Reliance Industries Ltd’s (RIL) consumer businesses, which include its retail business and telecom services, are at the cusp of a strong growth, according to a report by Goldman Sachs.
It also said that RIL’s oil to chemical (O2C) business will continue to generate free cash flow even at cycle-low margins.
“We forecast consumer businesses to deliver FY20-23 EBITDA CAGR of 36 percent and drive 52 percent of EBITDA contribution in FY23, compared to 35 percent/ 14 percent in FY20/FY18,” it said.
As per the report, the growth is likely to be driven by faster market share gains in retail on a combination of new stores addition and new commerce-led hyper growth, monetisation of the customer base for its telecom business, and ability to gain market share from highly levered peers in the current downturn.
It noted that Reliance Retail, with FY20 core retail revenue of over US$ 13 billion, is the largest retailer in India and market leader in three of the largest retail categories, food and grocery, electronics and fashion and apparel, which together represent 76 percent of the retail market in India.
The report said that Reliance has the largest store network and in several categories the most profitable underlying business.
“Reliance’s market share in tier 3-4 cities is a real differentiator when compared with other modern retailers, online and offline, with Reliance having a significant lead in developing the ecosystem in these towns,” it said.
Reliance Retail is likely to have 12 percent market share of the overall grocery gross merchandise value (GMV) by FY29, against 1.9 percent in FY21.
Goldman Sachs reinstates a ‘Buy’ rating for RIL with a 12-month target price of Rs 1,755.
It said that four potential catalysts for RIL are likely over the next 12 months, including rapid earnings recovery with limited volume risk in energy business and ability to gain market share in consumer businesses from highly levered peers amid the downturn and product launches like Enterprise, IOT among others.
Stepping up in free cash flow generation from declining capital expenditure intensity, and accelerated deleveraging and value unlocking through strategic stake sales across all key divisions would also help the company.