For Reliance Industries, Jio remains the jewel in the crown

Shares of Reliance Industries Ltd (RIL) fell over 3% on Monday. The culprit? Disappointing June quarter (Q1FY25) results that failed to deliver any positive surprises. Consolidated Ebitda was down 9% quarter-on-quarter at ₹38,765 crore. While this dip was largely anticipated, the real letdown came from its retail arm, Reliance Retail Ventures Ltd (RRVL), where growth momentum slowed significantly.

RRVL’s revenue growth stood at 7% year-on-year in Q1, even as the average area operated in terms of square feet increased by 18%. This implies that RRVL’s revenue per square foot dropped. In comparison, Avenue Supermarts Ltd, which operates the DMart supermarket chain, saw 18% year-on-year revenue growth in Q1 and an increase in revenue per square foot.

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RRVL’s store count of almost 19,000 stores is nearly 50x that of DMart. However, in terms of total square feet under operation, RRVL is about five times DMart’s size, as the latter’s average store size is relatively larger.

Given this context, the valuation assigned to RRVL compared to DMart appears steeply discounted, which seems unwarranted. Based on FY26 estimates, most brokerages have valued RRVL at an EV/EBITDA multiple of 30x-35x, whereas this figure for DMart stands at 50x. EV stands for enterprise value. This suggests there is scope for an upside surprise in terms of RRVL’s relative valuation, but much depends on the revenue trajectory in the coming quarters.

As such, the retail sector faces a new challenge—quick commerce. Until recently, competition from quick commerce was dismissed as companies in the sector were making losses. But the scenario is improving with Zomato Ltd’s Blinkit on the verge of becoming profitable at the adjusted Ebitda level. In fact, Zepto, a leading player in quick commerce, has grown its revenue over five-fold to ₹10,000 crore in FY24 from about ₹2,000 crore in FY23. RRVL has a presence in quick commerce through Dunzo, but has struggled to make a mark.

Meanwhile, Q1FY25 standalone numbers show that RIL’s traditional refining business remains vulnerable to global cyclicality. The Ebitda of oil-to-chemicals has fluctuated in a wide range of ₹12,000 crore to ₹20,000 crore over the last eight quarters, with Q1FY25’s Ebitda close to the lower end at ₹13,093 crore, down 14% year-on-year. This decline is attributed to the 30% drop in the benchmark Singapore gross refining margin for gasoline and weaker petrochemical spreads. Higher volume growth in the oil and gas production business offset some of this drag.

This leaves us with RIL’s telecom venture—Jio—which stands out as the jewel in the crown for the company. In Q1FY25, the mobile subscriber addition growth rate moderated to about 2% quarter-on-quarter, while the average revenue per user (Arpu) was flat at ₹180. The Arpu is set to rise after an average tariff hike of 20% announced recently. The tariff hike could boost revenue and Ebitda by ₹20,000 crore annually, taking the estimated Ebitda from the mobile business to ₹70,000 crore from FY26.

Apart from the tariff hike, faster 5G data speeds could lead to higher data consumption as more customers upgrade to the 5G network. This should boost Arpu further even if overall subscriber additions remain muted.

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Despite Monday’s decline, RIL’s investors can hardly complain. The stock has gained about 16% so far in 2024. Going ahead, investors will keep a close eye on the retail business, focusing on improving profitability and gaining traction in the new energy business. These two areas provide potential for positive surprises in terms of the sum-of-the-parts valuation of the company.

In the near term, potential announcements on retail or telecom business IPOs at RIL’s annual general meeting could offer further cues to investors.