Reliance Retail Set To Be Next Growth Engine For RIL: Goldman Sachs

Reliance Industries Ltd.’s retail business, including e-commerce, is set to be the next growth engine for the parent, driven by its omni-channel strategy, focus on under-penetrated fresh products, private label push and geographic reach, according to Goldman Sachs.

The Mukesh Ambani-owned oil-to-telecom conglomerate’s core retail revenue has grown more than five times over FY16-FY20, the global investment banking company said in a report. It now pegs RIL’s core retail revenue to grow at an annualised rate of 36% over the next four years to $44 billion. The financial services provider projects RIL’s retail Ebitda to grow 10 times over the next 10 years.

“While growth has taken a pause in FY21 due to Covid-related lower footfalls causing a downturn in the retail industry, RIL’s retail business has focused on building strong digital capabilities while continuing to expand its physical reach,” Goldman Sachs said.

It sees a sixfold increase in grocery organised retail penetration in India by FY30, coupled with a 15% market share gain for RIL. With a $400-billion gross merchandise value, grocery, it said, accounts for 60% of India’s total retail market.

Goldman Sachs values RIL’s offline retail business at $57 billion and e-commerce at $32 billion.

The four key drivers of the grocery-led growth for RIL’s retail business:

Omni-Channel Presence

The retail landscape in India is rapidly evolving amid Covid-related disruptions and the shift towards online, Goldman Sachs said. Online penetration, it said, has been accelerating, led by grocery, and the trend is expected to continue in FY22.

RIL’s investment-led scale-up in digital assets combined with its lower cost structure will lead to expansion of market share. Goldman Sachs forecasts a 50% market share for RIL in online grocery by FY25, with a 30% market share in overall e-commerce. This translates into $35 billion gross merchandise value for e-commerce by FY25, with $19 billion in grocery.

Fresh Food

Goldman Sachs sees Reliance Retail as best placed to win market share in the fresh food segment, rapidly accelerate store rollout and target the widest assortment through multiple formats and channels.

Reliance Retail has sold 0.66 million tonnes of fruit, vegetables, and staples in FY21, accounting for only about 0.1% of the total production in India. Goldman Sachs expects that the company’s fresh food sales growth will rise to mid-teens in 10 years from 5-10% now.

Private Label Push

The growing presence by Jiomart in private label products beyond packaged staples will help drive traffic/footfalls to Reliance Retail and increase the company’s negotiating power with brands on pricing.

On average private labels on Jiomart are 36% lower priced than brands in personal care, 20% in home care and 20% in packaged foods and beverages. Goldman Sachs said improving stock levels and ensuring consistent availability can drive traction for these products.

Geographic Network

Goldman Sachs said the company has significant opportunities to gain share from the unorganised and fragmented market, especially in grocery and fashion, where RIL continues to focus on tier II and III cities with low competition.

The risk-reward for RIL, according to the investment banking company, appears favorable and a sequential earnings recovery is expected over the next 12 months supported by catalysts such as telecom tariff hikes, new product launches with Google, Facebook, and Microsoft, and potential value unlocking from a proposed energy business stake sale.

Goldman Sachs maintains a ‘buy’ rating on RIL with a 12-month price target of Rs 2,425 apiece, implying a 9% upside from June 19 closing. It updated its FY22/23 net profit estimates by -2%/+1% to reflect updated retail estimates.

Key Risks

• Lower-than-expected refining/chemical margins.

• Lower-than-expected average revenue per user.

• Lower-than-expected market share and margins in the retail business.

• Project delays and higher future capex.

Shares of RIL closed 0.52% higher at Rs 2,237 apiece compared with the NSE Nifty 50 index's 0.4% gain.