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a discount on Reliance?

a discount on Reliance?

recent negative press may have led to an undervaluation in its stock
December 17, 2021
4 min read
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a discount on Reliance?

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what’s one thing that might ruin an afternoon for Asia’s richest man? losing that title, of course. just ask Mukesh Ambani, who has not only been overtaken on the rich list but also seen Saudi Aramco make a U-turn on a prospective $15 billion deal for a share of Reliance’s O2C (oils-to-chemicals) business. the latter may be why Reliance’s stock price, at Rs 2,369/share, is sitting nearly 14% below its all-time-high of Rs 2,751/share from October and is down nearly 6% over the past month.

but a closer look suggests Reliance’s present valuation may be a tad more than fair.

dialling in the numbers

in FY21, a major chunk of Reliance Industries’ revenue came from three of its businesses: the oil to chemical business (~52%), Reliance Retail (~25%), and Jio (~15%). diving into their financials, analysts place the fair market valuation of the businesses individually as such: 

Kotak Securities values the oil-to-chemical and exploration and production businesses collectively at Rs 700 per share, based on 10 times FY23 expected EPS (earnings per share) of Rs 69. a 10x P/E multiple is consistent with mid-cycle earnings for a USD-linked business.

Reliance’s 66.5% stake in Jio is also valued at Rs 700 per share. this is 25x the FY23 expected EPS of Rs 28, similar to Bharti Airtel’s FY23 multiple.

that leaves around Rs 1,050 from the overall Reliance Industries share price (which was at Rs 2,450 at the time of analysis) to be ascribed to Reliance Retail. that translates into 69x the FY23 expected EPS of Rs 15.2 and 56 times FY24 expected EPS of Rs 18.6.

ace up the sleeve

now, this is where things get interesting. Avenue Supermarts, popularly known as D-Mart, traded at a multiple of 120x its expected FY23 EPS and 90 times its expected FY24 EPS. that’s over 1.5 times the premium afforded by the market to Reliance Retail. a limiting factor there might be Reliance’s stalled deal for Future Retail, where it's in a tangle with Amazon. but regardless of how that plays out, Reliance is taking steps to beef up its retail play. a successful integration of Jiomart with WhatsApp would be a major boost.

if, hypothetically, Reliance’s retail business were to be valued at a similar premium to D-Mart, its value would increase by around Rs 600/share. FY24 expected EPS of Rs 18.6 * P/E multiple of 90 = Rs 1,674, against the present analyst estimate of around Rs 1,050. that would bump the Reliance Industries fair market value closer to Rs 3,000/share, and thus the potential undervaluation.

despite the Aramco setback, Reliance remains one of India’s biggest revenue generators that’s consolidating its size advantage in the market. for those willing to hold it long term, it almost certainly offers good value.