Amazon-Future Case Verdict: HSBC, Goldman Sachs Differ On Impact On RIL

HSBC and Goldman Sachs are split over the impact of the Supreme Court’s ruling in the Amazon-Future Retail case on Reliance Industries Ltd.

The apex court has upheld the Singapore emergency arbitrator’s award, which held that Future Retail Ltd. should put on hold its transaction with Reliance Retail Ltd. on grounds that it violated Amazon’s contractual rights borne out of an agreement to invest Rs 1,431 crore in Future Coupons Pvt. in 2019. Future Coupons holds stake in Future Retail.

Last year, Kishore Biyani’s Future Group said it would sell its retail, wholesale, logistics and warehousing assets to RIL’s retail arm at Rs 27,513 crore.

Goldman Sachs sees limited impact from this ruling.

“We expect significant market share wins from omni-channel offerings with ramp-up in digital capabilities, alongside the post-Covid macro reset, to drive significant growth for RIL retail,” the research house said in a report.

It expects RIL’s core retail revenue to grow at an annualised rate of 36% over the next four years to reach $44 billion (Rs 3.27 lakh crore); and e-commerce revenue to be 35% of total revenue in FY25 at $15 billion (Rs 1.11 lakh crore).

Goldman Sachs also expects RIL to have a 50% market share in the online grocery space by FY25, with a 30% market share in overall e-commerce.

HSBC, on the other hand, said RIL might not give up this acquisition easily and would likely challenge the order of the emergency arbitrator via Future Group in high court or fight in out in arbitration proceedings in Singapore.

“We foresee a prolonged battle for this asset, with the risk of further destruction in quality of assets,” HSBC said in its note.

Here are some of the key highlights from the research houses...

Goldman Sachs On RIL

• Maintains ‘buy’ rating with a target price of Rs 2,435 per share, an upside of 17.5% from the current trading price.

• In the past one year, Future revenues have been hit significantly by the pandemic as well as severe constraint on cash flows, leading to revenue for Future Retail falling 64% year-on-year and Future Lifestyle has fallen 67% year-on-year. Over the same period Reliance’s core retail business has seen revenues fall only 3%.

• As of FY20 data, Reliance Retail had a 1.2% market share in grocery retail and Future Retail had 0.7%; and 2.9% in fashion for Reliance vs 1.3% for Future.

• Consequently Reliance’s grocery business is now almost 6x larger than Future Retail (it was 1.7x in FY20) and Reliance’s Lifestyle business is also 6x Future Lifestyle Fashion (compared with 2.3x in FY20).

• Over the past two years Reliance has added 11.8 million square feet of core retail space, which would be half of Future group’s retail area before the pandemic.

• Future Group seeing several store closures, especially in Future Retail, the incremental acceleration to Reliance’s store addition provided by Future outlets (if the deal was successful) would be relatively small, especially as Future has scaled back its business significantly in the small format stores.

HSBC On RIL

• Maintains ‘hold’ rating with a target price of 2,050 per share, a downside of 1.1% from the current trading price.

• Future Group’s assets would mean approximately 15% additional stores and around 80% additional store area to RIL.

• Continues to like RIL’s business and balance sheet and believes all three of its core businesses — oil-to-chemicals, retail, and digital services — have become self-sustaining and cash-generating, with retail and digital growing strongly.

• As a key downside risk, it expects lower oil-to-chemicals margin than the research house now forecasts and a slow uptick.

• Key upside risk: it is awaiting the closure of the deal with Aramco, a large investment in retail, and an attractively priced smartphone launch.