Retail to be next growth engine for Reliance Industries: Goldman Sachs

With a potential for a 10x growth in pre-tax profit from the business over the next decade, retail including e-commerce will be the next growth engine for Reliance Industries Ltd (RIL), Goldman Sachs said in a report. After growing 5x over FY16-FY20, RIL's core retail revenue growth has taken a pause in FY21 (April 2020 to March 2021) due to COVID related macro headwinds including lower footfalls.

The oil-to-telecom conglomerate run by billionaire Mukesh Ambani used the period to build strong digital capabilities of the retail business while continuing to expand its physical reach. "We believe retail business (including e-commerce) is set to be the next growth engine for RIL, with potential for retail EBITDA to grow 10x over the next 10 years," the brokerage said.

During the macro downturn, RIL has focused on building strong digital capabilities and the scale-up in omnichannel offering is driving sizeable market share wins. "We see a six-fold increase in grocery organised retail penetration in India by FY30, coupled with 15 percent market share gain for RIL.”

"We expect RIL core retail revenue to grow at a 36 percent CAGR over the next 4 years to $44 billion and e-commerce revenues to be 35 percent of total retail revenues in FY25, at $15 billion," it said.

It forecast a 50 percent market share for RIL in online grocery by FY25, with a 30 percent market share in overall e-commerce. This translates into $35 billion e-commerce GMV (gross merchandise value) for RIL by FY25, with $19 billion in grocery.

"Overall, we expect retail EBITDA to grow 10x from current levels by FY30," it said. Goldman Sachs valued RIL's retail business at $88 billion in the base case and at $120 billion bull case valuation based on stronger than expected macro growth and market share wins.

It valued RIL's retail business using discounted cash flow (DCF) at $57 billion for offline business and $32 billion for e-commerce. "We see a multi-year runway of growth driven by our expectation of growing organised retailing in India from a 2.6 percent share today to a 13.2 percent share in FY30 and rising market share for RIL in organised retailing due to its omnichannel strategy with a market share going from 41.5 percent now to 54.7 percent in FY30," it said.

With a $400 billion GMV, grocery is the largest retail category in India, accounting for 60 percent of the total retail market. "We expect RIL core EBITDA growth of 59 percent year-on-year (YoY) in FY22E based on cyclical growth in the oil-to-chemical (O2C) business, and structural growth in the consumer businesses," it said.

Over the next 12 months, continued sequential earnings recovery is expected along with catalysts around telecom tariff hikes, new product launches with Google, Facebook and Microsoft, and potential value unlocking from a proposed energy business stake sale.