considering the kind of deal making that we have seen in the past, we could be looking at a valuation of Rs 4-4.5 lakh crore. That brings the total valuation from these two entities to around Rs 10.5 lakh crore.
Thereafter, we have the retail business where there is a big question mark over the value of that business. People do talk about valuation of Rs 6 lakh crore-5 lakh crore and all and that is how probably we might get to a value of Rs 2500 per share value. But I would say that roughly around Rs 2.5-3 lakh crore is a reasonably decent value for that business. That brings a whole enterprise value to around Rs 13-13.5 lakh crore which is where the stock is currently.
I would say Rs 2,100-2,200 would be more or less fair value for the company and should settle there . Even these levels are not very cheap. It still factors in a lot of work happening in Jio over the next two years which is technology integration, bigger enterprise business, 5G revenues also probably. So many things have to work to get to these Rs 6-6.5 lakh crore kind of valuation and even in the retail business of 3 to 4 lakh crore so that is where I think we are 2100 to 2200 would be of more or less fair value for the company.
Given the steep rise in Reliance stock over the last few weeks and months, do you see some profit booking coming in post these numbers?
As I indicated, the fair value resides somewhere between Rs 2100 and Rs 2200 but Reliance has become a portfolio stock and one must have this stock in portfolio if you want to play India because it is pretty much there in all consumer facing businesses, digital and retail businesses. From that perspective, the downside is difficult to gauge.
I would say at around Rs 1,850 levels, there will be a fair degree of support from where it can start recovering. However, having said that, we might still see a lot more deals in the pipeline over the next couple of months — whether it is in retail or something more in the digital business– and that will keep the stock in that plan and so the downside may not be very significant, probably a 10% downside is what I would track and would probably accumulate from those levels again. That would be my recommendation to investors. If you have invested, stay invested, but this is more a buy on dips kind of counter but not necessarily at these levels. I see a huge huge upside coming through.