Can retail, Jio dial up faster growth for RIL?
March quarter results (Q4FY24) not providing any significant triggers for the stock. Understandably, growth has moderated in RIL’s retail business, a significant variable from valuation perspective forming a large part of the company’s sum-of-the parts. Gross retail revenues fell sequentially in Q4, following the festival season led bump in Q3.
But sequential performance may not be a fair comparison. Year-on-year, retail put up a good show, clocking an Ebitda growth of 18%. The concern isn't solely the financial performance of the retail business but rather the rich valuations that many retailers enjoy.
A case in point is Avenue Supermarts Ltd, which operates the DMart supermarket chain. Avenue’s shares hit a lifetime high of ₹5,900 each in October 2021 but have since dropped nearly 20%. This has happened even as DMart’s Ebitda more than doubled in FY23 compared to FY21, reaching ₹3,637 crore, indicating that the valuation multiple has come off.
Of course, one can argue that DMart’s valuations were expensive to start with. Reliance Retail is valued at a minimum EV/Ebitda of 30x by most brokerages for FY25 or FY26 projections. However, assuming an EV/Ebitda of 20 times after five years of 20% CAGR growth, the returns for investors purchasing today would be barely in double digits.
Therefore, either the growth rate must exceed expectations, or the premium valuation of 30x must continue beyond five years to yield meaningful returns. On the other hand, the telecom vertical Jio is being valued in line with Bharti Airtel Ltd at a one-year forward EV/Ebitda of 10x-11x, but it has good potential as far as generation of free cash flow is concerned. Jio has already completed major capex on 5G and 6G is not on the horizon anytime
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