Digital And AI Expansion Propel Retail Advancement Despite Market Challenges

Key Takeaways

• Strategic investments in technology and infrastructure could enhance operational efficiencies, leading to improved net margins through cost optimization.
  
• Expansion into AI services and 5G technologies is poised to drive future revenue growth by opening new market opportunities.
  
• Reliance faces challenges in O2C and retail due to weak demand, along with pressure from competition and financial costs impacting overall profitability and growth.

Catalysts

Engages in hydrocarbon exploration and production, oil and chemicals, textile, retail, digital, material and composites, renewables, and financial services businesses worldwide.

• The scale-up of digital commerce and the successful launch of new brands through AJIO are expected to strengthen the retail segment, targeting higher revenue through improved offerings and customer engagement.
  
• The growth in digital services, particularly with the expansion of Jio AirFiber and increased data consumption, points to a significant future increase in revenue and earnings through higher ARPUs and subscriber growth.
  
• Reliance's strategic investments in technology and infrastructure across retail and digital services are expected to enhance operational efficiencies, potentially leading to higher net margins through cost optimization and streamlined operations.
  
• The recovery of margins in fashion and lifestyle sectors and the ongoing efforts to streamline operations in retail are expected to yield improved net margins and earnings as these changes take effect over upcoming quarters.
  
• The expansion into AI services, such as JioAICloud, combined with the advances in 5G technologies, could be a catalyst for future revenue growth, allowing the company to tap into new market opportunities and verticals.

Reliance Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Reliance Industries's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.3% today to 8.8% in 3 years time.
• Analysts expect earnings to reach ₹971.1 billion (and earnings per share of ₹71.11) by about November 2027, up from ₹679.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹1244.8 billion in earnings, and the most bearish expecting ₹734.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.2x on those 2027 earnings, up from 24.4x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to grow by 2.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.6%, as per the Simply Wall St company report.

Reliance Industries Future Earnings Per Share Growth

Risks

• Revenue growth for Reliance Industries is being affected by weak demand in O2C (Oil-to-Chemicals) due to unfavorable market conditions, which has negatively impacted EBITDA by 24% in the segment. This softness in demand may continue to dampen future earnings growth in this area.
  
• The retail sector is experiencing weak market demand, especially in Fashion Lifestyle, which has led to stagnant or declining revenues. Streamlining operations to improve margins could affect short-term revenue growth.
  
• Higher depreciation and interest charges have affected PAT (Profit After Tax), reducing net earnings. This could continue to be a burden on profitability if asset investments do not yield expected returns.
  
• Intense competition in digital services could impact ARPU (Average Revenue Per User) growth despite recent tariff hikes. SIM consolidation and churn may affect future revenue growth in this sector.
  
• Margin pressures and geopolitical uncertainties in the energy business, especially O2C and oil and gas, could exacerbate due to risks like supply chain disruptions and fluctuating global demand, affecting overall earnings volatility.

Valuation

• The analysts have a consensus price target of ₹1616.43 for Reliance Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1950.0, and the most bearish reporting a price target of just ₹1300.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹11089.2 billion, earnings will come to ₹971.1 billion, and it would be trading on a PE ratio of 34.2x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹1305.65, the analyst's price target of ₹1616.43 is 19.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.